Institutional Investors in Corporate Governance

In Oxford Handbook on Corporate Law and Governance, 2015, Forthcoming

U of Penn, Inst for Law & Econ Research Paper No. 14-37

51 Pages Posted: 21 Oct 2014 Last revised: 23 Jul 2015

See all articles by Edward B. Rock

Edward B. Rock

New York University School of Law; European Corporate Governance Institute

Date Written: July 21, 2015

Abstract

This chapter of the Oxford Handbook on Corporate Law and Governance examines the role of institutional investors in corporate governance and the role of regulation in encouraging institutional investors to become active stewards. I approach these topics through asking what lessons we can draw from the U.S. experience for the E.U.’s 2014 proposed amendments to the Shareholder Rights Directive.

I begin by defining the institutional investor category, and summarizing the growth of institutional investors’ equity holdings over time. I then briefly survey how institutional investors themselves are governed and how they organize share voting. This leads me to two central questions: (a) why, over the last twenty five years, have institutional investors not fulfilled the optimists’ hopes?; and (b) can the core incentive problems that subvert Institutional Investor activism be cured by regulation? The U.S. experience, in which substantial deregulation has led to only modest increases in shareholder activism, suggests that a key explanation for institutional investors’ relative passivity is a fundamental lack of incentives. In considering whether imposing positive obligations on institutional investors is likely to succeed, I examine the disappointing results of the S.E.C.’s long experiment with incentivizing mutual funds to vote their shares. The U.S. experience suggests that the E.U. efforts are likely to be similarly disappointing.

I then examine the important role that hedge funds now play in catalyzing institutional shareholders, and consider some of the risks in relying on such highly incentivized actors.

Keywords: Corporations, administrative law, securities law and regulation, comparative law, shareholders, voting rights, shareholder activism, institutional investor passivity, inadequate incentives of institutional investors, activist hedge funds, activists, activism, E.U. Shareholder Rights Directive

JEL Classification: D02, G23, K22, K23, P12

Suggested Citation

Rock, Edward B., Institutional Investors in Corporate Governance (July 21, 2015). In Oxford Handbook on Corporate Law and Governance, 2015, Forthcoming; U of Penn, Inst for Law & Econ Research Paper No. 14-37. Available at SSRN: https://ssrn.com/abstract=2512303

Edward B. Rock (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

European Corporate Governance Institute ( email )

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

Register to save articles to
your library

Register

Paper statistics

Downloads
1,164
Abstract Views
4,251
rank
16,976
PlumX Metrics