The Role of Institutional Investors in the Corporate Governance of Financial Institutions: the UK Case

Abstract

Back in the 1930s, Berle and Means (1932) highlighted the impact of the separation of ownership and control in corporations. Over sixty years later institutional investors own large portions of equity in many companies across the world, and the key role played by institutional investors in corporate governance cannot be underestimated. The Cadbury Committee (1992) viewed institutional investors as having a special responsibility to try to ensure that its recommendations were adopted by companies, stating that ‘we look to the institutions in particular ... to use their influence as owners to ensure that the companies in which they have invested comply with the Code’. A similar view was expressed in the more recently published Greenbury Report (1995) as one of the main action points is ‘the investor institutions should use their power and influence to ensure the implementation of best practice as set out in the Code’. Therefore the two most influential committees which have reported on corporate governance in the UK clearly emphasize the role of institutional investors. The institutional investors’ potential to exert significant influence on companies has clear implications for corporate governance, especially in terms of the standards of corporate governance and issues concerned with enforcement.