Active institutional investors and the board of directors

Abstract

The present research examines the role of activist institutional investors in the formation of the board of directors. Activist institutional investors, such as pension funds, have a long term investment perspective and are independent of the firms in which they hold significant stakes. This study finds that pension fund ownership is associated with boards that are more independent of management and have more balanced compositions. The strongest results pertain to an overall board quality index reflecting board efficiency, board leadership, board independence and balance. The finding that activist institutional investors influence the board vindicates the efforts of regulators to encourage institutional investors to be active in terms of corporate governance.