Passive Investors, Not Passive Owners

Passive Investors, Not Passive Owners demonstrates that while passive investors – such as those that invest through index funds – are not active owners in the traditional sense of accumulating or selling shares so as to exert influence over managers and their choices, they are far from passive owners. Instead, the research finds that passively managed mutual funds, and the institutions that offer them, use their large voting blocs to exercise voice and exert influence on firms’ governance. The research finds that ownership by passively managed mutual funds is associated with significant governance changes such as more independent directors on corporate boards, removal of takeover defenses and more equal voting rights. These governance changes, in turn, are shown to improve firms’ long-term performance.