Institutional Shareholders Role In Corporate Governance

In the present time many countries of the world have institutional investors who are making up a significant percentage of the total investment population. In the USA, for example, institutional investors, including pension funds, hold around 50% of all listed stock. In India also Institutional shareholders have acquired large stakes in the equity share capital of listed companies.
The institutional investors are now in the process of becoming majority shareholders in many listed companies and own shares largely on behalf of the retail investors. They thus have a special responsibility given the weightage of their votes and have a bigger role to play in corporate governance as retail investors look upon them for positive use of their voting

Now the institutional shareholders are focusing more on the long-term relationship with the companies by retaining the ownership of the shares. The paradigm shift of institutional investors towards long term ownership of the shares is having a major influence on corporate governance in the sense that institutional investors require a greater level of accountability and transparency, and have the back-office resources to ensure that they can play an effective role as concerned and active shareholders.

In this regard it is very pertinent to the OECD principles of Corporate Governance. An important extract from OECD Principles of Corporate Governance:
“Controlling shareholders, which may be individuals, family holdings, bloc alliances, or other corporations acting through a holding company or cross shareholdings, can significantly influence corporate behavior. As owners of equity, institutional investors are
Increasingly demanding a voice in corporate governance”

This extract from the OECD principle reflect the growing interest of institutional shareholder to participate in the management of the company by having longer term ownership of the shares in the

At the height of the 1997-98 financial crises, the OECD was asked by the G7 to develop international standards on corporate governance that could be useful to OECD Members and non-Member countries alike. In May 1999, the OECD Principles were formally endorsed by OECD Member countries. While the OECD Principles were developed with publicly listed companies in mind, many of these Principles are also applicable to privately-held enterprises. The OECD Principles cover five main areas: 1) the rights of shareholders; 2) the equitable treatment of shareholders; 3) the role of stakeholders; 4) disclosure and transparency; and 5) the responsibilities of the board.

In the OCED principles of corporate governance there is a clear mention that the key shareholder rights are the participation in any decision concerning fundamental corporate changes and the right to be informed of options to address these changes. These fundamental changes can be amendments in the corporate chapter; authorization of additional shares; and extraordinary transactions that result in a fundamental change of the asset structure. This principle is totally in favor of the shareholder right to take part in the management of the