Making a Case for Regulating Institutional Shareholders' Corporate Governance Roles

Abstract

Drawing on the disconnect that currently exists between the social expectations associated with the corporate governance role of institutions and the institutions’ private interests, this article suggests that the current English legal framework does not adequately promote an optimal corporate governance role for institutions and does not meet the public interest of safeguarding investors’ long-term saving needs and sustaining a sound wealth-creating corporate sector in the long term. Our starting point is that investor-led governance, as this is aspired by UK policy-makers, is not only a matter of achieving beneficiaries’ private investment objectives through maximising long-term shareholder-value, but a matter of public interest. Next, we argue that existing regimes of private law that govern this area – first, the fabric of largely private law in contract and trust that governs the investment funds’ relationships with their beneficiaries, and, secondly, the company law and corporate governance norms that govern investment funds’ shareholder role – do not adequately take into account the public interest and, increasingly, are unable to meet the needs of private interests too. These inadequacies have only led to reinforcing a governance deficit for institutional shareholder behaviour and have left the dubious quality of institutions’ behaviour to market forces. We suggest that institutions’ shareholder behaviour should be governed in securities and investment management regulation and we outline the broad contours of how this may be achieved.

Keywords: institutional investors, corporate governance, shareholder stewardship, shareholder activism, soft law, securities regulation, investment management law

JEL Classification: G30, G38, K22