Caleb Griffin

Regulating Big Tech is now a matter of intense public debate. We ask how well Big Tech companies fulfill their role as gatekeepers of the public square. We ponder whether their dominant market positions merit an antitrust response. We assess their culpability and complicity in spreading online misinformation and hate. However, in the many normative debates over how Big Tech should use its power, the source of that power remains largely unexamined.

Big Tech, like Big Tobacco before it, is an industry founded on addiction. Although typically "free" to use, the world's largest digital platforms exploit users' dopamine pathways to consume as much of their time and conscious attention as possible. Many of the problems currently gripping the public consciousness would be fundamentally less important if these platforms were not powerfully addictive. They would be private problems-issues to be resolved between the company and its users. A key reason they are significant, public problems that society can no longer ignore is that Big Tech has intentionally addicted billions of people.

The business model of many large technology companies, or significant subsidiaries thereof, is built on maximizing the frequency and duration of use, what the industry refers to as "time on device." In this, they have been remarkably successful. The average American spends just over 40% of their waking hours online, with that number approaching 60% for American teens. A growing body of research problematizes the "choice" to spend this much time online. Today's dominant digital platforms are intentionally designed to produce structural and functional changes in various regions of the brain and to trigger the same brain reward pathways as nicotine and other addictive drugs. Thus far, such platforms have managed to almost entirely avoid liability for harms associated with their use.

This Article surveys existing tools that may help to combat Big Tech's addictive design practices. It finds that existing laws and legal duties fail to protect users from exploitation. Accordingly, this Article proposes designating the largest manipulative technology platforms as "systemically important platforms." Platforms so designated would be legally required to open their platforms to middleware, a type of software that can modify how data is presented. Such middleware would feature a control panel of tools that would enable users to curate their digital experience. In addition, these platforms would be subject to increased tax burdens and enhanced regulatory scrutiny with the goal of curbing manipulative design practices and providing billions of users with greater agency.

This Article contributes to the growing literature on the influence of index funds on corporate governance by providing new data on index funds’ ownership, voting control, and impact on shareholder proposal outcomes. The Article first presents data on the firm ownership and voting control of the three largest index funds (the “Big Three”) at Fortune 250 companies. It finds that the Big Three combined are the largest shareholder in 96% of Fortune 250 companies, that Vanguard and BlackRock combined (the “Big Two”) are the largest shareholder in 94.4% of such companies, and that Vanguard alone (the “Big One”) is the largest shareholder in 65.6% of such companies.

The Article next analyzes the power of the Big Three index funds to decide the outcome of shareholder proposals. It presents data on the voting margins for all shareholder proposals at Fortune 250 companies in calendar years 2018 and 2019. It then pairs the voting margin data with the voting control data to provide a market-wide picture of which shareholder proposals are likely within the Big Three’s influence. The findings suggest that the Big Three already possess sufficient voting power to determine the outcome of a majority of shareholder proposals.

Additionally, the Article provides data on the Big Three’s influence over specific categories of shareholder proposals. It finds that the Big Three have the power to determine approximately half of environmental and social proposals (with low error rates) and approximately 65% of governance proposals (with somewhat higher error rates). In light of these findings, the Article explores the profound implications of this proxy voting power and proposes methods for investors to reclaim their autonomy.

By voting one-quarter of shares at large public companies, just three index funds increasingly control American corporate governance. Nowhere is this control more acute than in the case of environmental and social (“E&S”) voting. The “Big Three” funds—Vanguard, BlackRock, and State Street—have the power to determine the fate of the bulk of E&S proposals.

This Article demonstrates that, despite a considerable marketing focus on their E&S efforts, overall support for E&S proposals is low for the Big Three. In the 2018-2019 proxy season, Vanguard’s largest funds supported 7.5% of unique shareholder E&S proposals, while State Street’s largest funds supported 22.7% of such proposals and BlackRock’s largest funds supported 7.1% of such proposals. Other funds support E&S proposals at far higher rates (e.g., Deutsche Bank at 77.9%) and far lower rates (e.g., Dimensional at 0%). Given that funds have a fiduciary duty to vote in the “best interests” of their investors, which fund got it right? The surprising answer is that no one knows—not even the funds themselves. Only by blind luck could these funds, who seek no input from their investors and make no serious attempts to discern investor preferences, be accurately reflecting investors’ interests with their voting behaviors.

