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Debate on Indexing, Common Ownership Draws in Academic, Regulatory, Business Experts

In a recent opinion piece for the Wall Street Journal, Vanguard Founder John Bogle weighed in on the debate around index funds’ increasing share of corporate ownership and the implications for corporate governance and market competition. “I do not believe such concentration would serve the national interest,” Bogle wrote in the WSJ. Bogle cited recent academic work by Harvard Law School Professor John Coates, who asserts that indexing is reshaping corporate governance and shifting voting power and control to a small number of individuals. Professor Coates explores the issue in an upcoming academic paper which includes policy options such as enacting federal legislation making it clear that directors of index funds and other large money managers have a fiduciary duty to vote solely in the interest of the funds’ shareholders. A recent hearing at the FTC addressed similar concerns. Participants in the FTC program examined concerns that acquisitions and holdings of non-controlling ownership interests in competing companies, for example by institutional investors, may have anticompetitive effects. SEC Commissioner Robert Jackson delivered testimony before the FTC and addressed both sides of the debate. “Whether concentrated common ownership has led to weakened competition can and should be debated. What is not debatable, however, is that we are at a pivotal moment in financial history when corporate elections are increasingly decided by a handful of powerful index fund managers. That concentration of power is an urgent corporate governance challenge of our time,” Jackson testified, adding: “Whatever one thinks about those debates, all should agree that American investors are entitled to understand how their money is being voted in corporate elections. That’s why it’s time for the SEC to bring transparency to the increasingly important voting practices of major institutional investors.”Professor Lucian Bebchuk of Harvard Law School was among the panelists and argued in his presentation titled The Misguided Attack on Common Ownershipthat the claims of common ownership “alarmists” are unwarranted and that regulatory attention to common ownership is not merely unnecessary; it is costly and counterproductive. Bebchuk contends that arguments against common ownership “fail to take into account how the agency problems of investment fund managers provide them with incentives to under-invest in stewardship and to be deferential toward the corporate managers of portfolio companies.” Policymakers should be primarily concerned that investment fund managers engage too little and not that they engage too much, Bebchuk writes.The FTC heard from academic, industry and legal experts and is inviting public commentno later than January 15, 2019 on the issue.