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Abstract. A growing number of technology companies, including Google, Zillow, and Snap, have issued stock that does not allow investors to vote on corporate decisions. But there is fundamental disagreement [...]

This Article analyzes the conduct of mutual funds in shareholder litigation. We beginby reviewing the basic forms of shareholder litigationand the benefits such claims might offer mutual fund investors. We then investigate, through an in-depth docket review, whether and how the ten largest mutual funds participate in shareholder litigation. We find that although shareholder suits offer potential benefits, the largest mutual funds have essentially forfeited their use of litigation. This finding is particularly striking given that index funds and other long-termorientedmutual funds generally cannot sell their shares when they are dissatisfied with company performance, leaving them with only two levers in corporate governance--voting and suing. Mutual funds vote, but they do not sue. We analyze potential explanations for the failure of mutual funds to litigate on behalf of their investors. Collective action problems and conflicts of interest raise significant obstacles to mutual fund participation in shareholder litigation. Yet, we argue, there are situations in which shareholder litigation could create value for mutual fund investors. We therefore turn to the normative question: How should mutual funds litigate on behalf of their investors? Answering this question allows us to articulateamission statement for mutual funds in shareholder litigation. Ourmission statement is grounded on the perspective of the broadly diversified "market investor." The repeat-play incentives andbroad diversification of many mutual funds, index funds in particular, suggests that they could create value by focusing principally on deterrence objectives. Mutual funds should bring shareholder suits against portfolio companies when doing so would meaningfully enhance deterrence. They should also scrutinize the litigation brought by other shareholders, objecting to outcomes that fail to promote meaningful deterrence. At the same time, mutual funds should focus on compensatory goals in litigation against nonportfolio defendants because extraportfolio claims do not raise circularity concerns. In addition, mutual funds should consider whether litigation can be used to implement corporate governance reforms. Finally, in all cases, mutual funds should closely monitor litigation agency costs. We close by suggesting ways in which the incentives of mutual funds might be restructured to bring about these changes. [ABSTRACT FROM AUTHOR]

American investors have begun to embrace the reality that academics have been championing for decades -- that a broad-based passive indexing strategy is superior to picking individual stocks or investing in actively managed funds. But there are several reasons to believe that this trend will have harmful consequences for firm governance, shareholders, and the economy. First, because passive funds seek only to match the performance of an index -- not outperform it -- they lack a financial incentive to ensure that each of the companies in their very large portfolios are well run. Second, passive funds face an acute collective action problem: any investment in improving the performance of a company will benefit all funds that track the index equally, while only the activist fund incurs the costs. Third, passive funds do not generate firm-specific information as a byproduct of investing and thus must expend additional resources to identify underperforming firms and evaluate interventions proposed by other investors. Such expenditures would undo the cost savings that attracted investors to the passive fund in the first place. For these reasons, many passive funds will leave company performance to the invisible hand of the marketplace. And even if a fund does choose to intervene, it will rationally adhere to a low cost, one-size-fits-all approach to governance. The scope of this problem is potentially immense: as investors continue to flock toward passive investment vehicles, the institutional investors that dominate the passive fund market will increasingly influence and even control the outcome of shareholder interventions -- from shareholder votes to those proposed by hedge fund activists -- creating widespread economic harm. For that reason, this paper proposes that lawmakers restrict passive funds from voting at shareholder meetings. Doing so will reduce the influence of passive funds in governance and also preserve the role of informed investors as a force for managerial discipline. [ABSTRACT FROM AUTHOR]