Ultimately, this Article concludes that it is a convenient myth that index fund stewardship teams are even marginally constrained by the “best interests” standard when voting on E&S proposals. The truth is that these index funds, possessing the power to decide the fate of most E&S proposals, can do as they wish with that power. The status quo urgently needs change to ensure that index funds are truly acting in investors’ best interests. This Article proposes that such change should come in the form of greater input from index fund investors.

The meteoric rise of passive investing has placed three large index funds in a new and pivotal role as the arbiters of corporate law controversies and the framers of market-wide governance standards. Collectively, the “Big Three” — Vanguard, BlackRock, and State Street — control a supermajority of index funds assets. The single largest investor in almost 9 out of 10 publicly-traded companies is one of the Big Three. As their growth is projected to continue unabated, it is difficult to overstate the centrality and importance of these institutions for the future of corporate governance.

Society is only just beginning to grapple with the implications of this concentrated economic power. On the one hand, there is potential for this power to be used for good. Index fund investors are uniquely concerned with long-term, sustainable economic growth and stability, and they are likely to be more representative of the average American investor than many other financial industry actors. Concentrating the power of many dispersed “human investors” through index fund voting has the potential to better align corporate behaviors with the interests of a broad swath of American society. On the other hand, to the extent that this power is divorced from the actual interests and perspectives of individual investors, index funds’ considerable power may instead be used to advance the interests of index fund agents or other special interests in a way that is harmful to society at large.

As it currently stands, individual index fund investors are utterly unable to express their preferences in how voting decisions are made. They cannot rely upon index fund providers to take their unique interests and values into consideration when deciding how to vote (or even to know what these interests and values might be). Further, index fund investors cannot even indirectly express their preferences by selecting a particular fund or a particular index fund provider that is more likely to vote in line with their interest and values, since the shares controlled by different individual funds are nearly always voted in the exact same manner and since the different index fund providers share very similar voting philosophies and priorities. As a result, a small number of individuals at a handful of index fund providers wield increasingly dominant power with only very limited accountability.

To address this problem, a number of corporate law scholars have recently proposed solutions that would limit index fund providers’ power in some way, whether by requiring increased transparency, placing caps on index funds’ ownership of a given company or industry, or even going so far as to disenfranchise index funds entirely. Instead of these solutions, which generally rely upon regulators, auditors, or index fund advisers themselves to promote better outcomes, this Article proposes a novel solution that would harness the voice of individual index fund investors in the decision-making process. This approach builds off of the technological innovations that have permitted index funds to streamline the process of deciding how to vote their funds’ shares. It proposes using this infrastructure to overcome individual shareholders’ rational apathy instead of using that infrastructure merely to simplify the work of index fund employees. The involvement of individual investors could take one of three forms: (1) allowing individual investors to elect to have the votes corresponding to their indirect share ownership cast according to the recommendations of a particular agent (such as the index fund provider, portfolio company management, a particular proxy adviser, or another institutional investor), (2) requiring index fund providers to seek more information about the characteristics and values of their investors, which funds would use to better inform their voting decisions, or (3) giving individual investors the opportunity to shape the voting guidelines used by index funds by completing a general, issue-based survey about how they desire to vote on a number of key corporate governance issues, the answers to which will guide fund advisors in voting on company-specific questions. The uniting feature of all three approaches is that they would involve individual investors in the voting process to a greater degree, thereby diminishing the power of index fund agents, mitigating concerns about the concentrated power of index funds, and reducing agency costs. The proposals set forth in this Article set out to re-democratize shareholder democracy and to give voice to individuals typically shut out of the corporate decision-making process. With passively-indexed investments set to overtake active investments in the very near future, now is a crucial time to map the future exercise of funds’ corporate governance power.

Economic research reveals that merger activity frequently results in price increases. Such price increases often negatively affect consumers and may represent a net harm to society. While economists, antitrust scholars, and regulators have made extraordinary contributions to understanding and mitigating the impact of such price increases on consumers, our understanding of the impact of these price increases on shareholders is comparatively weak. This Article begins to fill that gap. It demonstrates that, in situations where M&A induces price increases, even significantly positive merger premiums and abnormal returns due to the merger may hide concrete harms to a firm’s shareholders. In this sense, the best efforts of the board of directors to maximize share price through a merger may perversely generate negative net wealth effects for a significant number of shareholders.

