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The conventional view of regulation is that it exists to constrain corporate activity that harms the public. But amid perceptions of government failure, many now call on corporations to tackle social problems themselves. And in this moment of dissatisfaction with government, powerful asset managers have stepped in to serve as regulators of last resort, adopting rules that bind corporate America on issues of great social importance, including climate change and workplace diversity. This Article describes this dynamic — where shareholders have become regulators — which has been made possible by the rise of institutional shareholding (and index investing in particular) and the contemporaneous growth of shareholder power. As a result, the large diversified asset managers that specialize in index funds (the so-called “Big Three” — Vanguard, State Street, and BlackRock) collectively hold nearly controlling stakes across the public equity market. In addition to intervening in traditional areas of corporate governance, they have adopted sweeping board diversity mandates as well as “ESG” disclosure and carbon emission reduction requirements, and enforced them through their proxy voting policies. And the early consensus is that asset managers have been influential in these areas, driving change where other private (and public) efforts failed.

This Article describes these regulatory interventions in detail and concludes that we are witnessing a novel privatization dynamic. It also offers a theory about the incentives that shape it. Asset managers will only supply regulation if it has a positive impact on their profits; therefore, demand from clients — which include not just individuals, but also institutions — will govern the choice of policies and the substance of their rules. And given the breadth of the Big Three’s clientele and their interest in avoiding government backlash, their policies are likely to take many interests into account. Nonetheless, serious concerns loom large, including the fact that for-profit asset managers lack democratic accountability and government oversight for their policymaking, with no guarantee that it will further the public interest. To the extent that their policies are shaped by the corporate clients that provide much of the assets they manage, they are unlikely to be as impactful as many perceive. The provision of regulation by asset managers may also take pressure off the government to respond to these issues with policies better calibrated toward advancing social welfare. At bottom, understanding the forces that shape (and potential problems that accompany) this privatization dynamic is of critical importance not just for investors and corporations, but also for the public.


Business Organizations Law | Law | Securities Law


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