Financial Intermediary Capitalism and the Accidental Oligopoly

Asset management firms’ accumulation of ownership shares has significant implications on the distribution of economic power

Photo by Tomas Eidsvold on Unsplash

Last week I testified before the Senate Committee on the Budget on the invitation of Senator Bernie Sanders. The hearing was also about private equity, but I focused on concentration among large asset management firms—in particular, the economic power accrued by BlackRock, Vanguard, and (to a lesser extent) State Street because of their dominance in U. S. equity index funds. My written statement follows here.

Executive Summary

In recent decades, a few asset management firms have accumulated major ownership shares of virtually every large corporation in the economy. This development has had significant implications for the distribution of economic power in the United States.

Economic power is the power of individuals or organizations to determine how our economy functions. Today, economic power is concentrated in three types of entities: individual technology behemoths such as Amazon and Facebook; large private equity firms, which individually own more than two hundred companies; and giant asset management firms such as BlackRock, Vanguard, and State Street (also known as the Big Three), which I focus on here.

Under state law, corporations are governed by their shareholders, who elect the board of directors and vote directly on certain issues. The Big Three control more than $20 trillion in assets, largely in mutual funds and exchange-traded funds (ETFs) that they manage on behalf of households and institutions. Many of these funds buy stock in corporations. Because these funds hold legal title to the stock, their managers generally have the power to vote the stock in corporate elections — even though the true economic owners are the investors in the funds.

The Big Three currently cast 25 percent of all votes cast in director elections for large corporations. This gives them significant influence over corporate directors and executives. The Big Three have been criticized for misusing this power in at least four different ways: (1) failing to adequately oversee corporations; (2)…