In able to ‘exit’, while others point

In the past ten years, there has been a large shift from active to passive investments. Vanguard, Fidelity, and Blackrock represent the largest portion of the passive index fund industry, and the major shareholder of the S&P 500 firms.
These funds hold illiquid and enduring ownership positions, therefore leading to contrasting opinions on incentives and possibilities to actively exercise shareholder power. Some argue passive investors have low shareholder power because they are not able to ‘exit’, while others point out this gives them more incentives to actively influence corporations.
In my opinion, there are few components to keep in mind regarding these large funds. In fact, the ‘Big Three’ might held relevant power about agency problems by being leading owners of stocks in the market. Stockholders directly control the employment or firing of managers. However, it is also important to consider the fact that these large funds require the presence of numerous management possibly leading to increasing agency problems, “in large corporations ownership can be spread over a vast number of stockholders”1.
There are many risks of mutual fund’s managers not being concerned with the interests of investors leading to agency problems between the fund and its investors. More specifically, these large funds might exercise unseen influences through privately communicating with management of invested companies and by the fact that company’s executives might be inclined to adopt goals and objectives of these large funds, effectively aligning to their decision-making and strategies. “Since agents are people with their own self-interests, sometimes an agent does something that benefits himself or herself to the principal’s detriment”2. Therefore, corporations are reacting to these scenarios by applying specific incentive mechanisms such as detailed contracts, monitoring activities, and by incentivizing employees. For example, Apple tackled agency problems via alignment of management and agents’ targets and expectations by “implementing a new rule that executive officers must hold triple their base salary in company stock”3 with configuration towards shareholder ownership.
The negative corporate experiences including Enron, WorldCom, and the real estate bubble have shown the importance of regulations in the corporate environment. These situations led to the enactment of corporate frameworks such the Sarbanes-Oxley Act through which “each company’s must have an assessment of the company’s internal control structure and financial reporting”1. Overall, regulators and/or investors can respond to these challenging corporate scenarios by enhancing internal and external control mechanisms, placing limitation on managerial ownerships, increasing surveillance of managerial compensations, applying highly regulated bilateral contracts, and by soliciting wide enforcement tools in the form of courts and procedural guidelines.