Role of Institutional Investors in Corporate Governance

Institutional investors are major players within financial markets.

Because of their financial heft and expertise, institutional investors play an influential role within corporate governance. Evaluate the purpose behind institutional interest within a particular stock, prior to making financial decisions.

Identification

Institutional investors include independently wealthy individuals, investment firms and large corporations that may maintain asset portfolios above $1 billion. Corporate boards covet stable, long-term institutional investors.

Effects

Institutional investors ease financing concerns for corporations. The institutional investment attracts more capital to the business, as other investors respect an established firm’s ability to uncover profitable investments. Additionally, lenders are more likely to extend credit to corporations on favorable terms when institutional money is present.

Features

Passive institutional investors simply collect dividends and capital gains without interfering in business operations. Some institutional investors, however, seek management control to improve profitability of the underlying business.

Misconceptions

Corporations do not welcome all institutional investors. Corporations sometimes install "poison pills" to maintain management control and thwart hostile takeovers. When one institution surpasses a certain ownership stake, poison pills dramatically increase the number of common shares outstanding. Additional common stock adds to the expense of any hostile takeover.

Warning

Firmly entrenched institutional investors may dismiss change and product innovation, which may lead to lower corporate profits.

References

• Investopedia: Posion Pill
• Investopedia: Institutional Investor
• Investopedia: Corporate Governance

Resources

• Investopedia: Passive Investing
• Investopedia: Hands-Off Investor