Large index ownership raises governance issues for RBA

The increased vocalisation by large index fund managers such as BlackRock is a concern for the Reserve Bank of Australia (RBA), which has increased over the last two years.

Speaking at the Parliamentary inquiry on common ownership and capital concentration, deputy governor Guy Debelle said the increased ownership by large index funds raised governance questions regarding voting.

“What you have seen over the last year or two is that firms such as Blackrock becoming much more, not necessarily activist, but more vocal across a range of market issues including how they deploy their voting rights through their passive or index funds,” he said.

“Some of their stakes are so large that if you have such a large share of equity in a company held by a passive fund and it’s great but it raises interesting governance issues as to what they are supposed to be doing. They have a fiduciary duty to investors in their fund so it’s an interesting question as to how they should deploy their voting rights.”

He said the RBA monitored the active versus passive debate but there was currently a lack of information available regarding common ownership.

Meanwhile, he said there were certain superannuation funds which were “more or less activists” and were investing large amounts in the Australian equity markets. The amount of equities held directly by households had actually reduced, he said, as more people held exposure via their super fund instead.

“[Super funds] have a large chunk of funds under management and a portion of that is going to be invested in the Australian stockmarket which gives them a holding across all these companies,” he said.

Debelle referenced US activists Bill Ackman and Peter Singer, and chair Tim Wilson said he felt super funds were going down a more activist route as he could see antitrust laws being “weaponised”. Antitrust laws regulated business practices, encouraged competition and prevented monopolies.

“I remain utterly convinced that the cause in part is the very nature of antitrust laws in the United States and how our trust can be weaponised effectively as an economic instrument,” he said.

“I see exactly the same thing from super funds and even if they don’t do it today, that doesn’t mean they can’t do it in the future because they’ve got not just a huge consolidation of economic capital but power exercised by a small number of people because they are empowered as a trustee to do so.”