How to Combat Common Ownership - Is Business Broken?

Summary

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.

Transcript

Kurt Nickish (0:00)

You're listening to Is Business Broken, A podcast from the Mehrotra Institute for Business, Markets and Society at Boston University Questrom School of Business. I'm Kurt Nickish. In our last episode we introduced the concept of common ownership. That's where major investors buy significant stakes across competing firms and how that can lower competition, raise prices and affect innovation. But what could be done about that? Is there a way to address these anti competitive issues? Today we'll explore potential solutions through policy, governance and self policing. Can regulatory changes help preserve competition without stifling investment? Are there ways to redesign corporate structures to mitigate the negative effects of common ownership while still fostering growth? Will the financial industry fight these changes or help frustrate find a solution? Our guests today are Fiona Scott Morton, Theodore Nirenberg, professor of Economics at the Yale School of Management, Glenn Weil, Founder of the Radical Exchange foundation and the Plurality Institute, and Florian Ederer, Alan and Kelly Questrom, professor in Markets, Public Policy and Law at BU Questrom.

Glenn Weil (1:21)

Fiona, glad to have you here.

Fiona Scott Morton (1:23)

Thank you very much.

Glenn Weil (1:25)

Glenn, great to see you.

Theodore Nirenberg (1:26)

Yeah, Kurt, thanks for having me.

Glenn Weil (1:28)

And Florian, great to have you back.

Florian Ederer (1:30)

It's wonderful to be back.

Glenn Weil (1:32)

So in last week's episode we discussed some of the anti competitive issues with common ownership and today we're going to be looking at solutions. This is kind of open to all of you, but as economists, you are accustomed to trying to think about how to adapt a market system to maximize private and social good. Is common ownership just among the problems that you think about solving?

Kurt Nickish (1:56)

Is it a hard problem to solve?

Fiona Scott Morton (1:59)

I think yeah. When Glenn and I first wrote that paper together with Eric Posner, I mean, it started with Glenn in my office and we were venting a little bit about the existing literature, throwing up its hands and saying, oh, there are these three things we want. Governance, competition, and, you know, opportunities for savers to save in a diversified manner. And we can't have them all. And Glenn and I said, well wait, we're economists. Our job is to figure out what's the second best. I mean, we can't have the first best here, but surely we can do something more than just throw up our hands. So it wasn't such an obvious solution or easy problem that everybody who looked at it said, oh sure, here's how you solve that or that's obvious or let me write a paper. And so I would say to date 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.