Corporate governance: Role of institutional investors

Essay by bhramaraUniversity, Master's March 2004

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Institutional investors have become predominant players in financial markets and their influence worldwide is growing. The abuse of power by many corporations has prompted increased the need for active institutional participation to enforce governance practices. Only institutional investors will have sufficient stake to be able to hold large corporations accountable. Encouraged by the institutional investors, responsible companies are now examining their own practices and are following good governance practices. For investors it's a good reason to cheer.

The growing dominance of equity holdings by institutional investors both domestic and international has brought their activities into limelight as owners of the companies as well as monitoring authorities. The recent debacles like Enron, WorldCom, Aldelphia, and Tyco International have only reinforced the need for active institutional participation in instigating corporate governance practices in companies. The abuse of power by management or majority shareholders can be the most important aspect for institutions to take active participation in corporate governance, besides its fiduciary responsibility towards clients.

Amid all the present hype regarding the breach of corporate governance practices by the companies, what exactly does a company owe to its shareholders? In the case of recent accounting scandals, the burning question relates to specific aspects of a company's governance: why were the Board and management lax in carrying out their fiduciary duty towards shareholders and what is the role of the company management in the series of scandals? And how did the shareholders fail to notice the lax? This may be due to lack of transparency in the company's dealings. Corporate governance practices come into picture here in ensuring and promoting corporate fairness, transparency and accountability. It is the system through which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation,