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 other agents. Corrective measures are required to discourage their opportunistic behavior. To mitigate such behavior, this Article proposes both a market solution and the use of fiduciary duties.

Many have started to look to the corporate sector to control carbon emissions, mitigate climate change, and redress other problems. But any serious effort to control carbon emissions (or other problems) will have winners and losers: companies that will benefit from reduction; and companies that will bear the brunt of mitigation efforts. In particular, concentrated carbon emitters, such as oil exploration and production companies, are likely to suffer. If so, who will force the carbon emitters to cut their carbon output? Who will be the agents of change in the corporate sector? In recent years, the proponents of a corporate-focused strategy have started to look to “universal owners”—the asset managers and owners that hold a significant swath of many public companies. Some commentators have argued that universal owners should use their influence in portfolio companies to maximize the value of the overall portfolio rather than the value of any particular company. For some, this means that universal owners should adopt “systemic stewardship” that would push for market-wide initiatives to reduce environmental externalities and control systemic risk (e.g., standardized climate risk disclosure). According to others, universal owners should pursue a more ambitious agenda and take affirmative steps to mitigate the risks of climate change to the long-term value of the portfolio by, for example, pushing carbon emitters to cut output, whether or not that promotes individual firm value. But shareholders, even universal owners, do not manage companies. Rather, the business and affairs of a corporation are managed by full-time senior management teams under the general oversight of a board of directors within a framework created by corporate law. In this Article, we analyze the extent to which universal owners can and should be expected to sacrifice single firm value even when doing so increases the value of the overall portfolio. We are quite pessimistic about the potential of systemic stewardship that entails substantial tradeoffs among portfolio companies. This pessimism stems from three principal reasons. First, universal owners would have to consider the possibility that inducing some firms to reduce environmental externalities and mitigate risk will generate a competitive response that will eliminate the benefits from these actions for their other portfolio companies. If that were to happen, universal owners would be stuck with the losses without receiving any corresponding gains. Second, corporate law, as it currently stands, has a strong “single firm focus” (SFF) that stands in sharp contrast to the potential “multi-firm focus” (MFF) of large portfolio investors. If universal owners were to work individually or together to protect their overall portfolios from systemic risk, it would clash with corporate law in a fundamental way that could create significant risks of liability. Third, universal owners typically manage a wide variety of portfolios for clients, each of whom is owed fiduciary duties. A “tradeoff” strategy that would benefit some portfolios at the expense of other portfolios would conflict with these fiduciary duties as well as with the core multi-client, multi-portfolio business model. As a result, we expect that universal owners will not act in concert and will not openly pursue an MFF strategy. Rather, they will act unilaterally and under the cloak of promoting single firm value. But because any serious effort to mitigate climate change will involve tradeoffs, we do not expect universal owners to be effective in controlling carbon emissions.

Dual-class shares and the anticompetitive effects of common ownership are two of the most discussed corporate governance issues of our time. In this Article, we identify a hidden connection between them, which allows us to derive policy implications that are relevant for both. The traditional debate on dual-class shares is based on the trade-off between having visionary founders firmly in control of the firm and the risk that they extract private benefits of control. We show that the exclusive focus on this trade-off is rooted in the outdated assumption that all shareholders are firm-value-maximizing (FVM); that is, they aim to maximize the value of the firm in which they have invested. However, as the debate on common ownership acknowledges, diversified institutional investors, à la BlackRock, care about maximizing the value of their funds’ portfolios, regardless of what happens to any individual investee company; they act as portfolio-value-maximizing (PVM) shareholders. Consequently, they might prefer a lower level of competition in product markets to maximize the joint value of the competitors that are in their portfolio. In present-day financial markets dominated by PVM institutional investors, dual-class shares can serve the additional purpose of allowing insiders to silence PVM shareholders, thus mitigating the anticompetitive effects of common ownership. For this reason, we argue against banning dual-class shares, or even introducing a mandatory time-based sunset. That is not the end of the story. The ongoing climate crisis demonstrates that a relatively low number of major carbon emitters can impose gigantic externalities on the planet. The macroeconomics literature, in turn, has provided ample evidence that a subset of systemically important firms can affect the whole economy. Allowing these companies to have dual-class shares without limitations grants FVM shareholders, à la Zuckerberg, the unfettered ability to inflict systemic harm on society. If limitations were imposed on such shares, PVM shareholders would internalize part of these externalities via their other portfolio holdings and hence have the incentive to steer individual portfolio firms into being mindful of these externalities. Thus, we suggest that there should be limits placed on the use of dual-class shares by systemically relevant firms and show how such limitations ought to be tailored according to a firm’s specific ability to impose systemic externalities.

Separation is at the heart of corporate law and practice. Corporations separate shareholders from their money by partitioning assets, dividing ownership from control, and filtering investment through institutional intermediaries. On the conventional view, these forms of corporate separation are ethically regrettable, because they undermine shareholders’ motivation and capacity to take responsibility for how companies use their money. This Article challenges the conventional view and defends the claim that separating shareholders from their corporate investments promotes the value of pluralism in a diverse modern economy. It also makes the case that as new technological developments continue to erase the boundaries between social and economic spheres, corporate separation is now more important than ever.