Institutional investors and corporate governance

• Main Author: Alshabibi, Badar
• Published: University of East Anglia 2017
• Subjects: 658
• Online Access: https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.753851

This study aims to explore the role of institutional investors in the improvement of corporate governance within the companies in which they invest (investee companies). This aim is accomplished by analysing evidence concerning the characteristics of numerous companies’ boards of directors, and of their key subcommittees, listed across the globe. These characteristics are related to board attributes (composition, activity, entrenchment and busyness) and board diversity (gender, age, nationality and education). Furthermore, this study also seeks to investigate the behaviour of institutional investors in improving corporate governance by considering different settings, including various economic conditions (pre-crisis, crisis and post-crisis periods), legal systems and ownership structures. Using a sample collected from 15 countries for the period of 2006 to 2012, this study finds that institutional investors promote more favourable corporate governance outcomes, with foreign institutional investors playing a lead role in the improvement and convergence of corporate governance practices around the world. This study provides evidence that institutional investors promote the enhanced composition of boards and of their audit and compensation committees, though not of nomination committees. Furthermore, institutional investors are positively associated with the activity of audit committees but not with the activity of boards nor of compensation and nomination committees. The results also demonstrate that institutional investors reduce board entrenchment though no evidence is found that institutional investors reduce board busyness. The findings also suggest that the role of institutional investors in corporate governance is determined by a company’s institutional environment including the prevalent economic condition, the legal system and the ownership structure of the country in which it operates. In particular, the findings show that institutional investors play a stronger role in the improvement of governance structures during crisis and post-crisis periods than they do during pre-crisis times. This result is also applicable to individual board attributes, such as the independence of audit committees. Additionally, institutional investors improve the independence of boards and of their key subcommittees (with the exception of nomination committees) in civil law countries and reduce board busyness in common law countries. However, there is no evidence that institutional investors reduce board entrenchment in either legal system. Furthermore, the results indicate that they improve governance outcomes in nonfamily-owned firms but not in family-owned firms. Moreover, this study presents no evidence that institutional investors promote board diversity; in fact, this study generally finds no association between institutional ownership and various board diversity attributes such as gender, age, nationality and education. However, the findings do show that institutional investors are positively associated with the education diversity of boards during times of crisis and are negatively associated with board age diversity during pre-crisis and post-crisis periods. Furthermore, while in common law countries institutional investors are found to be negatively associated with board age diversity, they have no influence over board diversity attributes (i.e., gender, age, nationality and education) in civil law countries. The results also suggest that the associations between institutional investors and board diversity are mixed and insignificant within different ownership structures, i.e. in family- and non-family-owned firms.