An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, pensions, and insurance companies are examples.
Fund managers and other professionals working for the institutions have the skills and expertise to contribute towards the direction and management of a company.
The key issue is the increasing dominance of this investor class and its potentially positive contribution to governance by concentrating power in a few hands.
Major problems with Institutional Investors:
– Short Termism of fund managers
– Lack of skills of Trustee
– Lack of influence of individual shareholders
– There can be corporate governance issue with Institutional Investor entity.
Shareholder Activism:
If you see the institutional investor structure you will feel that Entity is working as an just trader, the actual owner of the investment are individuals. But the individual investors do not have voice and cannot influence anything in the investee company.
And so the Institutional Investor can not only work as an trader, they have to play an active role and have to represent as a shareholder activist on behalf of all small investors.
The Shareholder activism can be in the form of:
– Making positive use of voting rights.
– Engagement and dialogue with the directors of investee companies.
– Paying attention to board composition/governance of investee companies.
– Presenting resolutions for voting on at the AGM.
– Requesting an EGM and presenting resolutions.
Intervention in Investee Company:
Institutional Investor can intervene in various matter of the investee company if needed. Below are some areas where it is required to intervene.
1) Strategy
2) Operational Performance
3) Acquisition & Disposal
4) Remuneration Policy
5) Internal Controls