But if the Big Three keep growing, the effects of their concentrated ownership will only get worse. Einer Elhauge, also of Harvard Law School, wrote that concentrated ownership “poses the greatest anti-competitive threat of our time, mainly because it is the only anti-competitive problem we are doing nothing about.”
Ramaswamy says his new company, Strive, will aim to limit the power of the Big Three through competition. If Strive attracts enough investors to have a say in how the companies are run — a huge “if,” considering Ramaswamy said Strive only raised about $20 million compared to the trillions managed by the Big Three — Ramaswamy says that will put pressure on companies to focus on “excellence” rather than getting involved in heated political issues.
But the goal of staying out of politics in 2022 is as realistic as staying dry in a hurricane. Last year, for example, BlackRock, Vanguard and State Street supported a successful effort to shake up Exxon Mobil’s board by installing new members who pledged to take climate change more seriously. Was it because of excessive wakefulness, as Ramaswamy says, or because Exxon Mobil had been underperforming its peers for several years and was woefully ill-prepared for the transition to renewable energy that is transforming energy markets? The move seems to be in line with what investment companies say is their main objective, to look after the long-term interest of shareholders. What if companies hadn’t supported the climate initiative – wouldn’t that have been interpreted as a political decision by the activists who urged shareholders to put pressure on companies to tackle the climate? (In any case, BlackRock announced this week that it would likely vote on fewer climate-related shareholder proposals in 2022 than in 2021.)
In late 2018, a few months before his death, John C. 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 revolutionized 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 BlackRock, Vanguard or State Street manages, the more it can lower its fees to investors. This makes it difficult for new companies to enter the business, meaning the Big Three’s market share looks likely to persist. “I do not believe that such a concentration serves the national interest,” Bogle wrote.
Bogle outlined several ideas for limiting its power, but pointed out problems with several of them. For example, regulators may 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 the companies in the S&P 500, one of the most popular types of funds?
Harvard’s Coates argues that policymakers will have to tread carefully to manage the dangers of concentration without limiting the benefits to investors of these companies’ low-cost funds. “Without a doubt, getting the balance right will require judgment and experimentation,” he wrote.