Article | Corporate Law
Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance

by Michal Barzuza,* Quinn Curtis† & David H. Webber‡

Vol. 93, No.6 (February 2021)
93 S. Cal. L. Rev. 1243 (2020)

Keywords: ESG Activism, Index Fund, Corporate Governance 


Major index fund operators have been criticized as ineffective stewards of the firms in which they are now the largest shareholders. While scholars debate whether this passivity is a serious problem, index funds’ generally docile approach to ownership is broadly acknowledged. However, this Article argues that the notion that index funds are passive owners overlooks an important dimension in which index funds have demonstrated outspoken, confrontational, and effective stewardship. Specifically, we document that index funds have taken a leading role in challenging management and voting against directors in order to advance board diversity and corporate sustainability. We show that index funds have engaged in a pattern of competitive escalation in their policies on environmental, social, and governance (“ESG”) issues. Index funds’ confrontational and competitive activism on ESG issues is hard to square with their passive approach to more conventional corporate governance questions.

To explain this dichotomy in approaches, we argue that index funds are locked in a fierce contest to win the soon-to-accumulate assets of the millennial generation, who place a significant premium on social issues in their economic lives. With fee competition exhausted and returns irrelevant for index investors, signaling a commitment to social issues is one of the few dimensions on which index funds can differentiate themselves and avoid commoditization. For index funds, the threat of millennial migration to another fund is more significant than the threat of management retaliation. Furthermore, managers themselves, we argue, face intense pressure from their millennial employees and customers to respond to their social preferences. This three-dimensional millennial effect—as investors, customers, and employees—we argue, is an important development with the potential to provide a counterweight to the wealth-maximization paradigm of corporate governance.

We marshal evidence for this new dynamic, situate it within the existing literature, and consider the implications for the debate over index funds as shareholders and corporate law generally.



*. Professor of Law, University of Virginia School of Law. For useful comments and suggestions, we are grateful to Steve Bainbridge, Ryan Bubb, Emiliano Catan, George Geis, Scott Hirst, Kate Judge, Dorothy Lund, Alma Oliar, Ariel Porat, Adriana Robertson, Mark Roe, Leo Strine, Andrew Tuch, and participants at the Association of American Law Schools Annual Meeting—Business Associations Section, the UVA/UCLA Corporate & Securities Law Conference, Tel Aviv Corporate Governance Seminar, Tel Aviv Law & Economics Workshop, Tulane Corporate & Securities Law Round Table, University of Chicago Law School Faculty Workshop, and Corporate Law Academic Webinar Series. The authors wish to acknowledge excellent research assistance from Brianna Isaacson and Jordan Voccola.

†. Professor of Law, University of Virginia School of Law.

‡. Associate Dean for Intellectual Life and Professor of Law, Boston University School of Law.