The Uncertain Stewardship Potential of Index Funds

In, Global Shareholder Stewardship: Complexities, Challenges and Possibilities ((Dionysia Katelouzou & Dan W. Puchniak eds, Cambridge University Press, Forthcoming)

U of Penn, Inst for Law & Econ Research Paper No. 20-09

European Corporate Governance Institute - Law Working Paper No. 490/2020

33 Pages Posted: 28 Jan 2020 Last revised: 10 Feb 2020

See all articles by Jill E. Fisch

Jill E. Fisch

University of Pennsylvania Law School - Institute for Law and Economics, European Corporate Governance Institute

Date Written: January 1, 2020

Abstract

Regulators and commentators around the world are increasingly demanding that institutional investors engage in stewardship with respect to their portfolio companies. Further, the demand for stewardship has broadened from an expectation that investors engage to reduce agency costs and promote economic value to a call for investors to demand that companies serve a broader range of societal interests and objectives. This chapter considers calls for stewardship in the context of the U.S. capital markets specifically as applied to index funds. It argues that, irrespective of the merits of institutional stewardship generally, the structure of index funds and the business environment in which they operate limits their ability to engage in effective stewardship. Although index fund sponsors have had a powerful influence on their portfolio companies, well-intentioned calls for them to play a more significant role and, in particular, claims that they should incorporate non-economic objectives more broadly into their engagement strategy, are in tension with the valuable role that index funds serve in the U.S. markets by providing a low-cost diversified investment option for an increasing segment of ordinary citizens. The chapter concludes by considering the possibility of using pass-through voting to enhance the stewardship potential of index funds.

Keywords: Corporate governance, institutional investors, mutual funds, passive investing, stewardship, shareholder voting, shareholder engagement, shareholder activism, ESG, capital markets

JEL Classification: G11, G23, K22

Suggested Citation

Fisch, Jill E., The Uncertain Stewardship Potential of Index Funds (January 1, 2020). In, Global Shareholder Stewardship: Complexities, Challenges and Possibilities ((Dionysia Katelouzou & Dan W. Puchniak eds, Cambridge University Press, Forthcoming), U of Penn, Inst for Law & Econ Research Paper No. 20-09, European Corporate Governance Institute - Law Working Paper No. 490/2020, Available at SSRN: https://ssrn.com/abstract=3525355 or http://dx.doi.org/10.2139/ssrn.3525355

Jill E. Fisch (Contact Author)

University of Pennsylvania Law School - Institute for Law and Economics, European Corporate Governance Institute ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)

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