Corporate Governance - The Role of Shareholders
From the shareholders' viewpoint, corporations exist only to enhance the wealth of their owners. This means that the shareholders' perspective on successful governance is relatively simple: When management and shareholders' interests are more closely aligned, it saves money for the company and increases shareholder wealth. As a result, good governance focuses on finding the best approach to connect the interests of shareholders with those of management.
Nevertheless, shareholders' standpoints are not that simple. It is common for shareholders to disagree on the best approach to establishing a company's governance since they are not all the same. They vary in a number of significant ways. Shareholders, for example, do not all have the same investment horizon. Long-term investors may accept volatility in quarterly profits and the share price if they feel that the company's management actions will lead to greater profitability in the long run. Short-term investors may prefer that management concentrate on boosting short-term profitability and stock prices.
Investors have varying goals as well. The financial performance of a company may be the only thing on the mind of a huge mutual fund. In contrast, an institutional investor that represents a particular client, such as a socially responsible investment fund, may concentrate on how economic outcomes are produced and their effects on diverse stakeholders.
It's also important to note that not all stockholders are equally involved in the company. There are active investors, such as hedge funds, and then there are passive investors like index funds at the other end of the spectrum. Those that invest in this strategy want to achieve the same level of success as a pre-determined market index. In general, they may not be as concerned about the company's performance and governance. As an alternative, there is a group of people known as "active investors." These investors have a keen interest in the performance of specific companies. For example, they might meet with management and campaign for board members to be removed, voice their displeasure with remuneration practices, or push for policy changes via the company's proxy vote. Activist investors are those who try to change the way the company's board of directors acts in a good way.
Lastly, the size of stockholders fluctuates. Large institutional investors, in contrast to minor funds, often have large amounts of capital to devote to governance issues. For example, with almost $6 trillion in assets under management (AUM), BlackRock has a proxy voting committee of around 20 members. Across 90 markets and 15,000 firms, these people, who are based in different countries, manage BlackRock's voting policies and actions.
The diversity of shareholder groups provides a challenge for the company's management team in terms of cooperation. This makes it more difficult for shareholders with differing interests to work together to exert influence on management and the board of directors toward a shared aim. Despite the fact that they all want to improve the company's success, shareholders might work against one another in certain situations.
The well-known "free rider" phenomenon further complicates coordination. Resources must be spent on shareholder activities, such as proxy fights and shareholder-sponsored recommendations for a vote on a proxy. All shareholders profit from these efforts, even while a single institutional investor pays the expense of these efforts. For example, an activist institutional fund might lead a successful effort to declassify a corporation's board or eliminate anti-takeover regulations that are destructive to the economy. The activist investor bears the burden of this effort, even while the benefits accrue to all owners. Institutional investors may not spend enough money on efforts to improve company governance because of the difference between the costs and benefits.
Institutional Investors and Proxy Voting
Regulations require publicly listed firms to have an annual meeting of shareholders to elect the board of directors and conduct other activities requiring shareholder authorization. In the United States, prior to the annual meeting, shareholders get a printed proxy statement and are given the opportunity to vote their shares in person, over the phone, or by mail.
When it comes to voting on corporate governance matters, institutional investors have an advantage over individuals. Voting against executive recommendations on management-sponsored proxy items, such as director elections or compensation practices, might be one way they use their power. Besides, they may also support shareholder resolutions that call for or advocate for changes to bylaws or policies that the company doesn't want.