Making Life Harder for Short Sellers

Here is a half-baked theory I have about index fund voting. People worry sometimes that index funds own a pretty large percentage of the stock of a lot of public companies, and that their control of those companies—by the concentrated voting power of their shares—will lead to trouble. There are different theories. One theory is that index funds are too passive, that they don’t have good incentives to actually understand the companies they own and so will not do the work to vote the correct way. Another theory is that index funds are anti-competitive, that because they own all the companies they will vote to maximize overall industry revenue rather than one company’s competitive position. Another theory is less of a theory and more just “boy it’s weird that a handful of big fund managers control all the companies.” You could have other theories. The point is just that some meaningful number of intelligent people think some form of “it is bad that index funds vote so many shares at so many public companies.”

When I write about this, I usually get emails saying something like “the solution is to say that index funds can’t vote their shares, which will concentrate voting power among more active and less diversified investors,” and indeed some index-fund critics have suggested this solution. Sometimes I get more financial-engineering-y emails saying “the solution is to let voting rights trade separately from economic ownership, so that index funds can own shares of a company but sell their voting rights to more active and engaged shareholders.” You could find fault with these solutions, which probably both go too far and don’t do enough to address the problems that people identify with index fund ownership. But the point is just that some meaningful number of intelligent people think some form of “it is bad that index funds get to vote so many shares at so many public companies, and the solution is for them to own shares but not vote them.”