The long slow grind of the common ownership theory through competition policy and more widely continues. To recap, the competition-related critique is that if firms within the same industry share common owners they might feel reduced pressure to compete. Hence this has been particularly troubling for the big passive managers.
To the extent that this poses a real risk it has played out mostly in the US to date, where concern about common ownership has been raised from both the Right and Left of politics. It is of course a core part of the argument in that case in Texas alleging that the big passive managers colluded to reduce coal output (more on that below).
But it has started to show up in the UK too. I had a quick look through the most recent Competition and Markets Authority (CMA) State of Competition report and it includes a section on common ownership. This cites a number of academic studies claiming to find evidence of the effects of common ownership and also includes some analysis of common ownership in different sectors.
Here’s a pretty chart from the report.
The CMA says:
[W]ithin-industry common ownership is much more likely than cross-industry common ownership. From a competition perspective, within-industry common ownership is likely to raise more concerns than crossindustry common ownership, because common ownership of firms in the same industry may reduce their incentives to compete vigorously with one another.
If on the other hand common ownership is due to a desire to diversify risk, we would expect to see more cross-industry common ownership. In the chart, this would correspond to darker off-diagonal squares than squares on the diagonal. For cross-industry ownership, finance and extraterritorial companies play an important role in linking many different industries. This may indicate an important coordinating role for these industries.
And we should expect something further from the CMA on this topic.
Ongoing CMA work, which we expect to publish in the coming months, explores the characteristics of ownership networks and the firms that form them in more detail, for instance by zooming in on much more granular industries, and linking cross- and common ownership to industry structure and outcomes.
I assume this is still the plan. The CMA has been steered by the Government to adopt a more pro-growth orientation and has a new chair. But I think any anti-competitive outcomes from common ownership would not be considered good for growth! (PS. Common ownership already features in the CMA’s merger guidance. It is not really directed at cross-industry shareholdings of the type that the big passive managers hold, but might it capture them in any case in future?)
Turning to politics, in contrast to the US (and Australia1) to date this topic has not really picked up any interest in the UK. As noted previously, the politics of it are a bit unusual as the core concern - essentially concentrated private power - can appeal to both Right and Left. My sense is that the extent to which the Right in the UK starts to get interested will depend on how the thinky end of the market orients towards it.
Currently Right-of-centre policy wonks in the UK still tend to be economically liberal and have followed their US counterparts towards a Borkian position on competition policy that is instinctively suspicious of competition regulators. I think they will also tend to be fans of index funds, given that the rationale for them is of course underpinned by a belief in efficient markets. Combined this seems to make it unlikely, currently, that they would see any value in legitimising the common ownership argument.
However, as we have seen in the US, it is possible that, faced with their own Right tradition now being supplanted by the populist alternative, Reform UK, tactical considerations come into play. Economic liberals on the US Right seem to have concluded that they can live with fierce anti-immigration policy, tariffs and a general rejection of typical political norms if it gets them deregulation, DOGE and other objectives.
The existence of common ownership (even if the effects are not clear) has proved a useful avenue through which the US Right has attacked Responsible Investment. It may well prove appealing to their equivalents here.
As far as I can tell Reform UK does not really have any serious policy capacity, and the instincts of Farage and Tice are Thatcherite. But they have previously counterposed SMEs and ‘big business’ and you can easily imagine this extending to ownership if they see tactical advantage. After all, how many divisions does Larry Fink have?
Flipping to the US, I had a read through the FTC/DoJ submission in support of the Texas case. There are some interesting / troubling arguments in there. For example, it is argued that it doesn’t matter if the intent of investor activity was not explicitly anti-competitive in nature if that is what the outcome is alleged to be. Similarly, it is also argued that it does not matter if action did not have the effect of reducing coal output, constraining it could be enough.
I have read various takes on this case and as an ill-informed amateur have no sense of how likely it is to succeed. But it is clearly significant in terms of the potential impact on stewardship activity now that competition regulators are involved. If it goes the wrong way that would seem likely to be particularly significant for sector- or portfolio-wide engagement initiatives, possibly some policy engagement too.
A potential indicator of how seriously this issue is taken by parts of the asset management industry is the existence of sections of websites dedicated to rebuttals. BlackRock used to have such a common ownership section, which seems to have been taken down, though you can still find some of the literature online, for example here and here. The Investment Company Institute still has a dedicated website section.
Part of the response of managers has been to play down the extent and intent of their engagement. On that score, I noticed that the always interesting Martin Schmalz posted on LinkedIn about BlackRock’s intervention in BHP’s failed pursuit of Anglo American.2 He makes the point that this suggests that passive managers do intervene where there are competition issues at stake.
Finally, a reminder that this topic has entered public discourse in the US. As just one example, Bernie Sanders was on Joe Rogan’s podcast again recently. And the influence of the Big Three was taken as read in their discussion of corporate power.
Much of the popular discussion of this topic is very cranky / conspiratorial in nature and one can imagine the Big Three’s ownership appearing in an Adam Curtis film at some point, if it hasn’t already.
But my personal view is that this has managed to creep into public discussions because there is something meaningful at the core. A handful of global financial institutions do have significant potential control in major companies across the globe. If, as the managers now seek to argue, that potential control is rarely meaningfully exercised that raises questions about oversight of corporations. If managers do exercise that power then inevitably there will be questions about to what end.3
There’s no getting away from policy and political questions either way. And as passive assets, and the control positions the result from them, continue to grow the questions also increase in importance. It’s all getting… bigger.
There has been a parliamentary inquiry into common ownership in Australia. Interest has come from both Left and Right, though there is definitely an anti-industry funds angle here on the part of the latter.
This one caught my eye too.
Essentially the argument of the bits of the US Right that have thought about this is ‘stick clearly to value maximisation’. This is definitely Ramaswamy’s position - he argues that ESG engagement essentially tries to smuggle a stakeholder model of the corporation into shareholder primacy. But I’m not at all sure a return to shareholder value maximisation is what MAGA footsoldiers would support.