Institutional investors to promote good corporate governance practices

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Institutional Investors are financial institutions such as pension funds, mutual funds and insurance companies, that accept funds from third parties and invest them on their behalf[1]. According to the Cadbury Committee, they should play a key role in corporate governance and have a special responsibility to overview the compliance of corporate governance principles. The same view is shared also by the Grenbury Report, the Harper Report and also by many international codes and authors.

Notwithstanding, a recent study carried out by the OECD in the role institutional investors actually play in the promotion of corporate governance has found out that in practice this is not always the case. Institutional investors face some challenges such as the difficulty to closely monitor multiple investments and difficulty to attend shareholders meetings in foreign countries and exercise their voting rights. Also, the fact that they are usually paid for the amount of assets under management and not in relation to the profits generated by their investments creates a disincentive to actively participate and have a close involvement on the company’s management[2]. Rock’s study on institutional investors in corporate governance also shows how such investors have not been fulfilling the desired role of acting as protectors of corporate governance in private entities[3].

In an attempt to improve their cooperation with corporate governance, some institutional investors have created their own set of principles, to be applied in all their investments. Such is the case, for example, of the Hermes principles, which has published a set of twenty rules to be followed by its investee companies, including rules regarding communication, finance, strategy, social, ethical and environment[4].

In my opinion, although the efforts of institutional investors to promote good corporate governance practices are of course positive and should always be welcomed, I disagree with the phrase for comment this week that indicates that effectiveness and credibility of the entire corporate governance system depends largely on institutional investors exercising their shareholders rights.

Good corporate governance practices depend on the company as a whole and also on directors particularly, while institutional investors are normally minority shareholders that would not be able to make decisions on behalf of the company anyway. So, although they can make a positive contribution, the exercise of their shareholders rights is not in my view the crucial factor for good corporate governance practices.

[1] OECD, “The Role of Institutional Investors in Promoting Good Corporate Governance”, <https://www.oecd.org/daf/ca/49081553.pdf> accessed 3 March 2018.

[2] Ibid.

[3] E. Rock, “Institutional Investors in Corporate Governance”, University of Penn, Institute for Law and Economic Research Paper, 2015.

[4] “The Hermes Principles: What Shareholders Expect ot Public Companies – And What Companies Should Expect of their Investors” <https://www.ecgi.org/codes/documents/hermes_principles.pdf> accessed 3 March 2018.

 

 

 

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