Morningstar Magazine - December 2017/January 2018 - 37

weakly, and if these institutional investors have
large stakes in rival firms, then the worry
is that they're not going to compete as vigorously.
That said, I think this is a reasonable view. In
the final draft of our paper, which is not
necessarily the one that everybody has been
reading, we do give more weight to this
view. We say that this would be a reasonable
response to the problem.
Do you think that, in addition to the argument
around concentrated ownership, the traditional
tools of trustbusting could yield greater gains to
consumers today?

Posner: I'm very much in favor of antitrust
litigation. In the United States, the antitrust laws
have been interpreted in a more relaxed way
than they have been in the distant past, with the
result that industries have become more
concentrated than they used to be.

I think it's a complicated question. You could
make the argument that the Justice Department
could just focus on the underlying firms
rather than the institutional investors and maybe
that would be sufficient if the concentrated
markets were broken up. Then ownership
by institutional investors would not be a problem.
It's only a problem when the underlying
markets are concentrated. But that said, I think
half of the markets in the country are highly
concentrated, and they are highly concentrated
because there are technological reasons why big
firms are doing better than little firms.

Policymakers Take Notice
Since you've started writing on the topic, what's been
the level of interest among policymakers? Do you
think that there is interest, and has the level of interest
surprised you on the upside or downside?

Posner: We started working on this paper before
the presidential election. I know secondhand
that people in the Justice Department were
interested in the topic. I know that there's interest
among European antitrust authorities.

Europe's capital markets are somewhat different
from ours and the problem may not be as
pressing, but they are also more aggressive about

antitrust than the U.S. government is. As for the
new U.S. administration-to be fair, they
are just still transitioning, but I'd be skeptical that
this would be a priority for them. There is
certainly a lot of interest among academics and
people who are interested in policy, but I
suspect the problem of institutional investing will
be a long-term issue.
What about the reaction among the fund industry?
Have they reached out to you? BlackRock, for example,
has written about this.

Posner: Right. I attended a conference in New
York with representatives from the industry
put together by NYU. They are obviously not happy
about this work, but they seem willing to engage.
What I'd like to see them do is provide data
to independent academics. That would be the best
way to settle the various controversies. I
am not tremendously impressed with what they
are writing. I think they are giving money
to researchers to write stuff that they hope will
support their view. I don't think that's
a great thing.

When institutional investors started buying
up large chunks of these firms, people were
writing how this could be a good thing, because
now you'd have shareholders who are large
enough that it would be worth their while to exert
control over these corporations. But the problem is
that if they also own rival corporations, they
may exert the control over these corporations in
a way that's not beneficial to the public.
There are some deep questions that the debate
about institutional investors doesn't really
get to the heart of. These are deep questions for
which there are no easy answers. So, I'm
not going to give you an easy answer here. But
I do think that it's a big part of the puzzle. K
Haywood Kelly is head of global research with
Morningstar. He is a member of the editorial board
of Morningstar magazine.
Aron Szapiro is director of policy research with Morningstar.

Any closing thoughts?

Posner: One thing I have been thinking about
a lot since we worked on this paper and
for the book is the relationship between corporate
governance and the role of institutional investors.
I'm quite struck by the bind that institutional
investors find themselves in. On the one hand,
I do believe them when they say that, at
least for index funds, they'd like to just be passive.
They don't want to actually have to vote. But
on the other hand, the government forces them to,
right? They're not allowed to be passive.

There is a paradox here, which goes to the
root of how corporations are organized.
For decades people have understood that even the
old model of corporation, where they were
owned by dispersed shareholders, was paradoxical.
You had all these owners who didn't exert
any influence over the corporation or the other
shareholders. So, the managers just got
to do whatever they wanted to, which is certainly
not ideal. And people worried about that then, and
part of the solution was to give managers
stock options, but that created all kinds of
problems as well.

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