Quietly and with little fanfare, the ownership of hundreds of public
companies in the United States has moved from being dispersed among many
players to being concentrated in the hands of a just a few.
But it's not big
banks that are dominating corporate ownership, as in the past. Instead it's
mutual funds that hold almost 30 percent of U.S. corporate ownership today,
compared with 8 percent in 1990, according to research by Stephen M. Ross
School of Business Professor Gerald Davis. Fidelity, Vanguard, and American
Funds each have more than $1 trillion in assets.
These mutual funds,
the Fidelity family of funds in particular, don't wield their power as past
large holders have, nor are they necessarily long-term investors in a
particular company. And they don't rock the boat by challenging management or
putting a slate of directors up for election to corporate boards.
This makes the new
structure unique in U.S. history, according to Davis' new paper, A New
Finance Capitalism? Mutual Funds and Ownership Re-Concentration in the United
States. That's partly because the new finance capitalism didn't develop
by some grand plan from oligarchs, but by a trend in U.S. pension reform.
Many employers have
shifted from defined benefit plans, such as traditional pensions, to defined
contribution plans, such as 401(k)s. That has put more U.S. households and more
money into the capital markets by way of mutual funds.
to be the distinctive characteristic of the American system of corporate
governance that ownership is highly dispersed, with no single owner holding a
controlling position, Davis says. In fact, economists value this as
a positive feature of the system because it makes decision-making less prone to
'cronyism.' So it's ironic that as scholars were arguing for the superiority of
dispersed ownership, the U.S. was seeing ownership becoming much more
concentrated. It was quite surprising for me to find that Fidelity is the
largest shareholder in about one in 10 public companies. Who knew?
In some ways, the
new concentrated ownership harks back to the early 1900s, when three large
banks -- JPMorgan, National City Bank of New York (now known as Citigroup), and
First National -- formed a powerful money trust that owned shares
and debt of most important industrial companies. These banks also placed many
of their partners on several corporate boards, giving them wide control of the
But Fidelity and the
other mutual funds do not act like JPMorgan of the early 1900s, Davis says. For
one, the mutual funds buy their ownership stakes on the open market through
arms-length procedures. They also do not have any obvious influence over a company's
financing decisions, as they don't have control over access to debt. The funds
also do not nominate directors, with a few rare exceptions.
And despite the fact
that big mutual funds hold 10 percent ownership positions in some companies --
which normally indicates a long-term investment -- the funds move their money
from company to company with surprising frequency.
I used to
imagine that if you were a 10 percent owner, you were in it for the long
haul, Davis says. To a remarkable degree, it's amazing that they're
as agile as they are.
One unique quirk is
a correlation between how often a mutual fund votes with management on
shareholder issues and the amount of pension management business a fund's
parent does with that company. This is particularly true in the case of
Fidelity, according to earlier research by Davis and fellow Ross professor E.
Han Kim. Though Fidelity has more than 300 separate, independently managed
funds, shares held by Fidelity funds are voted as a bloc according to a
It's not that
Fidelity votes with management at its clients and against management in
non-clients, Davis says. It's that they have a centralized voting
procedure so that all of their funds vote the same way, and it follows a very
strict set of rules that are very management friendly.
Davis says it's too
soon to tell what kind of effect the current financial crisis will have on the
phenomenon. But it's unlikely that the crisis will change the ownership
start a giant, full-scale withdrawal from their 401(k) plans, then that money
is probably going to be in mutual funds and mutual funds are going to invest it
in stocks, he says.
The recent financial
crisis is helping to perpetuate another type of concentration. Banks are using
the $700 billion Treasury bailout fund approved in early October to
consolidate. Davis says there has been a long-standing fear in the U.S. of
concentrated economic power. It goes back to Andrew Jackson's 1832 veto of the
Second Bank of the United States and the breakup of the money trusts in the
Now we have
three banks, Citigroup, JPMorgan Chase, and Bank of America, that are far
bigger in relative and absolute terms than banks ever have been in American
history, Davis says. We're going to end up with three banks that
control much of American finance and probably three mutual funds with
concentrated corporate ownership. It's weird that you don't see a lot of
commentary on the extent to which this has been happening.
says to expect some sort of re-examination of the huge corporate ownership by
mutual funds and the size of U.S. banks. At least, that's what history
There seems to
be a recurring motif in American history that whenever power gets concentrated
in financial institutions, there's political backlash that takes it down a