Study: ‘Passive' Investors Play Key Role In Swaying Corporate Governance Choices

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By Yin Wilczek

Jan. 28 — Contrary to conventional wisdom, “passive” institutional investors such as mutual funds and investment advisers may be just as important as activist investors in shaping corporate governance and policy, a soon-to-be-published study states.

The study by professors at the University of Pennsylvania's Wharton School said it reviewed an area in which there is a dearth of research: whether corporate behavior is influenced by passive investors such as Vanguard, State Street and Dimensional Fund Advisors that hold diversified stock portfolios with low turnover and that do not actively buy or sell securities to influence managerial decisions.

It found that such investors in fact play a key role in influencing companies' governance choices.

“Contrary to the presumption that passive investors lack the willingness and ability to influence firms’ policy choices, our evidence suggests that passive investors adopt general principles of what constitutes effective governance and successfully influence firms’ governance and other policy choices by voting (or withholding management support) accordingly,” the study states. “In particular, we find that ownership by passive investors is associated with more independent directors on a board, more poison pill removals, the elimination of restrictions on shareholders’ ability to call special meetings, and fewer dual class share structures.”

SEC Filings 

The study, “Passive Investors, Not Passive Owners,” was authored by assistant finance professor Todd Gormley, professor Donald Keim and Ian Appel. The study used Securities and Exchange Commission Form 13F filings to compute institutional stock holdings and reviewed data from two benchmarks: the Russell 1000 and the Russell 2000 indices.

Gormley told Bloomberg BNA that the paper is under review at a peer-reviewed journal and should be published in the “near future.”

The study said that overall, its findings “shed new light on the importance of passive investors and their rapid growth over the last few decades.” It also suggested that there are many mechanisms by which passive investors influence managerial decisions, including through their sizeable stock ownership and active expression of their governance views.

The study further found that passive ownership is associated with reduced cash holdings, higher dividend payments and lower senior management pay—factors that may mitigate the likelihood of an activist campaign.

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Ryan Tuck at

The study is available at