Institutional investors, corporate governance and stewardship codes Problems and perspectives (original) (raw)
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Europe's Corporate Governance Green Paper: Do Institutional Investors Matter?
SSRN Electronic Journal, 2011
The European Commission launched a Green Paper on corporate governance aimed largely at listed companies in April 2011. The Green Paper recognizes that institutional investors play a dominant role in the current financial markets, but it criticizes the shortterm thinking and practice among these investors. Long-term and appropriate shareholder engagement is viewed as the linchpin of an effective corporate governance framework. The question arises, however, if institutional investors should be actively engaged if they lack the time, knowledge, and a financial incentive to do so. We introduce and briefly discuss "shareholder engagement costs" that policymakers should take into account when increasing shareholdersʼ rights and betting on institutional investors to protect companies against business failures. The engagement costs considered here are: (1) conventionalism/micro-management, (2) management distraction, (3) risk aversion and (4) lack of transparency.
Problems and Limitations of Institutional Investor Participation in Corporate Governance
Corporate Governance, 2003
During the past decade, major governance breakdowns in public limited companies have brought issues of corporate governance to the forefront of debate. As a result, a series of governance codes have been introduced into the UK that have sought to obligate publicly listed companies to certain practices in their overall operations. One of the codes, the Hampel Code, specifically called for an increased role for institutional investors in governance issues. Using financial system theory as a framework for discussion, this paper questions the viability of institutional investors taking a more active role in monitoring and enforcing governance in the UK. It is argued that, if institutional investors choose to increase participation, then it could create anomalies to the efficient operation of the capital markets, involve institutional investors as delegated monitors, increase costs and create free rider problems.
HAL (Le Centre pour la Communication Scientifique Directe), 2018
The role of institutional investors in corporate governance has significantly increased. Many agency theory scholars have even praised the monitoring influence they have or could have on corporations and executive managers. Yet, recently, there have been repeated calls in favour of investor "stewardship". Drawing on a multidisciplinary review and on legal and regulatory materials, this article proposes an exploration of the concept of institutional investor stewardship. We provide a genealogical analysis of institutional investor stewardship that suggests that shareholder stewardship proceeds from the disparity between usual theoretical representations of shareholders and the rising influence of institutional ownership. We make two contributions. First, we contribute to the debate surrounding the role of institutional investors with an analysis of the emergence of renewed standards for institutional investors. Second, we contribute by clarifying the specific representation of shareholders, which was implied in traditional corporate governance models.
SSRN Electronic Journal, 2011
Corporate governance codes have been drafted to guide listed companies to improve corporate governance. Shareholders, in particular institutional investors, are being asked to play a critical role in safeguarding good corporate governance. However, addressing shareholders of Dutch listed companies through the Dutch Corporate Governance Code and describing their responsibilities as active owners has not so far resulted in a broad range of engagement of institutional investors with investee companies. This is possibly because there is a misalignment of key assumptions underlying the Dutch Code with actual capital market practices. Driven by those practices, institutional investors are first and foremost concerned with maximizing the returns on their investments. Enforcing institutional investors to take responsibility in improving corporate governance cannot be done through laws and codes alone. Passing laws and codes is one thing and enforcing them-and even inspiring buy in on the part of those they are aimed at-is something entirely different. Ultimately, enforceability is about the value that ultimate beneficiaries of institutional investors place on 'stewardship', and hold their (fiduciary) asset manager accountable for. This paper is a call for lawand policymakers to take a step back and reconsider the ultimate function of corporate governance codes in a context of international capital market practice in which codes can never be a goal in itself, but more a means for improving corporate governance around the world.
Institutional Investors in Corporate Governance
Oxford Handbooks Online, 2015
This chapter examines the role of institutional investors in corporate governance and whether regulation is likely to encourage them to become active stewards. It considers the lessons that can be learned from the US experience for the EU’s 2014 proposed amendments to the Shareholder Rights Directive. After reviewing how institutional investors fit within the historical evolution of finance, the chapter documents the growth in institutions equity holdings over time. It explains how institutional investors are governed and organize share voting before turning to two competing hypotheses to account for the relative passivity of institutional investors: the excessive regulation and the inadequate incentives hypotheses. In evaluating these hypotheses, it reviews the results of the SEC’s attempt to incentivize mutual funds to vote their shares. The chapter concludes by highlighting the role of hedge funds in catalyzing institutional shareholders, along with some of the risks associated w...
