Asset Managers as Regulators

50 Pages Posted: 8 Feb 2022 Last revised: 24 Aug 2022

See all articles by Dorothy S. Lund

Dorothy S. Lund

Columbia Law School; European Corporate Governance Institute (ECGI)

Date Written: December 1, 2021


The conventional view of regulation is that it exists to constrain corporate activity that harms the public. But amid perceptions of government failure, many now call on corporations to tackle social problems themselves. And in this moment of dissatisfaction with government, powerful asset managers have stepped in to serve as regulators of last resort, adopting rules that bind corporate America on issues of great social importance, including climate change and workplace inequality. This Article describes this radical dynamic—where shareholders have become regulators—which has been made possible by the rise of institutional shareholding (and index investing in particular) and the contemporaneous growth of shareholder power. As a result, the large diversified shareholders that specialize in index funds (the so-called “Big Three”—Vanguard, State Street, and BlackRock) collectively hold nearly controlling stakes across the public equity market. In addition to intervening in traditional areas of corporate governance, they have adopted sweeping board diversity mandates, as well as “ESG” disclosure and carbon emission reduction requirements, and enforced them through their proxy voting policies. And the early consensus is that they have been influential in these areas, driving change where other private (and public) efforts failed.

This Article describes these regulatory interventions in detail, and in so doing, concludes that we are witnessing a novel privatization dynamic. It also offers a theory about the incentives that shape it. Like the market for regulation by government, institutional shareholder regulation is responsive to financial incentives. In particular, institutional investors will only supply regulation if it has a positive impact on their profits. Therefore, client demand will govern the choice of policies and the form of their rules. And given the breadth of the Big Three’s clientele and their interest in avoiding government backlash, their policies are likely to take a large number of interests into account. Nonetheless, serious concerns loom large, including the fact that for-profit institutional shareholders lack accountability and oversight for their policymaking, with no guarantee that it will further the public interest. To the extent that their policies are shaped by the corporate clients that provide the bulk of their AUM, they are unlikely to be as impactful as many believe. In addition, the provision of regulation by asset managers may take pressure off the government to respond to these issues with policies better calibrated toward advancing social welfare. At bottom, understanding the forces that shape (and potential problems that accompany) this new privatization dynamic is of critical importance not just for investors and corporations, but also for the public.

Keywords: institutional investors, index funds, corporate governance, board diversity, corporate political spending, climate change, corporate social responsibility, ESG, stewardship

JEL Classification: D21, G30, G34, K22, Q5

Suggested Citation

Lund, Dorothy S., Asset Managers as Regulators (December 1, 2021). University of Pennsylvania Law Review, Vol. 171, 2022, USC CLASS Research Paper Forthcoming, USC Law Legal Studies Paper Forthcoming, Available at SSRN: or

Dorothy S. Lund (Contact Author)

Columbia Law School ( email )

435 West 116th St
NEW YORK, NY 10027

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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