THE PROBLEM OF TWELVE

Harvard Law School professor Coates looks inside the financial microcosm that exercises outsize influence on the economic landscape.

The “problem of 12” is a term of art that describes the capture of some aspect of commerce, governance, or the like by a small number of the participating players. In this instance, it’s a handful of index funds, entities such as Vanguard, Fidelity, State Street, and BlackRock, “which now own as much as 20 percent of corporate America.” Given that the S&P 500 is made up of companies in which a huge number of shareholders hold a tiny number of votes apiece—“no one person owns more than 1 percent of a company’s shares”—this enables these funds to exercise undue authority over the firms in question: CEOs have to listen to them perhaps even more closely than they do their own boards of directors. Sometimes, Coates allows, this can be to the good, as when the funds, responding to their own shareholders, press for companies to be more attentive to diversity hiring, climate change, and other issues of the day. More often, it has negative consequences. Especially damaging is the capture of a large sector of the economy by private equity funds. The private is a complicated term, but for the author’s purposes, one meaningful aspect is that these funds need not be as transparent in their reporting as other investors. Furthermore, they can acquire companies, dissolve pension funds, lay waste to payrolls, and engage in all sorts of rapacious mischief without being held to account in an ethos of “heads I win, tails you lose.” In this short report, Coates proposes “greater antitrust management of index and private equity funds and the companies they own,” which would involve thorough change in the face of massive lobbying efforts calculated to keep such change from happening.

A powerful argument for thoroughly revising how the chief players in the financial world are regulated.