During the last half century, the balance of the market’s dominant forces has changed due to the crucial changes to the securities’ market circumstances. Institutional investors, such as pension fund and insurance companies, held about 34% of UK
236Small Business, Enterprise and Employment Act (2015) Explanatory notes.
237 D Milman, 'Revisiting the Core Principles of Modern Corporate Law' (2015) 371 Company Law
Newsletter 1.
equities in 1969.239 On the other hand, the last five decades has witnessed the decreasing of physical persons’ direct ownership of public equity from 54% to 11% only.240 Institutional investors have taken the place of individual shareholders. 241 In terms of the recognition of the role and influence of institutional investors in the UK, this was identified in the early 1990s by the Cadbury Committee.242 The Cadbury Committee requested institutional investors, as they hold a significant collective stake in ensuring “the companies in which they have invested comply with the Code”.243
The impact of the institutional investors are clear and can be seen through the power of challenging the management of the companies, which sometimes reaches the level of forcing the CEO to leave his or her post. This could be as a result of the institutional investors' attention being paid towards the company’s performance in its portfolio. Institutional investors could show their fury in the case of unpopular decisions being taken by management, or unsatisfactory performance by the company. Having a large bundle of stock makes institutional investors willing to work more as corporate monitors, as the liquidity of investment is more difficult. In other
239 J. E. Parkinson, Corporate Power and Responsibility : Issues in the Theory of Company Law
(Clarendon Press, 1993)Page: 166.
240 S Çelik and M Isaksson, 'Institutional Investors and Ownership Engagement' (2014) 2013/2 OECD
Journal Financial Market Trends 93.
241 Y Zhao, 'Competing Mechanisms in Corporate Governance: Independent Directors, Institutional
Investors and Market Forces' (2010) 21 International Company and Commercial Law Review 338.
242 C A. Mallin, A Mullineux and C Wihlborg, 'The Financial Sector and Corporate Governance: The
UK Case' (2005) 13 Corporate Governance 532.
words, "illiquid investors are “trapped” in the company" which creates concerns about the company's performance as an act of self-interest. 244 Parkinson believed that: “institutions in many cases are locked into their portfolio companies and therefore have an incentive to play an active supervisory role, rather than merely selling, if they become dissatisfied with company performance.”245
Obviously, the directors of companies should understand the fact that institutional investors nowadays are monitoring their performance. It should be mentioned in this context, in the capital market, that the share prices of a company could be the 'barometer' that shows the efficiency of the management in achieving the stakeholders’ goals. Therefore, if the company's price is lower than it should be, if the management was more talented, that would make the company more likely to be attractive for takeover. From this point of view, the 'market for corporate control' term refers to the transferring process of ownership and control from one group of investors and managers to another, as stated in the OECD glossary of statistical terms.246 So, to have the right to vote on a new board of directors, there is the need to buy enough shares in order to replace the current ineffectual management so that the share prices of the company could rise due to corporate performance. The benefit of this is reflected in many things, such as market discipline for the managers, as well as
244 Y Zhao, 'Competing Mechanisms in Corporate Governance: Independent Directors, Institutional
Investors and Market Forces' (2010) 21 International Company and Commercial Law Review 338.
245 J. E. Parkinson, Corporate Power and Responsibility : Issues in the Theory of Company Law
(Clarendon press, 1993) Page: 167.
246 OECD glossary of statistical terms. Available at https://stats.oecd.org/glossary/detail.asp?ID=3255 .
the capital markets, robust competition, market discipline and labour markets.247 In the context of institutional investors, who are described as ‘a new class of professional shareholders’, they have the opportunity in the 'market for corporate control' to carry out the functions of corporate governance: “the best people to carry out or at least to supervise the functions of corporate governance”.248 However, the market for corporate control may not always be the best solution, especially for emerging economies and developing countries, for example in the case of India which "is a poor avenue through which institutional investors may attempt to hold the company's controllers accountable."249
On the other hand, “in large companies small shareholders are too disorganised and powerless to impose their will”.250 Thus, the individual shareholders’ traditional problem with inter-shareholder communication deficiencies and free riding is being overcome by the institutional investors who monitor their ability to collectively organise in order to impose pressure on the company’s management. The way of institutional investors achieving this power is by forming a majority voice, which is as
247 J Macey, 'Market for Corporate Control' (library of economics and liberty 2008) Avalibal at:
<http://www.econlib.org/library/Enc/MarketforCorporateControl.html> accessed 10/3/2016.
248 T Hadden, Corporate Govermamce by Institutional Investors? Some Problems from an International Perspective (Institutional Investors and Corporate Governance, de Gruyter, 1994) Page: 89.
249 A Paranjpe and K Shorewala, 'Institutional Investors, Corporate Governance and Global Standards:
An Indian Perspective' (2011) 22 International Company and Commercial Law Review 135.
250 A Keay, 'Company Directors Behaving Poorly: Disciplinary Options for Shareholders' [2007]
a result of co-ordinating their responses.251 By bringing about the concentration of ownership, institutional shareholder ownership could be the indirect solution to the 'free rider' problem when shareholders are not active and are 'taking a backseat' and gaining benefits from other active shareholders’ work.252
Regarding the UK Stewardship Codes which were issued in 2010 as the first iteration, followed by a second issue in 2012, the aim is to promote the long term success of companies, as stated in the 2010 version, and to help the shareholders’ long-term returns improvement and governance exercises’ efficiency by enhancing the quality of engagement between institutional investors and companies, as mentioned in the 2012 UK Stewardship Code. Obviously, the UK Stewardship Code is seem as being complementary to the UK Corporate Governance Code, and shares the 'comply or explain' basis as well. Moreover, the FRC has included many areas of good practice in the 2012 UK Stewardship Code for institutional investors. However, in the view of Cheffins, "the Code is unlikely to foster substantially greater shareholder involvement in UK corporate governance."253
251 Y Zhao, 'Competing Mechanisms in Corporate Governance: Independent Directors, Institutional
Investors and Market Forces' (2010) 21 International Company and Commercial Law Review 338.
252 C Nyombi, 'A Critique of Shareholder Primacy under UK Takeover Law and the Continued
Imposition of the Board Neutrality Rule' (2015) 57 International Journal of Law & Management 235.