Scott Hirst

The death last week of the founder of Vanguard, Mr John Bogle, offers a timely reminder of the upheaval in the asset management industry brought about by the advent of index investing around four decades ago. Index investing had its antecedents in the development of modern portfolio theory. ...In a similar tradition to Berle and Means, Professor Lucian Bebchuk, Alma Cohen and Scott Hirst from Harvard University suggests that the institutionalisation of stock markets exacerbates the conflict of interest (The agency problems of institutional investors, Journal of Economic Perspectives 2017). In a world of diffuse and dispersed share ownership, institutional investors are reluctant to engage in monitoring in the knowledge that their competitors also benefit from their own time consuming and expensive monitoring activities. Index funds in particular, face weak incentives to engage in stewardship activities that improve governance and value because they bear the full cost of such activities but not the full benefits.

Lousy incentives for corporate stewardship is a flaw at the heart of our system of delegated asset management. What’s more, index funds, which are rapidly becoming the dominant force in investment management, have the lowest incentive to spend money to chivy the companies whose shares they hold to perform better...“Investment managers of mutual funds - both index funds and actively managed funds - have incentives to under-spend on stewardship and to side excessively with managers of corporations,” Lucian Bebchuk and Scott Hirst, both of Harvard Law School, and Alma Cohen of Tel Aviv University write in a newly revised study.