Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian A. Bebchuk and Scott Hirst

Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian A. Bebchuk and Scott Hirst

INDEX FUNDS & THE FUTURE OF CORPORATE GOVERNANCE 
INTRODUCTION
Index funds—investment funds that mechanically track the performance 
of an index1—hold an increasingly large proportion of the equity of U.S. 
public companies. The sector is dominated by three index fund managers—
BlackRock, Inc. (BlackRock), State Street Global Advisors, a division of 
State Street Corporation (SSGA), and the Vanguard Group (Vanguard), often 
referred to as the “Big Three.”
In a recent empirical study, The Specter of 
the Giant Three, we document that the Big Three collectively vote about 25% 
of the shares in all S&P 500 companies;
that each holds a position of 5% or 
more in a vast number of companies;
and that the proportion of equities held 
by index funds has risen dramatically over the past two decades and can be 
expected to continue growing substantially.
Furthermore, extrapolating from 
past trends, we estimate in that article that the average proportion of shares 
in S&P 500 companies voted by the Big Three could reach as much as 40% 
within two decades, and that the Big Three could thus evolve into what we 
term the “Giant Three.”
The large and steadily growing share of corporate equities held by index 
funds, and especially the Big Three, has transformed ownership patterns in 
the U.S. public market. How index funds make stewardship decisions—how 
they monitor, vote in, and engage with portfolio companies—has a major

impact on the governance and performance of public companies and the 
economy. Understanding these stewardship decisions, as well as the policies 
that can enhance them, is a key challenge for the field of corporate 
governance. This Article contributes to such an understanding.
Leaders of the Big Three have repeatedly stressed the importance of 
responsible stewardship, and their strong commitment to it. For example, 
then-Vanguard CEO William McNabb stated that “[w]e care deeply about 
governance,” and that “Vanguard's vote and our voice on governance are the 
most important levers we have to protect our clients’ investments.”
Similarly, BlackRock CEO Larry Fink stated that “our responsibility to 
engage and vote is more important than ever” and that “[t]he growth of
indexing demands that we now take this function to a new level.” The Chief 
Investment Officer (CIO) of SSGA stated that “SSGA’s asset stewardship 
program continues to be foundational to our mission.”
The Big Three leaders have also stated both their willingness to devote 
the necessary resources to stewardship, and their belief in the governance 
benefits that their investments produce. For example, Vanguard’s McNabb 
has said, of governance, that “[w]e’re good at it. Vanguard’s Investment 
Stewardship program is vibrant and growing.” Similarly, BlackRock CEO 
Larry Fink has stated that BlackRock “intend[s] to double the size of [its] 
investment stewardship team over the next three years. The growth of 
[BlackRock’s] team will help foster even more effective engagement.”
The stewardship promise of index funds arises from their large stakes and 
their long-term commitment to the companies in which they invest. Their 
large stakes provide these funds with significant potential influence, and 
imply that by improving the value of their portfolio companies they can help 
bring about significant gains for their portfolios. Furthermore, because index 
funds have no “exit” from their positions in portfolio companies as long as 
those companies remain in the index, they have a long-term perspective, and 
are not tempted by short-term gains at the expense of long-term value. This

Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian A. Bebchuk and Scott Hirst