More funds, with many specialized funds created to meet different investor preferences, will likely lead to less monitoring and control by traditional fiduciaries. What implications does that have for those of us interested in shaping corporations, which in turn shape us, to be more democratic and more positive in their contributions to a salubrious environment and harmonious society? How do we remain ESG positive?
Fund Proliferation, Decentralization, and Shareholder Power by Andrey Malenko, Nadya Malenko, and Anton Tsoy examines how the growing number of investment funds, the widening differences in what investors care about, and the shift in how voting decisions are made all affect how companies are monitored and managed.
This is not a traditional summary or review. It is me (James McRitchie) thinking through how the developments discussed in the paper might impact my work and what adjustments are advisable to ensure we achieve positive ESG outcomes.
More Funds: Background
As investment funds become more numerous and customized, and voting control spreads, it gets harder to ensure companies remain responsible in the traditional ESG sense. Fund managers have a tougher time fulfilling their duties to both investors and society. Not discussed in the paper, but I see this difficulty as exacerbated by Judge Laster’s decision in McRitchie v. Zuckerberg (Meta Platforms Inc.), to define directors’ duties as running to the corporation and its shares, rendering shareholders ‘incidental. (see Reclaiming Fiduciary Duty)
The authors develop a theoretical framework analyzing how fund proliferation, increased heterogeneity and polarization in investor preferences, and decentralization of stewardship impact shareholder oversight, corporate governance, and fund manager fiduciary duty.
More Funds: Methodology
More Funds: Findings
Investor Heterogeneity and Fund Proliferation: Increased diversity in investor preferences leads to the creation of more specialized funds. For example, there are about 150,000 investment funds, but only 54,000 publicly traded
companies (4,000 in the US). When funds proliferate within incumbent families (centralized monitoring), monitoring incentives can be preserved or enhanced if investor demand pushes up fees and fund concentration remains high.
Supply vs. Demand Effects: Entry driven by lower costs (supply-side, e.g., regulatory/technological changes) increases competition, lowers fees, and diminishes monitoring incentives, leading to weaker shareholder oversight. Entry driven by stronger investor preferences (demand-side) raises fees and can enhance monitoring, but this primarily occurs when ownership remains concentrated within existing families. Entry via new fund families dilutes ownership and undermines monitoring, regardless of fee level.
Decentralization & Voting: The shift toward pass-through voting (delegation of proxy voting to individual investors) and decentralization within families responds to ideological polarization. While this aggregation better aligns with heterogeneous investor values on social/environmental issues, it fragments ownership and often weakens monitoring, undermining stewardship, which has long been weak (see Fiduciary Responsibilities for Proxy Voting, from my post of October 1995)
Monitoring and Competition: Whether fund stewardship is centralized or decentralized critically affects monitoring incentives. Centralization tends to strengthen governance through concentrated oversight. When BlackRock calls, most companies listen. At the same time, decentralization can only outperform if delegated managers possess more fund-specific information and thus greater monitoring efficiency. Think expert shareholder activists in a proxy contest.
As investment funds become more numerous and customized, and as voting control spreads, it gets harder to ensure companies remain responsible, making it harder for fund managers to fulfill their duties to both investors and society. Overall, the study shows a trade-off: increasing fund variety and voting decentralization improve investor expression but can reduce effective corporate governance and shareholder power, which are necessary to hold management accountable.
More Funds: Impact on Corporate Governance
Ownership Concentration Matters: Effective shareholder monitoring has increasingly depended on ownership concentration and compensation structures. The internal organization of asset managers—in particular, the centralization or dispersion of stewardship—plays a crucial role in governance outcomes.
Fund Proliferation Is Not Always Bad: The proliferation of funds per se does not inevitably lead to weaker governance. If driven by investor demand and managed within large existing families, shareholder oversight can be strong, especially if managers capture higher fees reflecting heterogeneous preferences. Those fees can pay for monitoring and engagement.
Decentralization Tradeoffs: Current moves toward decentralized stewardship (pass-through voting, fund-level delegation) improve representation of diverse investor preferences but may reduce the incentives, efficiency, and power needed for effective monitoring and engagement. This could lead to lower portfolio company value, posing challenges for both governance and long-term portfolio returns. It could also have unintended consequences, such as leading to the proliferation of oligarchic companies.
More Funds: Fiduciary Duty
Navigating Client Preferences: Fiduciary duty is complicated by the diversity of investor values. As funds increasingly compete on mandate differentiation and voting policy, fiduciaries must balance maximizing portfolio value with catering to client preferences, recognizing trade-offs between governance quality and voting expressiveness.
Note: What are the implications here of McRitchie v. Zuckerberg, if the duty of corporate directors is only to the corporate entity and the value of the stock? If stockholders are “incidental” to company directors, are they also “incidental” to the fiduciary duty of fund managers?
Fee Structures and Incentives: The study highlights that fund fee levels are tied to both market competition and the intensity of investor preferences. Fee-driven incentives shape monitoring effort, suggesting fiduciaries need to consider both competitive positioning and stewardship dedication in fund design.
Pass-Through Voting Dilemma: The adoption of pass-through voting, while responsive to client values, tends to fragment oversight and free-ride on monitoring done by other asset managers, potentially compromising the fiduciary’s responsibility to oversee management effectively.
The authors conclude that the interaction between the asset manager industry structure, client preference heterogeneity, and evolving stewardship models is key in shaping governance outcomes and fiduciary obligations. Growing complexity demands that asset managers explicitly reconcile stewardship quality and client representation in their fiduciary practices.
A related paper by Jill Fisch and Jeff Schwartz is Corporate Democracy and the Intermediary Voting Dilemma. That article was the first to argue that institutional intermediaries could no longer vote without seeking the input from fund beneficiaries. They argued that fiduciary duties compel them to seek this input. Given the lack of government or private action to enforce fiduciary duties regarding proxy voting, I believe the ship has sailed. I hope to further confirm my suspicion by reading Discretionaries– Not Fiduciaries by Marc Steinberg.
Several SESP alumni ham it up for the camera.
Social Economy and Social Policy 45-year reunion
For me, Malenko’s paper reinforces the need to ensure that investors’ proxy voting choices are supported by organizations that will negotiate on our behalf with company managers and boards. So, for example, if I’m using iconikapp.com tools to vote all my shares automatically, I should consider not only aligning my votes and values through VoteForge, but also partnering with other investors to ensure a strong organization is bargaining on my behalf based on our shared values.
More Funds: a Brief Conversation
On 10/25/2025, I reunited with a few alumni of the Boston College Social Economy and Social Policy Program. I was one of the inaugural NIMH fellows in 1979.
Photo of Nadya Malenko rendered into an oil painting using AI
On Monday, 10/27/2025, Nadya Malenko and I discussed her draft paper. Malenko readily agreed to consider the fiduciary duties of fund managers, especially in the context of universal ownership. She also agreed with a concern I mentioned during our chat that political pressure is another factor (beyond competitive forces) driving fund managers to adopt pass-through voting.
The paper she originally intended to share with me is about investor heterogeneity and pass-through voting, but from the perspective of the custom policies used by proxy advisors’ clients. That draft is entitled “Custom Proxy Voting Advice.” I’m sure she emphasized that paper in our correspondence, but I had already read the paper discussed above, so I went ahead and posted the above notes.
Watch this space. I hope to provide some thoughts on Custom Proxy Voting Advice after I file a bunch of proxy proposals for the 2026 season. It is amazing how many emails pile up during a one-month vacation. If you have comments on either draft paper, please let me know.
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