Vanguard, BlackRock and State Street — the three largest U.S. money management firms — hold the most sway over Minnesota public companies, if they so desire.

Collectively, they own 18 percent of the shares in the state's 25 largest public companies. Vanguard is the largest or second-largest investor in 24 of the 25 companies. BlackRock is among the five largest investors in all 25 companies, and State Street is no lower than eighth-largest shareholder at all 25.

Though the firms have some actively managed products, the three firms are largely passive investors.

Why does that matter? The whole idea of passive investing is to base the holdings of exchange traded funds (ETFs) and index funds on the composition of underlying indexes. That saves clients money in the end, but also puts more air between the firms and the companies they invest in than other management styles.

So companies need to work harder to communicate with these big investors, whose holdings continue to become more popular.

"Active shareholders are the bread and butter of investor relations. There you can change the profile of the shareholders [vote]," said Heide Erickson, investor relations at Minneapolis-based Capella Education Co. and president-elect of the National Investor Relations Institute's Twin Cities chapter. "But with passive investors, by definition — there is not as much influence you have as a company."

Passive funds have generally outperformed active funds over the last eight years when stock market growth has been relative steady and volatility low making it harder for active managers to outperform their benchmarks.

As a result, the share of assets allocated to passive strategies has increased from 11 percent in 2000 to 43 percent in 2015, according to a 2017 research piece by UBS.

There are a lot of implications to the markets on the shift of funds from active to passive regarding price, volatility and volume, but it also has practical applications to companies in how often they engage with their different shareholders and who is initiating the conversations.

It's important for companies to know what their largest shareholders are thinking. Feedback can aid boards of directors in their communications and long-term planning.

And if a company faces a contested vote on a proposal, votes can be swayed if good relationships have been established.

The large passive investors do signal their preferences. Executives at BlackRock, Vanguard and State Street send an annual open letter to CEOs and boards of directors highlighting their areas of interest or concern. However, they are more general in scope, not geared toward specific companies.

Recent letters from BlackRock CEO Larry Fink and Vanguard's Chairman F. William McNabb highlighted environmental, social and governance concerns. Each urged companies to add more gender diversity to their boards.

Yet Fink also indicated a new model of shareholder engagement, pledging to add resources to the company's investment stewardship team.

"The growth of our team will help foster even more effective engagement with your company by building a framework for deeper, more frequent and more productive conversations," Fink wrote.

The companies would like nothing more than more frequent communication.

"I think like any investor we would welcome the opportunity to get engaged with them," said Brad Pogalz, director of investor relations for Bloomington-based Donaldson Co. "To see the index funds at least proclaiming to take a more active role in things like governance or some of the ESG topics is certainly encouraging."

Donaldson's largest shareholder is an active investor, State Farm Investment Management. So is its fifth-largest, St. Paul-based Mairs & Powers. However, Vanguard, BlackRock and State Street also are in the top five.

"The top 10 active shareholders for us make up something like a quarter of our shares," Pogalz said. "Vanguard, BlackRock and State Street make up a little over 20 percent of shares outstanding."

Pogalz said he talks more often with his largest active investors, but would offer the same approach and information if passive investors engage more.

"I don't know if it necessarily changes the relationship," he said.

Mark Henneman is chairman and CEO of Mairs & Power Inc., which is an active investor that makes long-term investments in Midwestern companies. The firm is the 30th largest institutional investor in Minnesota's largest companies.

The firm is among the top five shareholders in Donaldson, Minneapolis-based Graco Inc. and St. Paul-based H.B. Fuller.

Henneman and his team at Mairs & Power don't take the passive investors' global view of advocating what's best for the entire index.

"When I'm voting proxies on behalf of my shareholders and clients, I'm intensely interested in [the companies] having an advantage vs. their competition," Henneman said.

Because of that, the firm is likely to engage more often with the companies they are invested or interested in.

Vanguard — which as of Dec. 31 had $3.7 trillion of its $4.9 trillion under management in index funds — said in a statement that having a passive investment philosophy does not mean the firm never reaches out to companies.

"The level and frequency of these discussions are influenced by the potential material impact to our funds and the contentiousness of the issue, so in some cases we need to engage with a company multiple times throughout the year," the statement said.

The key to a good relationship with passive investors is to establish it ahead of any issues, said Erickson of Capella, which is merging with Strayer Education Inc.

"That means on an annual basis we always reach out," she said. "We are really trying to understand their hot buttons."

Erickson said she reaches out during quieter times of the year for feedback.

"That gives information for the board of directors to help them form their opinion in terms of whether to act faster on a governance issue," Erickson said.

So it is possible for a company to open an avenue of communication with passive investors.

But don't get Erickson started on another large pool of institutional investors called quant funds. Those funds buy and hold shares of companies based on proprietary internal algorithms, and some funds run so lean most have little to no interaction with the companies they own.

"It's challenging," she said. "There is no influence, it's all numbers driven."