Role of Institutional Investors in CG and Shareholder Activism

Question 1

What are Institutional Investors?

Answer 1

Pension funds, mutual funds, insurance companies etc.

Question 2

Why are Institutional Investors important?

Answer 2

They monitor corporate management to ensure alignment with shareholder interests.

Question 3

What is the mechanism for Institutional Investor oversight?

Answer 3

The investors use their substantial holdings to influence corporate decisions, advocate for shareholder-friendly policies, and enhance overall corporate governance standards.

Question 4

What challenges arise from the complex web of ownership among institutional investors?

Answer 4

• Conflicts of interest
• Diluted accountability
  This is as investors may own stakes across competing firms or have significant investments that influence their decision making capabilities.

Question 5

In what ways are institutional investors increasing their activism in CG?

Answer 5

• Engaging in direct dialogues with boards
• Exerting pressure through shareholder proposals
• Voting strategically on corporate actions
• e.g. the Universities Superannuation Scheme (USS) in the UK: Actively invests and engages in governance to match future liabilities with assets.

Question 6

What limits do Institutional Investors face in holding management accountable?

Answer 6

• Resource constraints
• Conflicting interests
• Structural limitations

Question 7

What role does the Universities Superannuation Scheme (USS) play in UK CG?

Answer 7

It exemplifies active institutional engagement by using its substantial assets to influence governance practices, focusing on long-term value creation and aligning company strategies with sustainable and unethical business practices.

Question 8

How do Resource Constraints limit the extent to which Institutional Investors can hold management accountable?

Answer 8

Managing a large portfolio can limit the ability to engage deeply with individual companies.

Question 9

How do Conflicting Interests limit the extent to which Institutional Investors can hold management accountable?

Answer 9

The need to maintain relationships with management can deter aggressive governance actions.

Question 10

How do Structural Limitations limit the extent to which Institutional Investors can hold management accountable?

Answer 10

The prevalence of passive investment strategies like index funds may reduce the incentives and ability to engage in active governance.