Common Ownership and Fiduciary Duty

A fast-growing legal literature commenting on a set of empirical papers alleging anticompetitive effects of common ownership claims that the reported effects, if true, would imply that corporate executives violate their fiduciary duty: whereas acting in the interest of common owners can help raise industry profits, doing so harms non-common owners of individual firms — so the claim. Similarly, mutual fund managers with heterogenous portfolios would violate their fiduciary duty to act in the interest of their funds' investors if they delegated governance and voting authority to a centralized, family-level entity, that represents interests different from their own. This paper evaluates these claims using a formal model grounded in established economic theory. The model shows that firm managers who act in the interest of common owners may indeed choose strategies that differ from those preferred by a non-common owner. However, doing so raises firm profits above the level that would be attained if non-common owners had controlled the firm. As a result, non-common owners are not harmed when executives heed to common owners' governance demands, and neither are executives and directors who care about firm value.The model reveals that it is precisely the heterogeneity of shareholder (or fund) portfolios that gives individual shareholders and fund managers an incentive to centralize corporate governance at the same level that full diversification is obtained. Heterogeneity of fund portfolios is not a valid antitrust defense, but, to the contrary, the economic rationale why family-level centralization of governance is both individually rational and problematic from a policy perspective.These results establish that even if a violation of fiduciary duty could be formally established in a legal sense when firm managers heed to common owners' instead of non-common owners' preferences, plaintiffs would be unlikely to emerge, because no shareholder is harmed. I conclude that the fiduciary-duty critique of the common-ownership literature in its current form is difficult to reconcile with established economic theory