The debate over common ownership has raised questions about what, if any, policy responses are appropriate when common owners reduce competition in product markets. This paper, available here, reviews the literature on policy responses and evaluates various reform proposals in light of recent empirical and theoretical developments.
A first section frames the discussion.
Common ownership theories of harm have attracted their fair share of criticisms. One group of criticisms centred around the question of “mechanism”: what was the mechanism with which institutional investors compelled portfolio firms to raise prices and reduce output? Moreover, some researchers have found statistical or anecdotal evidence that common ownership produces social benefits by internalising positive externalities across firms, like those that are due to research.
Policymakers must therefore confront three questions. First, is the time ripe for intervention or should they wait for more academic work to create a larger consensus among independent academics about the empirical effects of common ownership? Second, if or when policymakers should intervene, what is the appropriate regulatory response? And third, how should policymakers address common ownership if it both allows firms to internalize externalities and reduces competition?
The second section discusses whether there is a case for intervention against common ownership.
There are several facts that are mostly undisputed. First, there is an incentive—a very large one, from the standpoint of theory, given that the law blocks off other forms of collusion—for someone to buy up large stakes in competitors and discourage them from competing with each other. Second, stakes large enough to give influence have already been obtained by major institutional investors and large activist investors as well. Third, there is substantial evidence that common ownership has some effect on the behaviour of portfolio firms—with the major discussion being about whether this effect is negative or positive, systemic or sector-specific, large or small.
All of these developments taken together would normally be considered ample justification for a policy response—at a minimum, investigation, information-gathering, and readiness to intervene, but potentially much more.
The third section looks into what form policy intervention should take.
The mechanism through which common ownership causes anticompetitive outcomes is relevant for this discussion, since the policy response — for example, antitrust litigation, as opposed to some form of regulation — should normally be tailored to the mechanism. To simplify, the author identifies two main types of mechanisms: (i) pecuniary incentives; (ii) career incentives and manager selection.
These mechanisms can be tackled by a number of different types of policy intervention. One is antitrust enforcement, but there are reasons to think that this is not an ideal response. Courts may be reluctant to recognise liability on the part of firms that obtained their large stakes by offering index funds, which are widely regarded as socially beneficial. The empirical analysis that litigators would need to undertake in order to prevail is difficult and expensive; there remain a range of methodological disputes that heighten the risk of litigation; judges may regard remedies like divestiture as disruptive; and they may also simply not be able to understand the theory. This is not to say that antitrust is without relevance: it can provide an alternative or (more likely) supplemental policy instrument for addressing common ownership through greater antitrust enforcement (or regulation) of the underlying markets.
However, the literature suggests that the ultimate problem for competition is not so much the rise of common ownership as the decline of the large undiversified investor. That seems more like a regulation-of-capital-markets problem than an antitrust one. And this touches on one problem with attempts to address common ownership through antitrust: common owners have a fiduciary duty to exert pressure on managers so that they act in the interest of client. In other words, common owners may be legally required to employ means of corporate control available to them to reduce competition in the service of their clients. A solution for this would be to forbid large common owners from communicating with, or exerting control over, managers in any way. A problem with this approach is that it casts its net too large, depriving diversified owners of their control rights even if they are too small to reduce competition. Other corporate governance reforms might still leave significant gaps to exert anticompetitive influence over portfolio firms.
Another option would be to regulate corporate compensation, e.g. by requiring a higher degree of performance-sensitivity in management contracts when common ownership exceeds a certain threshold. A more radical regulatory approach would be to limit the size of common shareholders. Imagine that a common shareholder would not be permitted to own more than a small share (say, 1%) of competing firms in a concentrated market; alternatively, a common shareholder could own as large a share of a firm as it wants but only as long as it owns no shares in its competitors.
The last section discusses the potential costs of intervention.
There is a possibility that common ownership might be socially beneficial – e.g. through traditional cooperation mechanisms. In practice, it is unclear how such cooperation mechanisms would not benefit from traditional antitrust exemptions, or why regulation should allow for safe harbours for socially beneficial cooperation. As such, there is not much force to arguments that intervention against common ownership would preclude beneficial cooperation.
This is a short and helpful overview of the main policy proposals to address the harms flowing from common ownership. One reservation on my part is that it is very US-centric, but this merely reflects the nature of the debate to this point – with a few exceptions, as we shall see.
However, my main comment is that the author argues forcefully that the discussion on the causal mechanisms through which common ownership can lead to competitive outcomes is important to determine the appropriate regulatory response – but then discusses these responses, and their desirability, without reference to causal mechanisms. This is a pity, and something that I hope to see developed in future papers.