Introduction

Public corporations in the United States have traditionally featured dispersed share ownership, creating a separation of ownership and control. Over time, this dynamic shifted with the rise of large institutional investors and the resulting concentration of ownership. As researchers Fisch and Schwartz note, when voting was dispersed among millions of individual investors, managers held little regard for shareholder views. However, corporate leaders are now extraordinarily responsive to institutional investor demands. More recently, this shift away from dispersed ownership may be reversing, driven by two parallel developments in the asset management industry: the rapid proliferation of funds and the decentralisation of stewardship. Fund proliferation reflects increasing specialisation in investment products, particularly in sustainable investing, where fund numbers nearly doubled recently. Stewardship decentralisation includes mechanisms such as pass-through voting and the partial delegation of voting authority to individual fund managers. These trends reflect growing polarisation over social and environmental issues and efforts to accommodate diverse investor preferences, potentially at the cost of fragmenting shareholder power.

Institutional background

The asset management industry has seen a significant rise in fund proliferation, both in the number of funds and the diversity of investment strategies. The number of actively managed U.S. equity mutual funds grew from 530 in 1975 to almost 7,800 by 2016, with approximately 250 new funds started each year between 1999 and 2015. Morningstar style classifications increased from fewer than 20 in 1975 to over 100 in 2016, nearly tripling over the past 20 years. Globally, the number of equity mutual funds grew more than seven times between 1990 and 2015. Sustainable funds have seen rapid expansion, with the number of ESG funds nearly doubling between 2019 and 2023, from 484 to 913. Simultaneously, stewardship has become more decentralised. In 2019, Vanguard partially decentralised stewardship for 40 funds. In 2022, BlackRock, Vanguard, and State Street introduced pass-through voting programs. As of December 2025, more than $3.7 trillion of BlackRock’s total index equity AUM were eligible for Voting Choice, with almost 25% of institutional clients choosing to exercise their voting rights. More recently, the Big Three asset managers announced plans to split their stewardship teams into separate units to serve varied investor priorities.

Model

The research develops a framework to evaluate industry trade-offs using an augmented Salop circular model representing firms with heterogeneous characteristics and investors with heterogeneous preferences. Funds are characterised by investment mandates aligned with specific investor types. Investors aim to maximise financial returns net of fees, while also valuing the alignment between asset characteristics and their personal values or beliefs. The intensity of these preferences, represented by parameter r, captures the degree of investor heterogeneity; investors are considered homogeneous when r equals zero. This diversity creates demand for differentiated products, allowing specialised funds to charge higher fees. Fund managers choose monitoring efforts to maximise family profits, with incentives driven by position size and the share of the surplus retained through fees. The model focuses on specialised funds rather than broad market funds, applying equally to active and passive vehicles such as ETFs.

Equilibrium characterisation

The analysis indicates that monitoring is concentrated because free-riding often leads to only a single fund family monitoring any given asset. Shareholder concentration is vital, as larger blockholders have stronger incentives to monitor. Asset managers’ incentives depend on both the size of their position and their compensation; higher fees increase their share of the surplus, strengthening the drive to improve performance through monitoring. Equilibrium dollar fees are determined by fund families’ local market power, which depends on product differentiation and the distance between competing fund mandates. While asset managers bear the cost of monitoring, they cannot easily extract rents from it because asset prices correctly anticipate monitoring activity. Monitoring is therefore a pure cost from an ex-ante profit perspective, a result especially relevant for passively managed funds whose positions are perfectly anticipated by the market.

Implications

The research explores how fund proliferation and stewardship decentralisation shape governance outcomes. When proliferation is driven by supply-side factors, such as lower technological or regulatory costs, competition intensifies, fees compress, and shareholder oversight weakens. Conversely, demand-driven proliferation, reflecting stronger investor preferences, can improve governance if new funds are launched by incumbent families. This occurs because incumbents maintain concentrated ownership at the family level, and higher fees support stronger monitoring incentives. However, strong preferences can also lead to the adoption of pass-through voting. While this alignment benefits fund managers and investors, it can be socially inefficient. It reduces firm values because small investors lack the incentives to monitor effectively, and fund managers withdrawal from oversight allows them to sustain fee revenues without incurring monitoring costs. Delegation to fund managers is identified as a more efficient form of decentralisation than pass-through voting, as managers of concentrated portfolios retain stronger monitoring incentives when the monitoring cost is low or investor benefits from voting are not too high.

Conclusion

Recent developments in the asset management industry reflect a fundamental trade-off between representing heterogeneous investor preferences and maintaining shareholder power. While demand-driven fund proliferation can strengthen oversight within incumbent families, the trend towards decentralised stewardship, particularly through pass-through voting, risks returning to an era of dispersed and unaccountable corporate management. The form of decentralisation is critical; pass-through voting caters closely to investor preferences but dilutes governance, whereas delegating authority to specialised fund managers can help sustain effective monitoring. Competitive pressures may drive asset managers toward pass-through voting even when it is the least efficient arrangement. This is because initial asset owners, who suffer from lower firm values as managers withdraw from monitoring, are typically absent from discussions regarding voting reforms and stewardship arrangements.