Index Funds and the Future of Corporate Governance: Presentation Slides

Abstract

The presentation slides in this document provide an overview of our study Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy, which is forthcoming in the Columbia Law Review in December 2019. The slides build on and update our presentations at the 2019 ECGI Annual Meeting in Barcelona in which our study was awarded the ECGI’s Cleary Gottlieb Steen Hamilton Prize.

The slides begin by describing the agency-costs theory of index fund incentives that we put forward. Our agency-costs analysis shows that index fund managers have strong incentives to (i) underinvest in stewardship and (ii) defer excessively to the preferences and positions of corporate managers.

The slides then present a summary of our empirical findings regarding the range of stewardship activities that index funds do and do not undertake. We discuss four dimensions of the Big Three’s stewardship activities:

(1) The limited personnel time they devote to stewardship regarding most of their portfolio companies;

(2) The small minority of portfolio companies with which they have any private communications;

(3) Their focus on divergences from governance principles and their limited attention to other issues that could be significant for their investors; and

(4) Their pro-management voting patterns.

The slides also present a summary of our empirical evidence regarding five ways in which the Big Three may fail to undertake adequate stewardship:

(1) The limited attention they pay to financial underperformance;

(2) Their lack of involvement in the selection of directors and lack of attention to important director characteristics;

(3) Their failure to take actions that would bring about governance changes that are desirable according to their own governance principles;

(4) Their decision to stay on the sidelines regarding corporate governance reforms; and

(5) Their avoidance of involvement in consequential securities litigation.

The slides explain that this body of evidence is, on the whole, consistent with the incentive problems that our agency-costs framework identifies. Finally, the slides conclude by discussing the policy implications of the theory and evidence we put forward.

Our study is part of a larger project on the incentives of investment managers that also includes The Agency Problems of Institutional Investors (with Alma Cohen) and The Specter of the Giant Three.

Keywords: index funds, passive investing, institutional investors, corporate governance, stewardship, engagement, monitoring, agency problems, shareholder activism, hedge fund activism

JEL Classification: G23, G34, K22