The New Power Brokers: The Rise of Asset Manager Capitalism and the New Economic Order

On June 2, 2021, after a grueling six month proxy battle with the investment firm Engine No. 1, oil and gas giant Exxon Mobil reported final vote results from its annual shareholder meeting, announcing the election of three of Engine No. 1’s nominees to the company’s nine-person board.  Engine No. 1’s victory represented a watershed moment.  The activist fund had succeeded in mounting a first-of-its-kind, environmentally-focused proxy contest that called on shareholders to vote for its director candidates as part of a corporate overhaul to reduce Exxon’s carbon footprint and accelerate its transition from fossil fuels.  Owning only a 0.02% stake, Engine No. 1 managed to get its nominees elected by winning the support of Exxon’s largest shareholders⸺including BlackRock, State Street and Vanguard or the “Big Three”⸺who had come to support efforts to combat climate change and other Environmental, Social and Governance causes.

While Engine No. 1’s victory generated significant attention in the business media, it was not the only activist fund with which Exxon found itself clashing that year.  Almost concurrently with Engine No. 1’s launch of its campaign in December 2020, though to less fanfare, New York-based hedge fund D.E. Shaw began calling on Exxon to cut capital expenditures and operating expenses to maintain its dividend.  Unlike Engine No. 1, D.E. Shaw spearheaded a private pressure campaign focused on pushing Exxon to take actions to maximize financial returns, and to do so quickly.  Three months before Exxon’s annual meeting, Exxon and D.E. Shaw agreed to bury the hatchet, with Exxon announcing its commitment to realize $6 billion in cost savings and adding two new independent directors to its board with “expertise in capital allocation.”

At first glance, Engine No. 1 and D.E. Shaw’s campaigns could not appear to be any more different.  On one level, they seem to embody the two competing visions of the public corporation that have been driving much of today’s debate about the future of capitalism, with Engine No. 1’s call for greater environmental consciousness signifying a broader-minded, socially-oriented model of corporate purpose, in contrast to D.E. Shaw’s narrower emphasis on financial returns.  But looking deeper, the success of Engine No.1 and D.E. Shaw’s efforts reveal a common thread⸺the growing power of asset managers over America’s public companies. Over the last 70 years, institutional investors⸺ranging from activist hedge funds to the large passive index funds ⸺have come to own the substantial majority of corporate equities in the United States, and have wielded that ownership to reshape corporate America.

My new book, The New Power Brokers:  The Rise of Asset Manager Capitalism and the New Economic Order, chronicles the economic, legal, and technological developments at the heart of this transformation, and discusses how those developments should inform our thinking about the political economy of capitalism in the 21st century.  In particular, I make three overarching arguments:

First, the rise of asset managers has radically altered the structure of our public markets in ways that call for a reexamination of many of the ideas and assumptions that have long animated discourse about the relationship between shareholders and the companies in which they invest.  The conception of shareholder interests as a central focus in corporate governance originally emerged in the early 20th century as a response to the rise of big business and corporate tycoons who faced relatively limited constraints from shareholders and others in how they operated their businesses.  Whether that focus remains sensible today is less clear cut now when, unlike the widely dispersed shareholders of the past, today’s shareholders are mostly global asset management firms that are functionally investment intermediaries and whose significant⸺often controlling⸺positions in their target companies make it impossible for the latter to ignore their dictates.  The nature of investing has also profoundly changed.  In conventional thinking, the shareholder is thought of as an individual investor in a single company or limited universe of companies, whereas the underlying providers of capital to the asset management industry are for the most part regular working people investing through 401(k) accounts and retirement plans, the proceeds of which are then deployed by institutional investors in a variety of strategies across a broadly diversified range of assets.

Second, the status quo is suboptimal.  Corporate managers regularly face pressure from their institutional investors to prioritize the maximization of short-term financial results over other considerations.  Once at the global forefront of research and innovation, American companies today channel more of their earnings towards financing shareholder returns⸺like dividends and share buybacks⸺and less capital towards internal investments and organic growth strategies.  The Great Financial Crisis ushered in renewed calls for a New Deal-style, stakeholder model of capitalism.  But in the absence of the robust civic and regulatory framework that undergirded the New Deal era economic order, new self-styled ESG funds and large global asset management firms have come to fill the vacuum and define the new stakeholder capitalism agenda.  Pocketbook economic issues were at the heart of the post-World War II liberal consensus.  In the new regime, these types of concerns have fallen by the wayside, with attention becoming increasingly redirected towards social and environmental topics in ways that have proven to be ineffectual and harmful.

