The Looming Giants

A recent article in The Economist raised concerns about the disproportionate economic power wielded by giant global corporations. Earlier this year, in April, the US Council of Economic Advisers (CEA) published a study about the worrying rise in the market concentration of the most powerful American companies. In 1994, the hundred largest companies generated 33 per cent of US GDP; by 2013, that figure had risen to 46 per cent. In response, President Obama ordered that the CEA report to him every six months with recommendations on actions that eliminate barriers to competition. The situation in Germany paints a somewhat different picture.

The German Monopolies Commission, an independent expert committee that makes policy recommendations on German competition law, has submitted biannual reports on corporate concentration in Germany since 1978. During this time, the share of Germany’s GDP generated by the hundred largest companies declined from just under 20 per cent to 16 per cent. The German economy has always been geared towards medium-sized businesses, and that focus has only intensified in recent decades. Moreover, corporate ties among the hundred largest companies have also diminished, both with regard to inter-corporate shareholdings and to the number of persons with associated positions in multiple corporate supervisory boards. The number of corporate links involving multiple board memberships of CEOs has been reduced from 186 instances in 1996 to 45 today. The days of “Germany, Inc.” are no more.   

Does this mean that Germany has a healthy level of competition? Unfortunately, this does not appear to be the case. For starters, the most powerful American companies operate globally, which means they are active in Europe generally and in Germany specifically. Competition regulators in the EU have been vigilant, as court cases in Brussels (against Google) or in Germany (against Facebook) show. The enormous rise in corporate concentration in the United States constitutes an international problem.

Institutional investors have no interest in competition

Another phenomenon that has the potential of curtailing competition was mentioned in the most recent report of the German Monopolies Commission: the growing share of institutional ownership in multiple companies in a given economic sector. Institutional investors – e.g. insurance companies, investment funds, pension funds, private equity firms – typically hold minority stakes in companies. For instance, BlackRock owns seven per cent of Bayer and more than eight per cent of Merck. The problem is that it is not necessarily in the interests of BlackRock (to stay with our example) if Bayer poaches customers from Merck. What is gained on the one side is lost on the other.

Institutional investors are often more interested in the performance of an entire sector than that of individual companies. As a result, they have reason to embrace less competition in a branch. And evidence exists that when one and the same investor holds stakes in several companies from the same market, competition decreases and prices rise. A US study found that after BlackRock acquired Barclays Global Investors, fares increased on several air routes. Why? It turned out that, through the purchase, BlackRock now owned shares in multiple airlines servicing these routes.

Though it is still unclear how much of a problem institutional investment poses in Germany, concern is warranted. The global assets manged by institutional investors totalled just under three billion US dollars in 1980. By 2007, it had climbed to 48 billion dollars; by 2014, more than 85 billion. Institutional investors now own more than 60 per cent of the shares issued by DAX-listed companies. This is why Germany’s competition regulators must keep a careful eye on ownership concentration going forward. Consider the planned merger of Bayer and Monsanto. Institutional investors such as BlackRock, Vanguard, and Deutsche Bank already own significant shares in both these companies, along with several of their competitors. It is not only giant corporations that influence market concentration and competition. Giant investors do as well.

This article was originally published online by Capital magazine, 20 October 2016: www.capital.de/meinungen/die-macht-der-institutionellen-investoren.html