News & Insights

Client Alert

May 30, 2019

Implications for Public Companies from Continued Growth and Assertiveness of Passive Investors


Over the last few years, corporate leaders have grappled with the growth of passive investing and the immense concentration of funds in a few asset managers, particularly BlackRock, Vanguard, and State Street Global Advisors (the “Big Three”).

Corporate executives, boards, and investor relations teams prepare for a new world in which the Big Three become more powerful and engaged while active investment managers become even more active to stand out.

Recent research from Lucian Bebchuk and Scott Hirst found that the Big Three investors currently hold roughly 17% of Russell 3000 companies and 21% of S&P 500 companies. Since these passive investors vote virtually all of their shares and other investors do not, the Big Three represent about 21% and 25% of all director votes at Russell 3000 and S&P 500 companies, respectively. As shown below, that voting power is forecast to grow dramatically in coming years.

The increasing concentration of assets under management has generated intense pressure on all asset managers. Understandably, there is increasing attention on the Big Three as their importance grows, creating an incentive for these firms to demonstrate that they are taking their power seriously. This is one reason that the Big Three have been so public in explaining how they want to dramatically increase the size of their teams responsible for governance analysis and proxy voting.

As the Big Three have gotten bigger, they have also felt intense pressure from special interest groups who increasingly recognize the potential to achieve social and political victories at corporate ballot boxes. Many of these critics believe that the Big Three are not doing enough to advance important causes.

The fierce struggle among the Big Three for passive dollars likely causes these firms to look for ways to stand out, and stewardship is one of the few ways each firm can differentiate itself in pursuit of new customers. At the same time, the continued flow of funds to the Big Three increases pressure on active managers, who are competing with the Big Three and each other for investment dollars, pushing those active firms to be even more active.

The most likely outcome is that investors of all stripes are more likely than ever to demand time and attention from public companies. As the Big Three grow, so does the challenge for public company executives and boards.

Key Takeaways

  • Old approaches to investor relations are not enough. As passive investors grow and develop new decision-making models, public companies need to understand how they operate and identify and engage with relevant decision-makers.
  • Companies need to build capital with their investors. Common tactics include proactive engagement, enhanced disclosure, and policy change, but each is different. A thoughtful, nuanced, and strategic approach will maximize effective engagement.

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