Reference 1: Mallin (2018), Ch.

6, 7
CHAPTER 6 : The Role of Institutional investors in Corporate Governance
The key role played by institutional investors in corporate governance
cannot be underestimated. With the internationalization of cross-border portfolios,
and the financial crises that have occurred in many parts of the world, it is perhaps
not surprising that institutional investors increasingly look more carefully at the
corporate governance of companies
Influence of Institutional investors and Stewardship

 The institutional investors’ potential to exert significant influence on

companies has clear implications for corporate governance, especially in
terms of the standards of corporate governance and issues con`cerned with
enforcement.
 The Hermes Corporate Governance (2006)
o Hermes’ expectations of listed companies encompass 12 principles
relating to transparency and communication; corporate culture;
strategy; financial disciplines and structure, and risk management;
stakeholders, environmental and social issues; and governance.
o Listed companies can expect five core from Hermes. Those are
clearly communicated set of expectations on investor
communications, corporate culture, operations, strategy, financial
disciplines and structure, sustainability and governance; a
consistent approach; a thorough understanding of markets and
companies around the world; a long-term perspective when
exercising ownership rights; and a constructive, confidential
dialogue with boards and senior management
 Talbot (2010) states that ‘shareholder stewardship requires institutional
shareholders to take an active role in corporate governance and empowers
them, both legally and morally to do so
Development of guidance on institutional investor’s responsibilities

 The ISC (2002) recommends that institutional investors should have a

clear statement of their policy on activism and on how they will discharge
their responsibilities. The policy would be a public document and would
address the following areas:
o how investee companies will be monitored;
o the policy for requiring investee companies’ compliance with the
Combined Code;
 o the policy for meeting with an investee company’s board and
senior management;
o how any conflicts of interest will be dealt with;
o the strategy on intervention;
o an indication of when and how further action may be taken;
o the policy on voting.
 UK Stewardship Code 2010
The Financial Reporting Council (FRC) issued the UK Stewardship Code
in June 2010. The UK Stewardship Code is largely based on the ISC
‘Code on the Responsibilities of Institutional Investors’, in fact only a few
minor amendments were made to the latter before it was adopted as the
UK Stewardship Code, with the FRC assuming responsibility for its
oversight. The seven principles of the UK Stewardship Code are that
institutional investors should:
o Principle 1—publicly disclose their policy on how they will
discharge their stewardship responsibilities.
o Principle 2—have a robust policy on managing conflicts of interest
in relation to stewardship and this policy should be publicly
disclosed.
o Principle 3—monitor their investee companies.
o Principle 4—establish clear guidelines on when and how they will
escalate their activities as a method of protecting and enhancing
shareholder value.
o Principle 5—be willing to act collectively with other investors
where appropriate.
o Principle 6—have a clear policy on voting and disclosure of voting
activity.
o Principle 7—report periodically on their stewardship and voting
activities
Tools of corporate governance
The tools of corporate governance for Institutional investors under the spotlights
and an emphasis on their stewardship role

 One-to-one meetings
The meetings between institutional investors and companies are extremely
important as a means of communication between the two parties. This is
one clear example of the way in which individual investors are at a
disadvantage to institutional investors: corporate management will usually
only arrange such meetings with large investors who are overwhelmingly
 institutional investors. The issues that are most discussed at these meetings
between firms and their large institutional investors include areas of the
firm’s strategy and how the firm is planning to achieve its objectives,
whether objectives are being met, and the quality of the management.
Institutional investors are seen as ‘important for the way the business is
managed’, and their views may be fed back to the board in the planning
process, and incorporated, as appropriate, in an annual strategy paper
 Voting
he right to vote that is attached to voting shares (as opposed to non-voting
shares) is a basic prerogative of share ownership, and is particularly
important given the division of ownership (shareholders) and control
(directors) in the modern corporation. The right to vote can be seen as
fundamental for some element of control by shareholders. The institutional
investors can register their views by postal voting, or, in many companies,
the facility to vote electronically is now available. Most of the large
institutional investors now have a policy of trying to vote on all issues that
may be raised at their investee company’s annual general meeting (AGM).
Generally, an institutional investor will try to sort out any contentious
issues with management ‘behind the scenes’; however, if this fails, then
they may abstain from voting on a particular issue (rather than voting with
incumbent management as they generally would) or they may actually
vote against a resolution. In this case, they would generally inform the
firm of their intention to vote against. It tends to be corporate governance
issues that are the most contentious, particularly directors’ remuneration
and lengths of contract.
CHAPTER 7: Social Responsibility Investment

