Institutional Investors

Institutional investors are investment vehicles which pool funds from individuals so as to have a much larger investment power. Common types of institutional investors include insurance companies, hedge funds and pension funds. Globally, there has been a trend away from share ownership by individuals, towards ownership by large institutional investors. According to the UKs Office of National Statistics, between 1963 and 2004, the percentage of share ownership belonging to individuals fell from 54% to 14%. At the same time, the amount held by insurance companies, pension funds and unit trusts increased from 17% to 34%. Like ordinary members, institutional investors have a say on the composition of the board of directors and passing of certain actions relating to the structural and constitutional elements of the company.

Influence of institutional investors

The Cadbury Committee and the Greenbury Report have both recognised the important role of institutional investors in actively ensuring that the investee company complies with corporate governance standards. According to Hirschman (1970), the exercise of institutional influence can be within an exit and voice framework. Exit refers to the selling of stake within the company and voice refers to the expression of dissatisfaction directly to the management. However, for reasons pertaining to diversification policies and the size of their holdings, the exit strategy can only be exercised rarely.

Tools of Corporate governance

Listed below are a number of avenues available to institutions in voicing their power (whether directly or indirectly) in order to achieve desired outcomes. i. One to one meetings (with individual large institutional investors) To discuss key issues such as strategy, the monitoring of progress regarding objectives and quality of management Voting Institutional investors in possession of voting shares should make positive use of their voting rights. Focus Lists Comprise of underperforming companies when compared to a main index such as Standard and Poors. The reception of negative attention will pressure the company into making changes that will improve performance. Corporate governance rating systems By companies such as Deminor, Standard and Poors will have a similar impact as that described above.

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Increasing institutionalisation of shareholders has benefits in terms of corporate governance. By exercising their increased power in a positive manner, and using the tools of corporate governance identified above, institutional investors can have a major constructive impact on their investees.