The Role of Institutional Investors in Improving Board of Director Attributes around the World

Badar Alshabibi

doi:10.3390/jrfm14040166

Abstract

This paper investigates the role of institutional investors in the improvement of corporate governance for the companies in which they invest (investee companies) using evidence about the attributes of boards of directors across 15 countries. Furthermore, this paper examines the extent to which the activism of institutional investors is determined by the institutional environment, to include various economic conditions (pre-crisis, crisis and post-crisis), legal systems and ownership structures. Drawing from the agency theory and institutional theory, the results show that foreign institutional investors are the main promoters of board governance structures across the globe. This study also provides evidence that institutional investors promote the independence of a board and its audit and compensation sub-committees (but excluding its nomination committee). The study also demonstrates that institutional investors reduce board entrenchment, though it presents no evidence that institutional investors reduce board busyness. The results also suggest that institutional investors behave differently when operating within different economic conditions (pre-crisis, crisis and post-crisis), legal systems and ownership structures. This paper contributes to the growing literature on shareholder activism and comparative corporate governance mechanisms. The findings suggest that the activism of institutional investors is contingent on the institutional settings, to include economic conditions, legal systems and ownership structures.

Highlights

Institutional investors maintain a notable presence and exercise growing influence over global capital markets
The results suggest that the role of institutional investors in the improvement of governance outcomes is dependent on economic conditions, legal systems and ownership structures
Once the crisis passes, this influence is not significant. This result may imply that during the crisis period, busy directors may bring to the table the knowledge and expertise that they have gained from other boards as the emphasis is more on advising than on monitoring (Francis et al 2012); board busyness may be promoted by institutional investors during a time of crisis in an attempt to help the firm to ride out the crisis

Summary

Introduction

Institutional investors maintain a notable presence and exercise growing influence over global capital markets. Institutional investors who are dissatisfied with company performance or with the governance structure of an organization may choose to sell their company shares (“exit”) or opt to engage with their investee firms (“voice”) (Ferreira and Matos 2008; Martin et al 2007). Since the “exit” option is considered costly, large institutional investors choose to engage with their investee firms in order to change unfavorable governance structures and to correct undesirable performance (Mc Cahery et al 2015; McNulty and Nordberg 2016). Behindthe-scenes one-to-one meetings may be held; such meetings are considered an effective approach that is regularly used by institutional investors to enhance the governance structure of their investee firms (Holland 1998; Mc Cahery et al 2015). Several studies have found that the institutional investors have the ability to play an effective role in enhancing corporate governance mechanism in a stakeholders-oriented corporate governance system like Japan (Sakawa and Watanabel 2020; Sakawa et al 2021)

Objectives

Methods

Findings

Discussion

Conclusion