Institutional Investors and Corporate Governance: A New Zealand Perspective

Abstract

In recent years there has been a dramatic increase in the literature promoting increased institutional investor activism in the corporate governance of the companies in which they invest (‘investment-companies’) and in the overall shareholding by institutional investors in such companies. However, although we find there has been little research into the incidence or role of institutional investors in New Zealand, commentators suggest that the position in New Zealand likely reflects the characteristics of such investors in comparable jurisdictions. Research from the United States, the United Kingdom and Australia indicates that institutional investors do share some unique characteristics, but care must be taken that they are not viewed as a homogeneous group. We then examine the principal arguments put forward to justify why institutional investors should be active in the governance of investment-companies. These arguments are summarised into two principal categories, namely enhancement of the performance of the investment-company and improvements in the governance of that company. However, although the literature has focused on reasons why institutions should intervene, there has been less discussion on whether such investors can intervene. Accordingly we discuss in the New Zealand the legal and economic constraints against increased involvement. The legal barriers include the broad definition of director in the Companies Act 1993, which includes shadow directors or persons in accord with whose instructions the directors may regularly act; the problems of association under the Takeovers Code and the competing legal duties of certain institutional investors. We conclude that that the proposition for institutional investors to be active shareholders is more normative than realistic, given both the legal and economical barriers that actively discourage intervention by institutions in their investments. Finally we suggest that although legal impediments can be reduced through the passing of new legislation, the economic impediments are harder to overcome.