The trials and tribulations of the U.S. energy industry over the last decade provide a case study of the damage that this combination of financial short-termism and new social advocacy can produce. As the shale revolution picked up in the early 2010s, depressing oil revenues and profitability for energy companies, activist hedge funds took advantage of shareholder discontent and mounted successful campaigns against energy companies to scrap longer-term investments in their businesses and to do everything within their power to juice short-term returns through asset divestitures, share repurchases and dividends.  Energy companies like Exxon also came to face pressure from ESG activists and their supporters within the asset management world, who pushed companies to generally re-orient their businesses away from oil and gas in an attempt to cut carbon emissions and combat climate change, but did not offer a clear, practical vision for how to fill the resulting energy gap.  As a result, when the war in Ukraine disrupted international energy markets in March 2022, energy firms in the U.S. and elsewhere in the West found themselves  struggling to meet increased energy demands, with the constant pressure on cutting costs and carbon emissions stymieing efforts to commercialize clean energy alternatives at a level that could meaningfully compensate for the scaleback in oil and gas output.  Over two years later, the energy industry has largely been able to ramp up energy production to catch up with consumer demand, but that ramp up has been overwhelmingly driven by renewed investments in the company’s traditional oil and gas competencies.  Substantial questions persist as to what, if any, tangible achievements ESG activism has produced in the realm of fighting climate change and advancing the cause of clean energy.

Third, successfully reforming our system of asset manager capitalism requires fresh thinking that does not simply reprise the policy solutions of the past. The two primary levers for regulating corporate conduct in the United States since the New Deal era⸺mandatory disclosures and fiduciary duties⸺emerged as mechanisms to address problems emanating from the relationship between public companies and their shareholders in the first half of the 20th century.  Exclusively relying on these mechanisms to contend with today’s predicaments is unlikely to succeed when the identity of the corporation and its shareholders, and the nature of the relationship existing between them, have so dramatically changed.

By focusing on the complexity of historical factors that have shaped the current constellation of power relations among investors, corporations and everyone else, The New Power Brokers hopes to transcend the siloed nature of how the growing influence of asset managers is often talked about in contemporary policy discourse.  In recent years, the Big Three index funds and other large global asset management firms have become the subject of heated attacks by political conservatives who view their advocacy on environmental and social issues as a subterfuge for imposing liberal political values on corporate America.  My book does not broach the question of whether the political views that motivate these attacks are substantively correct, but makes the essential point that, even under a charitable hearing, conservative critiques miss the forest for the trees by fixating on symptoms of deeper changes in the structure of our financial markets.  Root causes must be treated.  Attempts to revive an idealized Reagan-era ethos of shareholder primacy are likely to be counterproductive not only on their terms but also in terms of the substantive political objectives of conservatives.

Legal academics and practitioners have exhibited a greater willingness to engage with the more fundamental changes in the structure of our economy.  However, their discussions tend to have an insular quality and take for granted the overarching normative assumptions of the legal professional class.  Anti-ESG critiques, especially from political conservatives, are dismissed as nothing more than bad faith partisan attacks by right wing pundits and talking heads.  Again, without engaging in an assessment of whether any particular opinion or policy objective is right or wrong in a metaphysical sense, it would behoove the legal community to forthrightly recognize the essentially political character of the power that institutional investors have exerted in our economy and the practical necessity that, in a democracy, the needs and opinions of the wider public must be thoughtfully considered when addressing matters of great public interest.  Adolf Berle⸺one of the key intellectuals who helped mold modern corporate governance theory and whose work is extensively discussed in the book⸺was a turn of the century Progressive and later New Deal Democrat whose political sensibilities deeply shaped his policy analyses and prescriptions.  Berle also appreciated that the legitimacy of the New Deal economic order critically depended on the existence of a robust, broad-based popular consensus.  Discussions among today’s legal practitioners would benefit from a similar appreciation of public sentiment.