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Index funds own an increasingly large proportion of American public companies. The stewardship decisions of index fund managers--how they monitor, vote, and engage with their portfolio companies--can be expected to have a profound impact on the governance and performance of public companies and the economy. Understanding index fund stewardship, and how policymaking can improve it, is thus critical for corporate law scholarship. In this Article we contribute to such understanding by providing a comprehensive theoretical, empirical, and policy analysis of index fund stewardship. We begin by putting forward an agency-costs theory of index fund incentives. Stewardship decisions by index funds depend not just on the interests of index fund investors but also on the incentives of index fund managers. Our agency-costs analysis shows that index fund managers have strong incentives to (i) underinvest in stewardship and (ii) defer excessively to the preferences and positions of corporate managers. We then provide an empirical analysis of the full range of stewardship activities that index funds do and do not undertake, focusing on the three largest index fund managers, which we collectively refer to as the "Big Three." We analyze four dimensions of the Big Three's stewardship activities: the limited personnel time they devote to stewardship regarding most of their portfolio companies; the small minority of portfolio companies with which they have any private communications; their focus on divergences from governance principles and their limited attention to other issues that could be significant for their investors; and their pro-management voting patterns. We also empirically investigate five ways in which the Big Three could fail to undertake adequate stewardship: the limited attention they pay to financial underperformance; their lack of involvement in the selection of directors and lack of attention to important director characteristics; their failure to take actions that would bring about governance changes that are desirable according to their own governance principles; their decision to stay on the sidelines regarding corporate governance reforms; and their avoidance of involvement in consequential securities litigation. We show that this body of evidence is, on the whole, consistent with the incentive problems that our agency-costs framework identifies. Finally, we put forward a set of reforms that policymakers should consider in order to address the incentives of index fund managers to underinvest in stewardship, their incentives to be excessively deferential to corporate managers, and the continuing rise of index investing. We also discuss how our analysis should reorient important ongoing debates regarding common ownership and hedge fund activism. The policy measures we put forward, and the beneficial role of hedge fund activism, can partly but not fully address the incentive problems that we analyze and document. These problems are expected to remain a significant aspect of the corporate governance landscape and should be the subject of close attention by policymakers, market participants, and scholars. [ABSTRACT FROM AUTHOR]

The problem of managerial agency costs dominates debates in corporate law. Many leading scholars advocate reforms that would reduce agency costs by forcing firms to allocate more control to shareholders. Such proposals disregard the costs that shareholders avoid by delegating control to managers and voluntarily restricting their own control rights. This Essay introduces principal-cost theory, which posits that each firm's optimal governance structure minimizes the sum of principal costs, produced when investors exercise control, and agent costs, produced when managers exercise control. Both principal costs and agent costs can arise from honest mistakes (which generate competence costs) and from disloyal conduct (which generate conflict costs). Because the expected costs of competence and conflict are firm-specific, the optimal division of control is firm-specific as well. Thus, firms rationally select from a range of governance structures that empower shareholders to varying degrees. The empirical predictions produced by principal-cost theory are more accurate than those produced by any theory focused solely on agency costs. Principal-cost theory also suggests different policy prescriptions. Rather than banning some governance features and mandating others, lawmakers should permit each firm to tailor its governance structure based on its firm-specific tradeoff between principal costs and agent costs. [ABSTRACT FROM AUTHOR]

Should copyright infringement claims be treated as marketable assets? Copyright law has long emphasized the free and independent alienability of its exclusive rights. Yet, the right to sue for infringement--which copyright law grants authors in order to render its exclusive nights operational--has never been thought of as independently assignable, or indeed as the target of investments by third parties. As a result, discussions of copyright law and policy rarely consider the possibility of an acquisition or investment market emerging for actionable copyright claims and the advantages that such a market might hold for copyright's goals, objectives, and functioning. This Essay analyzes the opportunities and challenges presented by an independent market for copyright claims, and argues that copyright law, policy, and practice would stand to benefit from the regulated involvement of third parties in acquiring, financing, bringing, and defending infringement claims. [ABSTRACT FROM AUTHOR]

The traditional law and finance focus on agency costs presumes that the premise that diversified public shareholders are the cheapest risk bearers is immutable. In this Essay, we raise the possibility that changes in the capital markets have called this premise into question, drawn into sharp relief by the recent private equity wave in which the size and range of public companies being taken private expanded significantly. In brief, we argue that private owners, in increasingly complete markets, can transfer risk in discrete slices to counterparties who, in turn, can manage or otherwise diversify away those risks they choose to forego, arguably becoming a lower cost substitute for traditional risk capital. If diversified shareholders are no longer the cheapest risk bearers, then the associated agency costs may now be voluntary; and if risk management can substitute for risk capital without requiring a transfer of ownership, then why go public at all? Do more complete capital markets herald (once again) the eclipse of the public corporation? We offer some preliminary responses, suggesting that the line between public and private firms may begin to blur as the balance between agency costs and the benefits of public ownership shift toward a new equilibrium. [ABSTRACT FROM AUTHOR]