The Agency Costs of Sustainable Capitalism: Responsible Activists, Index Investors, and the Big Three

The passive index investing revolution and the demand for bespoke environmental, social, governance (“ESG”) investment products are most monumental changes to shape investor landscape many years. These developments have been accompanied by an unprecedented concentration of power among BlackRock, Vanguard, State Street (the “Big Three” asset managers). Inevitably, Big Three powerful shareholders companies that identified as major contributors climate crisis. Due failure governments take effective action in global effort combat change, there has intense pressure directed at provide driven solutions. increasingly purported assume what I call role “sustainable capitalists”. In this Article, build upon Gilson Gordon’s “agency capitalism” framework put forward a new agency costs theory sustainable capitalism. In framework, show still exhibit some form “rational reticence”, especially with respect firm-specific sustainability activism. There is also risk may engage hypocrisy”, similar corporate greenwashing. combination reticence” hypocrisy” could result dual-monitoring shortfall – capitalism”. In capitalism best solution emerged was specialist activist hedge funds fill monitoring initiating activism “governance arbitrageurs”. context, adapted their strategies gain crucial support from longer-term institutional investors. Analogously, ESG potential initiate “ESG arbitrageurs” manner appeals to, mobilizes, Three. Most prominently, can play unique nominating directors boards, lending credible nominees. Activist already significant expertise board representation campaigns shown willingness changes. Other “responsible activists”, focusing more on portfolio-wide issues, candidates However, implementing meaningful strategic or reform using shareholder proposal mechanism proven be much challenging. Therefore, valuable other responsible activists ecosystem focus problem rational hypocrisy target themselves.