Corporate Governance 5e

Christine A. Mallin

Chapter 6
The Role of Institutional Investors
in Corporate Governance

© Christine A. Mallin 2016

 Learning objectives

• To appreciate who institutional investors are

• To understand the growing influence of
institutional investors and why they are
increasingly interested in corporate
governance
• To realise the importance of institutional
investors’ relationships with their investee
companies and the role of stewardship

Mallin: Corporate Governance, 5th edition

 Learning objectives

• To be aware of the ‘tools of governance’ that

institutional investors have available to them
• To be able to assess the potential impact of
‘good’ corporate governance on corporate
performance

Mallin: Corporate Governance, 5th edition

 The Role of Institutional Investors -
the UK
• Combined Code (2008) ‘institutional shareholders
should enter into a dialogue with companies
based on the mutual understanding of objectives’.
• Walker Review (2009), 9 of its 39
recommendations related to the role of
institutional shareholders, communication, and
engagement.
• UK Corporate Governance Code (2010) - the
section on institutional shareholders was
removed and a new UK Stewardship Code (2010)
introduced.

Mallin: Corporate Governance, 5th edition

 Changing Pattern of Share
Ownership
• Between 1963 and 2014 there was a decline
in the proportion of shares held directly by
individuals in the UK, and a corresponding
increase in institutional and overseas
investment.

Mallin: Corporate Governance, 5th edition

 Changing Pattern of Share
Ownership
• In 1963, individuals owned 54% of the total
equity of UK companies, by 1989 this had
dropped to 20.6%, and by 2014, the
percentage had dropped to 11.9%.

Mallin: Corporate Governance, 5th edition

 Institutional Share Ownership

• At end of 2014, largest owners of UK shares

were the overseas investors with 53.8%.
Insurance companies owned 5.9%, pension
funds 3.0%, unit trusts 9.0%, and other
financial institutions 7.1%.

Mallin: Corporate Governance, 5th edition

 Institutional Share Ownership

• This can be compared to 1963 when pension

funds held 6.4%, insurance companies 10%,
and overseas investors 7.0%.

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 Table 1: Summary of Main Categories of
Share Ownership in the UK 1963-2014
Type of investor 1963 (%) 2014 (%)
Individuals 54 12
Insurance companies 10 6
Pension funds 6 3
Unit trusts 1 9
Other financial instit. 11 7
Overseas 7 54
Source: ONS Share Ownership 2012
(Other categories owning shares include banks, investment trusts, public sector, private non-financial
companies and charities).
Mallin: Corporate Governance, 5th edition
 Role of Representative Bodies

• NAPF
• ABI
• ISC: Statement of Principles on the
Responsibilities of Institutional Shareholders
and Agents (2005, revised 2007); Improving
Institutional Investors’ Role in Governance
(2009); Code on the Responsibilities of
Institutional Investors (2009).
• PIRC

Mallin: Corporate Governance, 5th edition

 Private equity firms

• Increasing influence of private equity firms

• Walker Working Group (2007) ‘Guidelines for
Disclosure and Transparency in Private
Equity’
• OECD (2008) publications

Mallin: Corporate Governance, 5th edition

 Sovereign Wealth Funds

• Increasing influence of sovereign wealth

funds
• International Working Group of Sovereign
Wealth Funds - ‘Santiago Principles’ (2008)

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 Means of exercising ‘voice’

• ‘Voice’ and ‘Exit’ (Hirschman 1972)

• Myners Report (‘95) “Developing a Winning
Partnership” looked at how companies and
institutional investors can work together,
including:
- one-to-one meetings involving top
management

Mallin: Corporate Governance, 5th edition

 Means of exercising ‘voice’

- structured meetings i.e. an agenda and

knowledge of the institution’s investment
objectives
- constructive dialogues
• Voting
• Focus lists

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 Voting and Institutional Investors

• Combined Code (2008) - ‘institutional

shareholders have a responsibility to make
considered use of their votes’.
• UK Stewardship Code (2010, 2012) –
institutional investors should ‘have a clear
policy on voting and disclosure of voting
activity’.

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 Voting - A Fiduciary Duty?

• US View
• Australian View
• International Corporate Governance Network
• OECD

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 Voting in the UK

• NAPF (1999) identified a number of areas of

concern including:
- investment management and custodial
agreements
- discrepancy between intended voting
levels and the level of proxies actually lodged
with the registrar
- communication problems
- antiquated voting system

Mallin: Corporate Governance, 5th edition

 Voting in the UK

• Survey of institutional investors to identify

problems with existing voting practices both
domestically and in cross-border investments
• ONS Share Ownership Survey (2014)
• US Investors
• ICGN
• OECD

Mallin: Corporate Governance, 5th edition

 Voting in the UK

• NAPF recommended:
– Regular considered voting should be
regarded as a fiduciary responsibility
– Voting policy ought to be specifically
covered by agreement
– UK’s voting system should be modernized
– Companies should actively encourage
voting

Mallin: Corporate Governance, 5th edition

 Voting in the UK

– Member associations should offer

help and guidance
– Registrars should support electronic
voting arrangements
– Voting in the context of stock lending
should be re-examined
– Custodian should actively assist in
the voting process

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 Barriers to Cross-Border Voting

• Survey of institutional investors carried out by

ICGN in 2001

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 Barriers to Cross-Border Voting

• Found that most institutional investors state

that they try to exercise their overseas
proxies but there may be problems in trying to
do so, including:
– Timing/deadlines
– Information/language
– Blocking/depositing of shares
– Voting procedures/methods

Mallin: Corporate Governance, 5th edition

 Myners (2004, 2007)
Recommendations
• The Shareholder Voting Working Group,
chaired by Paul Myners, issued reports in
2004 and 2007 detailing the various
impediments to voting, highlighting the
complexity of the voting system, and making
recommendations on a number of areas to
help improve the situation and remedy the
problem of ‘lost’ votes.

Mallin: Corporate Governance, 5th edition

 Myners (2004, 2007)
Recommendations
• These recommendations relate to:
- the importance of beneficial owners in the
process
- improving operational efficiency
- clarifying voting entitlements

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 Myners (2004, 2007)
Recommendations
- stock lending
- systems and controls at custodians and
investment managers
- enhancing institutional investors’
procedures
- enhancing procedures at company
meetings
- the importance of issuers

Mallin: Corporate Governance, 5th edition

 Corporate governance and corporate
performance
• Is there a link between corporate governance
and corporate performance?
• Mixed evidence but on balance both
academic and practitioner evidence point
towards the view that good corporate
governance helps realize value and create
competitive advantage.

Mallin: Corporate Governance, 5th edition

 Concluding comments

• Institutional investors’ power and influence has

grown in many markets and continues to do so.
• Stewardship concept is gaining a higher profile.
• Tools of governance include
dialogue/meetings, voting, shareholder
proposals, and focus lists.
• Influence of US investors in particular in the
area of proxy voting.

Mallin: Corporate Governance, 5th edition

 Concluding comments

• Voting as a fiduciary duty.

• Voting can be an effective means of
exercising ‘voice’ but there are significant
barriers to both effective domestic and cross-
border voting.
• Shareholder activism key to helping ensure
good corporate governance.

Mallin: Corporate Governance, 5th edition