Corporate Governance Implications of the Growth in Indexing

Abstract

Passively managed funds have grown to become some of the largest shareholders in publicly traded companies, but there is considerable debate about the effects of this growth on corporate governance. The goal of this paper is to review the literature on the governance implications of passive fund growth and discuss directions for future research. In particular, we present a framework to understand the incentives of passive and actively managed funds to engage in governance, review the empirical evidence in the context of this framework, and highlight the questions that remain unanswered.

Keywords: passive funds, index funds, corporate governance, institutional investors, shareholder activism, engagement, stewardship, Big Three, voting

JEL Classification: G23, G34, K22