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Institutional shareholder responsibilities - Coggle Diagram
Institutional shareholder responsibilities
Institutional investors should have a lot of influence in the management of companies but many institutional investors do not see corporate governance as their responsibility
Many institutional shareholders have holdings in thousands of different companies and these holdings may only account for one quarter of 1% of a company
The expense and time spent entering into active engagement with a company is often not seen as beneficial to that organisation
Shareholder participation provides checks and balances on the board of directors, thus helping the board monitor the management of the company
In corproate governance the board isacocuntable to shareholders for how it uses the resources of the company
Despite delegating the running of the business to management, shareholders have kept certain decision making powers to ensure that management acts in their interest and is subject to regular monitoring
Institutional investors should take an interest in good corporate governance as
Investors expect a return on their investment. Most evidence suggests that well-governed companies deliver reasonable returns over the long term and shareholders in these companies are less exposed to downside risk than shareholders in companies that are not so well governed
Institutional investors also have legal responsibilities (fiduciary duties) to the individuals on whose behalf they invest. For pension funds, these individuals are the beneficiaries of the funds. In fulfilling their responsibilities, institutions should try to ensure that they make a decent return on investment and promoting good corporate governance is one way of trying to do this
The courses of action institutional shareholders have available to them if they become concerned about the decisions taken by the board are as follows
Voice their concerns direct to the company
Escalate. If their concerns are ignored, they could escalate them to wider group of shareholders possibly through a representative body
Vote. Shareholders can address their concern by either withholding their vote or voting against a particular resolution or the re-election of directors. They may also want to propose their own resolutions at a general meeting
Exit. In an extreme case a shareholder can sell their shares
ICSA shareholder engagement
Purpose was to investigate the nature of engagement between issuers and investors, the extent to which it had changed over the last five years, whether in its frequency, the form it takes, the organisations and individuals involved or the subjects being discussed
There was clear evidence that the quality of and time devoted to the engagement had increased since 2013. Over 60% of respondents reported increased engagement with only a handful reporting reduced engagement
Companies and investors initiate equally the engagements. Engagements initiated by companies usually target large holders, potential investors or those they believe might take a hostile position towards the company. Investors focus on the value of their investments and concerns about performance and governance
Over 70% of company respondents considered the quality of the engagement with shareholders had improved over the last 5 years. The engagement was still predominantly event driven, taking place around general meetings or the publication of financial results. There was some evidence that engagement was becoming an ongoing process
The issues discussed had not changed much over the last 5 years; still focusing on performance, strategy, capital structure, M&A activity and leadership. ESG issues and the impact of technological change had become more prominent issues for discussion over the period
The reasons for the increased engagement from the companies' perspective were changes in the company's ownership base, more international so subject to international trends and changes to the company's approach to engagement. Investors' engagement had increased due to the demand for discussions form the companies and the increased focus on ESG issues
Shareholder activism
The considered use by institutional investors of their rights as shareholders by voting against the board of directors at general meetings (or threatening to vote against the board) and active dialogue with the boards of companies to influence decisions by the board
In most cases activism is constructive, involving dialogue and discussion and it is only when a board of directors fails to respond in an acceptable and appropriate way to shareholder concerns that more aggressive action may be cosnidered
Further action will often involve withholding a vote at an AGM, or voting against a resolution at a general meeting, including votes against the re-election of certain directors. To do this successfully the need a majority of votes
Since most shareholders in large public companies hold a relatively small percentage of the total number of shares, organisation a group of dissident shareholders into a voting majority is diffcult, although voting guidelines on some issues are occasionally issued by institutional investor organisations or voting advisory firms and such guidelines such as red top notice advising members to vote agains the resolution may have the effect of persuading shareholders how to vote