These negative wealth effects arise because the categories of “shareholder” and “consumer” are not mutually exclusive. Rather, a growing number of consumer-shareholders pay for the goods and services of companies in which they invest, either directly or indirectly. This is especially likely with larger companies, which generally have a more sizable customer base; with publicly traded companies, which generally have a much larger number of shareholders; and with ownership of highly diversified funds, which own shares in hundreds, sometimes thousands, of firms. As this Article demonstrates, increases in the price of a firm’s products can produce economically significant impacts for consumer-shareholders. The magnitude of such impacts is frequently significant enough to change a seemingly substantial merger premium into a net loss.

This Article uses financial models to demonstrate the impact of product price increases following M&A on shareholders with a variety of characteristics. These models serve as a useful guide for corporate boards to estimate the impact of a merger on shareholders for a range of investment levels, product price increases, and merger gains, as well as for fund managers as they contemplate their fiduciary responsibility to vote in the best interests of the investors in their fund. These models also provide a tool for shareholders as they attempt to discern their own economic interests.

The empirical models provided in this Article reveal that mergers often result in net harms for shareholders. Shareholders have a greater interest in the net impact on their wealth than in the nominal share price being offered, particularly when share price gains mask significant, quantifiable losses. Boards, fund managers, and shareholders contemplating a merger ought to consider potential price increases resulting therefrom as an important factor impacting shareholder wealth. Additionally, shareholder awareness of the significant negative impact of price-increasing merger activity may mean that, in the future, corporate boards will have to justify price increases not only to antitrust regulators, but also to their own shareholders.

The shareholder wealth maximization norm exerts tremendous influence on both business practice and corporate legal scholarship. Widespread acceptance of the norm has produced substantial focus among corporate executives, analysts, and scholars on one key metric: share price. The norm and the related focus on equity prices rest on two key assumptions: (1) that the pursuit of shareholder wealth maximization, as measured by share price, effectively maximizes the wealth of actual shareholders and, (2) that the pursuit of shareholder wealth maximization, as measured by share price, is socially beneficial.

If the shareholder wealth maximization norm does not truly maximize shareholder wealth, it fails by its own terms. If pursuing shareholder wealth maximization does not produce a net social benefit but instead generates a net social harm, the pursuit of shareholder wealth maximization no longer constitutes a “win-win” for businesses and consumers but instead elevates business interests in a zero-sum competition between the two groups.

This Article addresses one context where the pursuit of share price gains both fails to maximize the wealth of all shareholders and fails to benefit society: corporate mergers and acquisitions activity. Since Henry Manne’s seminal paper, Mergers and the Market for Corporate Control, it has been generally accepted that merger gains accrue either through efficiency or market power. Efficiency gains involve creating synergies and eliminating redundancies, thus enabling merged entities to do more with less. To the extent that merger gains accrue via this route, mergers benefit everyone involved: shareholders benefit from a boost in share prices, society benefits from a more efficient marketplace, and consumers benefit from lower prices for goods and services. In contrast, market power gains enable the merged entity to increase the price of the goods it sells or the services it provides, thereby reducing consumer welfare. Because of the increased cost to consumers, this second option pits the interests of some groups against others. Wealthy shareholders likely benefit more from share price increases than they are harmed by the increased cost of goods and services, since these shareholders tend to own substantial amounts of stock and to make substantial sums from that stock. However, the reverse may be true for less wealthy shareholders and society at large. Corporate legal scholarship has largely failed to address this hidden cost.

Historically, economic literature has left unsettled whether merger gains accrue primarily through the former or latter routes, leaving scholars free to assume that merger gains do not necessarily come at the expense of consumers or society. Recent research, however, reveals that most gains in U.S. mergers come from market power increases. This finding exposes two key shortcomings of traditionalist interpretations of the shareholder wealth maximization norm: (1) share price gains serve as an inadequate proxy for increased financial welfare for all shareholders, and (2) share price gains serve as an inadequate proxy for increased social welfare.

If we truly desire to maximize the wealth of all shareholders and to benefit society as a whole, then we cannot rely on share price gains as a proxy for the interests of all constituencies.