Wednesday, August 5, 2009

What Role for Institutional Investors?

In my first post on this site, I mentioned that I had planned to write about institutional shareholder roles in corporate governance post-financial markets meltdown. Instead, another topic presented itself (i.e., the SIGTARP quarterly report). On August 1, at an American Bar Association Business Law Section Corporate Governance Committee presentation during the ABA Annual Meeting, a task force on the delineation of shareholder and board roles presented its final report.

The task force report, which is highly readable and balanced, praises shareholders and boards, noting that “shareholders and boards have become increasingly engaged in their roles, and generally this increased engagement has been a positive development.” Also, it gives kudos to institutional investors for actively using their voices and votes. Furthermore, the report praises boards for becoming “more actively engag[ed] in discussions with shareholders on a variety of governance related topics.” For example, “Pfizer, UnitedHealth and Home Depot . . . initiated meetings with large institutional investors to discuss issues ranging from executive compensation to board composition.” The report recognizes “[w]hile the data is not definitive, there is evidence that focus by large, long-term shareholders and greater activation by independent boards is associated with better corporate performance.”

I am particularly interested in the increase in meetings between corporate boards, executives and investors. The report indicates that some corporate executives are willing to discuss issues that are the subject of shareholder proposals during proxy season, such as “nomination of directors, compensation matters, social and environmental issues,” and the like. Might corporate executives be willing to discuss with institutional investors corporate risk management policies, internal control procedures and monitoring of internal auditors, and other hot topics on the border between corporate governance and corporate operations?

The report is available here.


  1. professor burch:

    how likely is it that corporate boards and executives are going to be willing to discuss risk management policies with institutional investors? my own experience is that corporate executives are enormously proud and do not believe or feel that they need any input whatsoever from shareholders, be they institutional or individual, particularly on matters of corporate operations.

  2. I agree that corporate executives may view institutional investors’ proposals related to risk management as an unwelcome intrusion into operational matters. In addition, under the Securities Exchange Act Rule 14a-8, corporations may exclude from proxy filings shareholder proposals dealing with a matter relating to a company’s ordinary business operations. However, the Commission has stated that proposals that relate to ordinary business operations but that touch on matters of significant social concern are not excludable. The types of matters considered to be of significant social concern have changed over time. Perhaps institutional investors could use their voice and the recent Obama administration focus on controlling systemic risk to make the case that risk management is a matter of significant social concern. Corporate executives and interested institutional investors should engage in “quiet diplomacy” rather than expensive and protracted proxy campaigns or litigation. It should be noted that the ABA report cautions that increased shareholder authority might also lead to increased shareholder accountability.

  3. Clearly it would be great for corporate executives to engage in conversation about the company with its shareholders as it could lead to improvements overlooked by the companies board. I think the people on these boards sometimes forget what their objectives are and are only concerned with what will make them wealthier individually!

    -David Rubin, St. Thomas University School of Law