John Coates, a professor at Harvard Law School, has written that the growth of indexation and the Big Three means that in the future, about a dozen people at investment firms will hold power over most American companies.
What happens when so few people control so much? Researchers have argued that this level of concentration will reduce companies’ incentives to compete with one another. This makes a kind of intuitive sense: For example, because Vanguard is the largest shareholder in both Ford and General Motors, why would it benefit from competition between the two? If every company is owned by the same small number of people, why fight as fiercely on prices, innovations and investments?
Indeed, there is some evidence that their concentrated ownership is associated with lower wages and employment and is already leading to price increases in some industries, including in airlines, pharmaceuticals and consumer goods. The firms dispute this. In a 2019 paper, Vanguard’s researchers said that when they studied lots of industries across a long period of time, “we do not find conclusive evidence” that common ownership led to higher profits.
But if the Big Three keep growing, the effects of their concentrated ownership will get only worse. Einer Elhauge, also of Harvard Law School, has written that concentrated ownership “poses the greatest anti-competitive threat of our time, mainly because it is the one anti-competitive problem we are doing nothing about.”
Ramaswamy says his new firm, Strive, will aim to limit the Big Three’s power through competition. If Strive attracts enough investors to gain a say in how companies are run — a huge “if,” considering that Ramaswamy has said that Strive has raised only about $US20 million compared with the trillions managed by the Big Three — Ramaswamy says he will push for companies to focus on “excellence” rather than wading into heated political issues.
But the goal of staying out of politics in 2022 is about as realistic as staying dry in a hurricane. Last year, for example, BlackRock, Vanguard and State Street supported a successful effort to shake up the board of Exxon Mobil by installing new members who promised to take climate change more seriously.
Excessive wokeness, or long-term vision?
Was that because of excessive wokeness, as Ramaswamy says, or because Exxon Mobil had been underperforming its peers for several years, and it was woefully ill prepared for the transition to renewable energy that has been transforming energy markets? The move seems well within what the investment firms say is their main goal, looking out for the long-term interest of shareholders.
And what if the firms hadn’t backed the climate initiative — wouldn’t that have been construed as a political decision by the activists who have called on shareholders to push corporations to address the climate? (In any case, BlackRock announced this week that it would most likely vote for fewer climate-related shareholder proposals in 2022 than it did in 2021.
In late 2018, a few months before his death, John Bogle, the visionary founder of Vanguard who developed the first index fund for individual investors, published an extraordinary article in The Wall Street Journal assessing the impact of his life’s work. The index fund had revolutionised Wall Street — but what happens, he wondered, “if it becomes too successful for its own good?”
Bogle pointed out that asset management is a business of scale — the more money that BlackRock or Vanguard or State Street manages, the more it can lower its fees for investors. This makes it difficult for new companies to enter the business, meaning that the Big Three’s hold on the market seems likely to persist. “I do not believe that such concentration would serve the national interest,” Bogle wrote.
Bogle outlined several ideas for limiting their power, but he pointed out problems with a number of them. For example, regulators could prohibit index funds from holding large positions in more than one company in a given industry. But how then would they offer an index fund that invested in all companies in the S&P 500, one of the most popular kinds of funds?
Coates, of Harvard, argues that lawmakers will have to move carefully to manage the dangers of concentration without limiting the benefits to investors of these firms’ low-cost funds. “No doubt getting the balance right will require judgment and experimentation,” he wrote.
But the most pressing issue is for us to recognise the problem. The growing influence of three large fund managers is not likely to diminish. Ramaswamy’s take on the problem is wrong, but he’s right that it’s a problem.
How much power do the three companies have to accumulate before we decide it’s too much?
This article originally appeared in The New York Times.
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