Anticompetitive Corporate Governance

Corporate law and antitrust law are generally understood to occupy distinct domains within the legal landscape. Corporate law primarily looks inward, governing how authority is allocated within the firm. Antitrust primarily looks outward, policing rivalry among firms in the marketplace. That division rests on a plausible premise: Governance arrangements may shape how a corporation is run, but they do not ordinarily affect competition in the marketplace itself.

That premise is becoming increasingly difficult to sustain. A small number of institutional investors now hold substantial positions across the public equity market, including in competing companies, and wield significant influence through voting, engagement, and market-wide stewardship policies. Their views of governance best practices often converge—a convergence reinforced by investor coalitions, trade associations, and proxy advisers.

In a new paper, I argue that these developments have transformed corporate governance into a potential instrument of competitive harm. What appears to be an internal governance choice at a single company can have market-wide effects when the same powerful investors promote similar arrangements across thousands of firms. The paper develops a two-level account of anticompetitive corporate governance. The first concerns competition among portfolio companies in product and labor markets. The second concerns competition among institutional investors themselves in capital markets.

Competition Among Portfolio Companies

The first level builds on the growing literature on common ownership. Large, diversified institutions frequently hold shares in several companies within the same industry. Because aggressive rivalry may reduce the combined value of those holdings, common owners may have weaker incentives to encourage vigorous competition among their portfolio companies.

Corporate governance provides several channels through which common ownership may soften inter-firm competition. Institutional investors can influence whether executive compensation rewards managers for outperforming rivals. They vote on directors and may support board networks connecting competing firms. They also promote disclosure and transparency—normally hallmarks of good governance, but also practices that can help competitors establish reference points and monitor deviations from industry norms.

Scholars have also linked the decline in labor’s share to common institutional ownership and the governance practices it facilitates. Zohar Goshen and Doron Levit argue that the rise of large institutional investors holding substantial stakes across many public companies has enabled these investors to promote shareholder-empowering governance practices on a market-wide basis. Although such practices may reduce agency costs, they can also intensify shareholder scrutiny and the threat of managerial displacement, making managers more reluctant to undertake uncertain investments. Managers may instead favor shareholder distributions and reduce investment and hiring. Common ownership therefore gives firm-level governance choices broader competitive significance: when similar governance pressures operate across multiple employers, they can weaken labor demand and suppress wages.

These concerns are no longer confined to academic debate. The 2023 Merger Guidelines recognize that partial and common ownership can soften competition. In Texas v. BlackRock, states allege that major asset managers used shareholdings and climate initiatives to restrict coal output. A federal court allowed most claims to proceed; Vanguard later settled without admitting wrongdoing, while the case continues against BlackRock and State Street. Whatever its ultimate merits, the litigation illustrates that investor-driven governance can become an antitrust question.

Competition Among Investors

But competition among portfolio companies is only half the story. Institutional investors are not merely shareholders. They are also competitors.

In primary capital markets, they compete for allocations of newly issued shares. In earlier work, I examined the campaign against dual-class shares—structures granting some shareholders superior voting rights. I argued that when influential investors collectively label such structures defective, seek their exclusion from indices, and demand discounts, their common position may function as a buyers’ cartel. It can strengthen their bargaining power, depress IPO prices, and influence governance terms such as sunset provisions.

The competitive concern takes a different form in secondary markets, where asset managers compete to generate returns and attract clients. Market-wide governance campaigns may reduce variation among portfolio companies and narrow the range of strategies available to competing funds. Here, too, dual-class structures illustrate how governance structures can affect competition in secondary markets: because dual-class companies tend to produce more variable outcomes—both positive and negative—reducing their prevalence may also reduce one source of performance differentiation.

A separate concern arises from the information exchange that investor alliances may facilitate. Collaboration on director elections, say-on-pay proposals, and other governance initiatives often requires institutional investors to communicate. Some of that communication will relate directly to the governance issue at hand. But the same communication channels may also create opportunities for competing asset managers to exchange information that may be competitively sensitive.

The Enforcement Paradox

This two-level framework exposes a striking enforcement mismatch. In product and labor markets, the principal obstacle is often proof. Even assuming that the mechanisms proposed in the anticompetitive common-ownership literature operate as claimed, the resulting conduct typically appears as tacit coordination or parallel behavior among portfolio companies. Section 1 of the Sherman Act, however, requires proof of an agreement. When agreement must be inferred from parallel conduct, enforcers must identify “plus factors” tending to exclude independent action or lawful conscious parallelism—a demanding, fact-intensive inquiry. That task is especially difficult in common-ownership cases because the alleged coordinating influence originates at the investor level rather than in an agreement among the competing portfolio companies, while the resulting conduct manifests in decisions made by the companies. This disconnect makes it difficult to establish the horizontal agreement that Section 1 requires.

Capital markets present the converse problem. Coordination among institutional investors is more naturally analyzed as coordination among competitors. Yet antitrust review may be displaced by implied antitrust immunity. Under the Supreme Court’s framework in Credit Suisse, much of the conduct examined in the paper—including conduct involving IPO pricing, shareholder coordination, and investor communications—may receive implied immunity because it falls within the SEC’s regulatory sphere.

The SEC, however, has historically not treated competition as a central priority. Its tools focus on disclosure, investor protection, and market integrity, and it lacks the antitrust agencies’ specialized expertise in detecting coordination. Antitrust is therefore available where governance-based harm is hardest to prove, but may retreat where its tools could be most useful.

A Reform Agenda for Courts, Regulators, and Scholars

To close this divide and enforcement gap, the paper proposes judicial, regulatory, and scholarly responses. Courts should construe implied antitrust immunity narrowly. Regulators should coordinate antitrust and securities oversight so that each field’s tools can address competitive harms beyond its usual reach. The institutional foundation already exists: In 2020, the SEC and the DOJ’s Antitrust Division signed their first memorandum of understanding aimed at promoting competition in the securities industry. The paper also proposes pass-through voting as a check on concentrated governance power and greater antitrust scrutiny of investor standard-setting and coordination.

Scholars should be more cautious when endorsing investor coalitions seeking market-wide reforms. Such coalitions may promote accountability and sound corporate governance while also operating as coalitions of competitors. Endorsing them may inadvertently legitimize competitor coordination without accounting for its competitive costs.

Read the full article here.