Over the past 20 years, the share of mutual fund assets owned by index funds, or “passive” investors, has nearly tripled—a development often seen as hurting corporate governance.
When active investors use their discretion to buy or sell shares of a company, they’re voting on the firm’s strategy and rewarding or punishing its leaders for performance. Even when they’re not buying or selling, they’re often engaged in a dialogue with executives, using the threat of selling to persuade managers to shift strategy or increase dividends or buybacks.
Passive fund managers can’t do this— they’re forced to hold, say, an S&P 500 stock, regardless of their view of the company’s strategy, simply because the stock is in the index they’re tracking. (Some critics refer to the passive camp as “lazy investors.”) Although the…
You're reading a preview of
Harvard Business Review (Digital) - 1 Issue, September 2016