The Role of the Institutional Investor in Corporate Governance

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By ADEYEMI BISI

TUE, JUNE 13 2017- “Institutional Investors are large entities with significant power to make a difference. We find that these investors are truly engaged – and when they are engaged – they can bring about tremendous change” – Professor Reena Aggarwal (http://msb.georgetown.edu/story/role-institutional-investors-reforming-corporate-governance)

Developing good relations between a company and its shareholders is as much a task for the shareholders as it for the Board. Institutional Investors as “professional shareholders” with large investments in companies have more at stake and thus should be at the vanguard of conveying shareholder concerns to the Board and Management. By understanding the needs of institutional investors, investees are better able to make strategic decisions that would in turn endear such companies to the investing public. As return on investment depends on the way an enterprise is governed and managed, Institutional Investors are expected to pay attention to the enthronement of good corporate governance in the companies in which they invest.

The essence of abiding by the principles of corporate governance is that well governed companies ultimately deliver reasonable returns over the long term and shareholders are less exposed to the risk of losing their investment to corporate failure. Institutional Investors are also expected to monitor the company’s compliance with the requirements of the relevant laws and regulations including relevant codes of corporate governance. The governance framework of the entity, its processes and policies should be assessed bearing in mind the size and complexity of the Company, as well as the nature of the risks that the Company is exposed to.

The responsibility to monitor compliance is more so where the Institution Investor invests in foreign jurisdictions. The series of corporate scandals witnessed globally in recent years gave rise to a flurry of legislation and regulations aimed at instilling higher corporate governance standards to forestall failure. Following increased globalization, foreign investors are expected to continue to have a large influence on emerging markets and the companies that play therein.

Institutional investors have the responsibility of making judicious use of their voting rights. It is thus imperative that they regularly attend general meetings and be active at such meetings. A survey conducted by the UK based Investment Management Association indicates that more than 17 out of every 20 UK Institutional Investor vote at all the UK companies in which they own shares. In Thailand recently, Institutional investors announced proxy voting guidelines aimed at boosting quality and sustainable growth of listed companies and the Thai capital market. The institutional investors joined forces to promote good corporate governance, corporate social responsibility and anti-corruption in listed companies and the capital market.  The proxy voting guidelines describe the role of the institutional investors in monitoring businesses in which they invest; discussion with company management and the exercise of voting rights at shareholders’ meeting for the long-term benefit of company and all stakeholders.

According to Serdar Çelik and Mats Isaksson in their article published in the OECD Manual on Financial Market Trends (Volume2013/2), a well-functioning market economy requires the presence of shareholders that have a self-interest to allocate their money to the most prosperous ventures and then monitor these companies to make sure that they make the best possible use of the money. To carry out this job well, it is in the self-interest of shareholders to gather as much information as possible about the corporation’s prospects and, whenever necessary, use this information to engage with the company and influence key issues, such as the company’s strategic orientation, its dividend policy and board composition. When Institution Investors collectively use information in this manner they carry out a function that is essential to value creation and economic growth.

ADEYEMI, Bisi is the Managing Director DCSL Corporate Services Limited. Email:badeyemi@dcsl.com.ng|www.dcsl.com.ng |Columist @theG&BJournal

DCSL 90X780

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