Passive Investing Might Not Be Great for Growth

When United Airlines called security to drag passenger David Dao off of his flight back in April, some observers cheered the airline’s falling stock price, expressing the hope that this would punish the company’s executives and owners and spur them to implement a more passenger-friendly attitude. United’s stock quickly recovered. But even had it fallen a lot and not bounced back, there’s no guarantee it would have been a big deal for the company’s largest shareholders.

The reason? Those big shareholders are also likely to own pieces of United’s competitors. For example, Berkshire Hathaway Inc. -- Warren Buffett’s firm -- is the largest shareholder in United Continental Holdings. But Buffett has also taken large stakes in three of United’s major U.S. competitors -- Southwest Air Co., American Airlines Group Inc., and Delta Air Lines Inc. So if people had abandoned United in disgust and fled to one or more of those rival airlines, their profits would have gone up as United's went down -- and Berkshire’s bottom line would have felt little or no pain at all. United’s other biggest shareholders -- institutions such as Vanguard Group -- are probably also highly diversified. So very few of United’s owners are likely to care when the airline makes a big mistake and sends business to its competitors. And it’s not just airlines -- look at the main shareholders of Bank of America Corp. and JPMorgan Chase & Co., for example, and you’ll see many of the same names as the biggest shareholders.