Voice versus Exit: The Causes and Consequence of Increasing Shareholder Concentration

Abstract

This conceptual paper investigates the reasons behind the recent increase in corporate engagement by institutional shareholders. Whilst the rise of institutional ownership is nothing new, what has changed is that large economies of scale in the fund management industry have resulted in ownership concentration amongst a relatively small number of very large institutions. This ownership concentration has brought down the cost of engagement while at the same time raising the cost of exit in terms of higher transactions costs (market impact). What has furthermore limited the restricted the ability to exit has been the shift from active to passive funds. Accompanying these institutional trends has been an evolution in the understanding of fiduciary duty towards an understanding that puts greater weight on the inclusion of environmental, social and governance factors.

Applying Hirschman’s concepts of Exit and Loyalty to the investment management industry this paper shows that a rising ownership concentration and the growth in passive assets means that for the majority of institutional shareholders, voice is today more practicable than exit. The inability to exit has resulted in an institutional investor community that is both more powerful and compelled to be more involved in corporate affairs.

Keywords: Ownership, Governance, Engagement, Fiduciary Capitalism, Passive Investment

JEL Classification: G23, G32, G34, L22, P16