 SRI involves considering the ethical, social, and environmental

performance of companies selected for investment as well as their
financial performance. The phrase ‘ethical investment’ is often used
interchangeably with the phrase ‘socially responsible investment’
 SRI covers a wide range of areas, including genetic engineering, the
environment, employment conditions, and human rights.
 Strategies for SRI
EIRIS is a leading provider of independent research into corporate social,
environmental, and ethical performance, and was established in 1983 to
help investors make responsible investment decisions. EIRIS has
identified three basic strategies for SRI:
o Engagement—identify areas for improvement in the ethical, social,
and environmental policies of the companies invested in, and
encourage them to make improvements.
o Preference—fund managers work to a list of guidelines that
trustees prefer companies invested in to meet.
o Screening—trustees ask for investments to be limited to companies
selected (screened) for their ethical behaviour. May be ‘positive’ or
‘negative’ screening.
Reference 2; OECD Principles Principle III : Institutional investors, stock
markets, and other intermediaries
The corporate governance framework should provide sound incentives throughout
the investment chain and provide for stock markets to function in a way that
contributes to good corporate governance. The Principles recommend that
institutional investors disclose their policies with respect to corporate governance.
Voting at shareholder meetings is, however, only one channel for shareholder
engagement. Direct contact and dialogue with the board and management,
represent other forms of shareholder engagement that are frequently used
A. Institutional investors acting in a fiduciary capacity should disclose
their corporate governance and voting policies with respect to their
investments, including the procedures that they have in place for
deciding on the use of their voting rights
The effectiveness and credibility of the entire corporate governance
framework and company oversight depend to a large extent on institutional
investors’ willingness and ability to make informed use of their
shareholder rights and effectively exercise their ownership functions in
companies in which they invest. When institutional investors have
developed and disclosed a corporate governance policy, effective
implementation requires that they also set aside the appropriate human and
financial resources to pursue this policy in a way that their beneficiaries
and portfolio companies can expect.
B. Votes should be cast by custodians or nominees in line with the
directions of the beneficial owner of the shares
Custodian institutions holding securities as nominees for customers should
not be permitted to cast the votes on those securities unless they have
received specific instructions to do so. Holders of depository receipts
should be provided with the same ultimate rights and practical
opportunities to participate in corporate governance as are accorded to
holders of the underlying shares
C. Institutional investors acting in a fiduciary capacity should disclose
how they manage material conflicts of interest that may affect the
exercise of key ownership rights regarding their investments.
The incentives for intermediary owners to vote their shares and exercise
key ownership functions may, under certain circumstances, differ from
those of direct owners. Such differences may sometimes be commercially
 sound but may also arise from conflicts of interest which are particularly
acute when the fiduciary institution is a subsidiary or an affiliate of
another financial institution, and especially an integrated financial group.
When such conflicts arise from material business relationships, for
example, through an agreement to manage the portfolio company’s funds,
such conflicts should be identified and disclosed
D. The corporate governance framework should require that proxy
advisors, analysts, brokers, rating agencies and others that provide
analysis or advice relevant to decisions by investors, disclose and
minimise conflicts of interest that might compromise the integrity of
their analysis or advice
The investment chain from ultimate owners to corporations does not only
involve multiple intermediary owners. It also includes a wide variety of
professions that offer advice and services to intermediary owners. Proxy
advisors who offer recommendations to institutional investors on how to
vote and sell services that help in the process of voting are among the most
relevant from a direct corporate governance perspective. In some cases,
proxy advisors also offer corporate governance related consulting services
to corporations. Other service providers rate companies according to
various corporate governance criteria. Analysts, brokers and rating
agencies, perform similar roles and face the same potential conflicts of
interes
E. Insider trading and market manipulation should be prohibited and
the applicable rules enforced
These practices can be seen as constituting a breach of good corporate
governance as they violate the principle of equitable treatment of
shareholders. However, the effectiveness of such prohibition depends on
vigorous enforcement action.
F. For companies who are listed in a jurisdiction other than their
jurisdiction of incorporation, the applicable corporate governance
laws and regulations should be clearly disclosed. In the case of cross
listings, the criteria and procedure for recognising the listing
requirements of the primary listing should be transparent and
documented.
It is increasingly common that companies are listed or traded at venues
located in a different jurisdiction than the one where the company is
incorporated. This may create uncertainty among investors about which
corporate governance rules and regulations apply for that company. It may
concern everything from procedures and locations for the annual
shareholders meeting, to minority rights. The company should therefore
 clearly disclose which jurisdiction’s rules are applicable. When key
corporate governance provisions fall under another jurisdiction than the
jurisdiction of trading, the main differences should be not
G. Stock markets should provide fair and efficient price discovery as a
means to help promote effective corporate governance.
Effective corporate governance means that shareholders should be able to
monitor and assess their corporate investments by comparing market-
related information with the company’s information about its prospects
and performance.