Opportunism in the Shareholder Voting and Engagement of the ‘Big Three’ Investment Advisers to Index Funds

The underlying theme of this Article is that the Big Three investment advisers to index funds (BlackRock, Vanguard, and State Street) need to be understood as agents of those who invest in the mutual funds and exchange traded funds they manage. They are not institutional investors, the role performed by the funds they manage, but investment advisers. As such, they are agents, prone to acts of opportunism like any other agent. Therefore, corrective measures are required to discourage their opportunistic behavior. To mitigate this behavior, this Article proposes both a market solution and the use of fiduciary duties. Part I describes the collective action problem that leads to Big Three voting that is uninformed, making their voting no more informed than retail investors. Part II provides principles of optimal voting and engagement that we should expect the Big Three to follow. Deviations from these principles, based on the optimal objective of portfolio primacy (maximizing the value of the entire portfolio at any point in time), indicate opportunistic behavior. Moreover, it is argued that the best approach for achieving portfolio primacy is simply to defer to the most informed locus of authority in a public company, the board of directors as advised by executive management. Part III takes a critical look at the Big Three’s millennial marketing strategy and finds examples of opportunistic behavior. This Part also presents a simple model describing the Big Three’s decision-making calculus that results in the opportunistic use of their voting and engagement power. That calculus involves determining how much the opportunistic use of its voting and engagement power will reduce an index fund’s value versus how much potential there is for a gain in the Big Three member’s market share and the resulting increase in assets under management. Finally, this Part tackles how this calculus interferes with the ability of the Big Three to act as informal regulators of public companies. Part IV proposes a possible market solution to the issue of Big Three opportunistic behavior. Part V proposes a possible fiduciary duties solution. Given the authority already granted them through existing statutory law, the Department of Labor and the Securities and Exchange Commission would be the enforcers of these proposed fiduciary duties