Institutional Investors as Minority Shareholders

41 Pages Posted: 16 Jul 2010 Last revised: 15 Apr 2015

Yishay Yafeh

Hebrew University of Jerusalem - Jerusalem School of Business Administration; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Assaf Hamdani

Hebrew University - Faculty of Law

Date Written: October 10, 2011

Abstract

We examine the role of institutional investors in corporate governance in an environment where ownership is concentrated. The presence of dominant shareholders alters the role of institutional investors by limiting their voting influence; by shifting the focus from shareholder-manager conflicts (when ownership is dispersed) to conflicts between controlling and minority shareholders (when ownership is concentrated); and by creating new potential conflicts of interest when business groups are present. Using hand-collected data on voting by institutional investors in Israel, which adopted far-reaching measures to empower minority shareholders, we find that: (1) Institutional investors rarely vote against insider-sponsored proposals even when the law grants them special voting power; (2) Institutional investors are more likely to vote against compensation-related proposals than against other related party transactions even when minority shareholders lack the power to influence outcomes; and (3) Institutional investors with potential ownership and business-related conflicts of interest are less likely to vote against insider-sponsored proposals than stand-alone institutional investors, both when minority shareholders have power and when they do not. One interpretation of these findings is that the power granted to the minority plays a role only in the selection of proposals brought to a vote but not in voting on existing proposals; another is that, in order for institutions to play a valuable role in corporate governance, granting voting power to minority shareholders is unlikely to be effective unless conflicts of interest are addressed.

Keywords: Corporate Governance, Corporate Law, Institutional Investors, Minority Shareholders, Business Groups, Shareholder Activism, Mutual Funds, Emerging Markets

JEL Classification: G20, G30, K20, K22

Suggested Citation

Yafeh, Yishay and Hamdani, Assaf, Institutional Investors as Minority Shareholders (October 10, 2011). Available at SSRN: https://ssrn.com/abstract=1641138 or http://dx.doi.org/10.2139/ssrn.1641138

Yishay Yafeh

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3081 (Phone)
+972 2 588 1341 (Fax)

HOME PAGE: http://bschool.huji.ac.il/facultye/yafeh/

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Assaf Hamdani (Contact Author)

Hebrew University - Faculty of Law ( email )

Mount Scopus, 91905
Israel

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