We examine the governance role of delegated portfolio managers. In our model, investors decide how to allocate their wealth between passive funds, active funds, and private savings, and asset management fees are endogenously determined. Passive funds invest their assets under management in the market portfolio, while active funds trade to exploit mispricing. Funds' ownership stakes and asset management fees determine their incentives to engage in governance. Whether passive fund growth improves

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... aggregate governance depends on whether it crowds out private savings or active funds. In the former case, passive fund growth is generally beneficial and improves governance even if accompanied by lower passive fund fees. In the latter case, passive fund growth improves governance only if its effect on investor welfare is not too positive: effective engagement requires fund managers to earn rents, and hence what is beneficial for fund investors is detrimental for governance. Finally, lower costs of engaging in governance can decrease total welfare, despite not reducing the value of any firm.