02 December 2018

HLS Forum: Common ownership - Do institutional investors really promote anti-competitive behavior?

ICGN Policy Director George S. Dallas warns that remedies currently on the table to offset the potential ills of common ownership would challenge fundamental shareholder rights that are fundamental to good stewardship.

A debate is building in the academic community as to the economic impact of common ownership, particularly with regard to its potential to motivate anti-competitive practices by companies in the same sector owned by its “common” investors. To many institutional investors and financial practitioners, this anti-competitive argument may seem initially as an arcane scholarly debate. But, in extremis, the regulatory policy implications of this academic challenge to common ownership are potentially severe and disproportionate. Taken seriously, this challenge could marginalise investors and undermine their fundamental ownership rights, at a time when regulators globally are pressing for more investors to exercise their stewardship obligations.

ICGN believes that this challenge to common ownership is ill-founded, and lacking in both an understanding of institutional investment practice and clear evidence. Accordingly, we believe that any blunt legislative initiatives to quell the perceived problem of common ownership would be retrograde, reducing the rights of investors and resulting in unintended consequences anathema to good corporate governance and good stewardship.

What might work in theory does not necessarily play out in practice; there can be obstacles. Common ownership is an example of this, especially when taking into account the practices—and the limitations—of institutional investors with regard to their exercise of shareholder rights. Institutional investors are increasingly focusing on sustainable value creation over a long-term horizon to provide stable returns for their beneficiaries. Distorting industry competition to achieve these goals is not part of this formula, and would run counter to the growing focus on broader social and environmental factors as investment and stewardship considerations.

Full article

© Harvard Law School Forum on Corporate Governance and Financial Regulation