Podcast Summary: Is Business Broken? Episode - "How to Combat Common Ownership"

Introduction to the Topic

In the April 10, 2025 episode of "Is Business Broken?" hosted by Kurt Nickish from the Questrom School of Business at Boston University, the discussion centers on the pervasive issue of common ownership—a scenario where major investors hold significant stakes across competing firms, potentially undermining competition, elevating prices, and stifling innovation.

Understanding Common Ownership

Kurt Nickish opens the conversation by revisiting the concept introduced in the previous episode:

"[00:00] Kurt Nickish: ...common ownership... can lower competition, raise prices and affect innovation."

The episode delves into potential solutions to mitigate these anti-competitive effects through policy reforms, governance changes, and self-regulation within the financial industry.

The Challenge of Solving Common Ownership

The guests elaborate on the complexities involved in addressing common ownership. Fiona Scott Morton reflects on the difficulty of finding viable solutions beyond theoretical discussions:

"[01:59] Fiona Scott Morton: ...we have not seen much of a flowering of solutions other than, I will say, the paper that Glenn and I and Eric wrote a few years ago."

Policy Interventions: Limiting Ownership Stakes

A significant portion of the discussion focuses on limiting ownership stakes in competing firms as a primary solution. The proposal suggests capping ownership stakes at 1% to reduce the influence of institutional investors over multiple competing entities.

"[08:04] Glenn Weil: ...your paper recommends this limit to be 1%."

Rationale Behind the 1% Limit

Fiona Scott Morton explains the choice of the 1% threshold:

"[08:29] Fiona Scott Morton: ...the Big mutual funds... they were all in the 3, 4, 5% at the time we were looking, but there are thousands and thousands and thousands of mutual funds. And so we thought that one was pretty conservative."

Implementation and Enforcement

The guests discuss the practical aspects of enforcing such a limit, emphasizing the need for legislative action and robust monitoring by regulatory bodies like the Federal Trade Commission (FTC).

"[10:08] Fiona Scott Morton: ...you need a law. You need Congress to pass a law... mandate information from the larger asset management companies about their interactions with their portfolio firms."

Potential Impacts and Criticisms of Ownership Limits

Addressing concerns about diversification, Fiona argues that limiting stakes to one per competitive firm would not significantly harm investment diversification:

"[11:30] Fiona Scott Morton: ...you don't actually want to hold four airlines... when you hold more than one airline, the additional diversification benefits are minimal."

The discussion also touches on how mutual funds could restructure to comply with the new limits without substantially impacting their ability to diversify investments.

Alternative Solutions: Reforming Shareholder Voting Rights

The conversation shifts to another proposed solution: reforming shareholder voting rights to mitigate anti-competitive pressures. This idea involves institutional investors abstaining from voting to prevent undue influence over corporate decisions.

"[17:17] Theodore Nirenberg: ...the idea was that it was not so important to have intra industry diversification."

However, concerns are raised about the potential for increased corporate governance issues if diversified owners choose not to engage in voting:

"[19:10] Fiona Scott Morton: ...you could end up with more corporate governance problems."

Regulatory and Political Hurdles

Implementing these policy changes faces significant regulatory and political challenges, primarily due to the strong influence of the financial services industry in policymaking.

"[30:00] Fiona Scott Morton: ...Financial services are incredibly strong politically... it's very rare for any policymaker who represents end consumers to win against financial services."

The Role of Antitrust Regulations

The guests advocate for expanding antitrust regulations to address common ownership. They highlight the necessity for comprehensive data collection and empirical research to build a robust case for legal action.

"[22:18] Fiona Scott Morton: ...collect very good data about who owns what... and then track exactly how much common ownership there is."

Conclusion and Future Outlook

As the episode concludes, the guests reflect on the ongoing rise of common ownership and the urgent need for regulatory intervention. They express optimism that increased awareness and research will eventually lead to effective policies to preserve competition and protect consumer interests.

"[35:55] Glenn Weil: This has been really fascinating. Florian, Glenn, Fiona, thanks so much for bringing your expertise and insights to this conversation."

Key Takeaways

• Common ownership poses significant threats to market competition, pricing, and innovation.
• Limiting ownership stakes to 1% across competing firms is proposed as a viable policy intervention.
• Reforming shareholder voting rights is another potential solution, though it carries governance risks.
• Regulatory and political obstacles are substantial, given the entrenched power of the financial services industry.
• Comprehensive data collection and empirical research are essential for building a strong case against common ownership.
• The issue requires collaborative efforts between policymakers, economists, and regulatory bodies to devise effective solutions.

This episode underscores the complexity of addressing common ownership and the critical need for multifaceted strategies to ensure healthy market competition and innovation.