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E-MailLucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School. Scott Hirst is Associate Professor at Boston University School of Law and Director of Institutional Investor Research at the Harvard Law School Program on Corporate Governance.
This post is based on their recent presentation slides. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy (discussed on the Forum here and here); The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).
We recently placed on SSRN a revised version of our study, Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy. That revision expands our work to engage in detail with points raised by commentators taking issue with our view of index fund stewardship and updates our empirical work. In addition, we have just placed on SSRN a set of presentation slides that provide an overview of our study.
These slides build on and update the slides we presented 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 an overview 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:
- the limited personnel time they devote to stewardship regarding most of their portfolio companies;
- the small minority of portfolio companies with which they have any private communications;
- their focus on divergences from governance principles and their limited attention to other issues that could be significant for their investors; and
- their pro-management voting patterns.
The slides also present an overview of our empirical evidence regarding five ways in which the Big Three may fail to undertake adequate stewardship:
- the limited attention they pay to financial underperformance;
- their lack of involvement in the selection of directors and lack of attention to important director characteristics;
- their failure to take actions that would bring about governance changes that are desirable according to their own governance principles;
- their decision to stay on the sidelines regarding corporate governance reforms; and
- their avoidance of involvement in consequential securities litigation.
We 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.
The presentation slides are available here. Comments on the slides or the underlying study are most welcome.
