Europe's Corporate Governance Green Paper: Do Institutional Investors Matter?

Abstract

The European Commission launched a Green Paper on corporate governance aimed largely at listed companies in April 2011. The Green Paper recognizes that institutional investors play a dominant role in the current financial markets, but it criticizes the short-term thinking and practice among these investors. Long-term and appropriate shareholder engagement is viewed as the linchpin of an effective corporate governance framework. The question arises, however, if institutional investors should be actively engaged if they lack the time, knowledge, and a financial incentive to do so. We introduce and briefly discuss “shareholder engagement costs” that policymakers should take into account when increasing shareholders’ rights and betting on institutional investors to protect companies against business failures. The engagement costs considered here are: (1) conventionalism/micro-management, (2) management distraction, (3) risk aversion and (4) lack of transparency.

Keywords: institutional investors, corporate governance, shareholder activism, shareholder rights, European Commission, Corporate Governance Green Paper

JEL Classification: K22