Shareholder Engagement by Large Institutional Investors

Abstract

While shareholder engagement has captured much attention recently, the evidence on the role of large institutional investors remains relatively scarce. Large asset managers have become an increasingly powerful force since the financial crisis of 2008, with the top 20 managers controlling together almost 22% of votes in the FTSE 350 companies. The prevailing view, however, holds that large fund families avoid active shareholder engagement. This study aims to contribute to the ongoing discussions about the stewardship role of large institutional investors by identifying the biggest investors in UK listed companies and revealing how these institutional investors behave and vote at shareholders’ meetings. The results show growing shareholder stewardship efforts by large asset managers, including index (often described as passive) fund managers, over the last five years and thus challenge some common assumptions about large institutional investors. The study also reveals that the primary target of these engagement efforts has been corporate governance standards, rather than business strategy or performance. These findings have important implications and will better inform discussions and efforts to build regulatory frameworks for effective shareholder engagement in publicly-traded companies. The results suggest that regulators need to remain realistic by not placing impractical engagement expectations on large institutional investors alone. To go beyond corporate governance engagement, regulatory efforts need to take a broader approach towards investor stewardship and shareholder rights. In particular, hedge funds and other shareholder activists can improve corporate strategy and performance engagement by supplying large asset managers with firm-specific information through activist demands.

Keywords: corporate governance, shareholder voting, shareholder engagement, shareholder activism, ownership structure, institutional investors, common ownership, passive index funds

JEL Classification: G23, G32, G34, K21, K22