1. The Problem The study in context to the " Role of Institutional Investors in Corporate Governance in India " has been done to evaluate the active role institutional investors and its elements play in corporate governance activities of companies and if they have any effect over financial feat of relevant companies. In this study, we principally evaluate two questions concerning to the debate: i) Do institutional investors evaluate corporate managers? ii) Are institutional investors fleeting and myopic that grants insufficient incentives to regulate the firm? We examine these questions by evaluating the magnitude to which manager's influence accounting numbers and the attendant market response to such responsibility. Institutional investors, who now own a noteworthy portion of equity in Indian banks, are frequently explained as transient and narrow-minded owners with no incentives to engage themselves in governance. We investigate the strength of this declaration by evaluating whether institutional owners restrain managerial diplomacy by limiting earnings manipulation. Particularly, we examine the relation linking institutional ownership and optional accounting behaviour, as calculated by discretionary accruals. Our conclusions are coherent with institutional evaluating and contradictory with institutional investors motivating narrow-minded management behaviour. 2. The Concept of the Study Institutional investors can be explained as economic entities with large amount of capital to spend; they involve brokers, mutual funds, pension funds, insurance companies, investment banks and endowment funds (Salehi et al., 2011). Their potential impact as huge shareholders was trailed back to 1930 in the division of owners from management of business to be in control of directors when it was primarily initiated by Berle and Means in 1932. This division of ownership was after the agency problem, when managers (agents) might search for their own interest instead of on behalf of the pursuit of shareholders. The conventional view that the dissemination of a firm's share possession has no impact on the value of the firm has been confronted by a vision that can be trailed back to Berle and Means (1932) and Jensen and Meckling (1976). The efficient evaluation theory opposes that the bigger the shareholding of the institutional shareholder, the more effective the evaluation exerted by that shareholder and the more the possibility of dissident success. Institutional investors jointly hold a significant portion of equity capital in the India. As a result, the role of such financers in corporate governance has been the topic of popular discussion in recent years. Former research (e.g., Schleifer and Vishny, 1986; Watts, 1988) and anecdotal proof recommend that institutions can possibly play an active role in evaluating and disciplining managerial judgment. Nevertheless, critics (e.g., Bhide, 1993) claim that institutional participation in corporate governance is bound to be reactive either because of their fragmented or evanescent ownership. Additionally, institutions are characterized as narrow-minded investors who emphasize excessively on current earnings instead of long-term earnings in shaping stock prices (Jacobs, 1991; Porter, 1992). Such a short-term emphasis is liable to deter institutional investors from incurring costs of evaluating managers and leading the firm. In this study, we present empirical facts on the contentious role of institutions in corporate governance by examining i)the relation involving institutional ownership and managers' open behaviour in manipulating accounting incomes, and ii) the pricing inferences of such managerial judgment. The participation of institutions in corporate governance has a straight effect on the agency expenditure ensuing from the disconnection of ownership and control. Agency costs occur from discrepancy of welfare between managers and shareholders Abstract: Thus institutional investors are the organisations which pool large sum of money and invest those sum in different kind of securities, real assets, mutual funds and others. These investors act as highly specialised investors on behalf of others. Typical investor include banks, indemnity companies, retirement or pension stock s, hedge finances, investiture funds advisors and mutual funds. Their role in the economy is to routine as highly specialized investors on behalf of others. The role that the institutional investors can play in the corporate governance system of a company is a controversial question. In this paper you will study the view points of many researchers here. Few believe that the institutional investors must interfere in the corporate governance system of a company; others believe that these investors have other investment objectives to follow. Those who believe that institutional investors need not play a role in the corporate governance system of a company, argue that the investment objectives and the compensation system in the institutional investing companies often discourage their active participation in the corporate governance system of the companies.
British Journal of Management, 2021
Over recent decades share-ownership of listed companies has concentrated into the hands of large institutional investors, challenging the traditional agency theory view of corporate governance as a mechanism to resolve the separation of ownership and control. Alternative theories have emerged to explain the role of institutional investors in corporate governance, each with a slightly different view on the motivations of these powerful shareholders and the nature of their relationship with corporate management. These theories share a common thread - the concept of investor stewardship - yet each theory applies it differently. This paper explores whether institutional investors should act primarily as stewards of their investee companies (agency theory), stewards of beneficiaries’ funds (agency capitalism), stewards of a market/economy (universal ownership) or stewards of society (stakeholder theory) and whether this varies internationally. Through an analysis of national stewardship codes, the paper determines which of these theoretical approaches are most strongly reflected in emerging stewardship policy across the world. It presents a typology of stewardship codes as a framework for understanding cross-country variation in investor stewardship policy. Stewardship codes influence the shareholder-manager relationship and can encourage integration of wider economic and societal concerns into corporate finance.
The Role of Institutional Shareholders in Sustainable Corporate Governance
2021
The global rise of institutional shareholders has triggered debates concerning their roles in corporate governance. Their lack of engagement with the investee companies had been largely criticised following the Global Financial Crisis in 2008. To fill the engagement gap UK and EU opted for empowering shareholders by introducing ‘comply or explain’ based legislations. However, with the increase of pressing issues such as climate change and social problems, sustainability and ESG have gained importance in corporate governance. Lawmakers want these issues to be an indispensable part of corporate governance with the help of institutional shareholders. UK Stewardship Code has been a pioneer to require institutional shareholders to promote sustainable business practices and to integrate ESG considerations into their investment and engagement decisions. This dissertation analyses to what extent UK Stewardship Code can be influential on institutional shareholders. As being one of the largest subjects of the UK Stewardship Code, a case study on the world biggest asset management company, BlackRock is conducted. This study argues that although the public stance of institutional shareholders, including BlackRock, have changed in parallel to the growing emphasis on sustainability in the legal framework, the results will not be very encouraging given the incentive problems continue to exist. It also draws attention to the potential unintended consequences of empowering institutional shareholders considering the concentrated market.
The Institutional Shareholder-Best Practice: the National Investment Funds' experience
Corporate Governance: An International Review, 2002
One of the most important achievements of the National Investment Funds' Programme-the implementation of the Mass Privatisation Programme-is its input into the process of building a Polish corporate governance infrastructure. Experience in the creation and operation of corporate governance systems as accumulated by the National Investment Funds (NIFs) is a valuable source of knowledge on a group of shareholders in Polish companies that is continuously expanding and diversifying in terms of identity. The action model applied to the National Investment Funds made possible the collecting of the first Polish experiences regarding the behaviour of institutional investors in supervisory processes. In its turn, the positioning of the Funds in such a role matched observations of world trends where ownership functions are concentrating in the hands of institutional investors. The objective of this study is to demonstrate the experience of National Investment Funds in the context of the achievements of institutional investors acting in mature market economies in the realm of corporate governance. Experience accumulated by the NIFs shows that the process of building efficient corporate governance structures is not a simple task. Analysis of their achievements in safeguarding their interests from the point of view of the institutional investor has confirmed the importance of an active stance in this sphere.