Institutional Investors’ Role in Corporate Governance

Over the past 60 years, capital markets in the US have grown dramatically. For instance, in 1950, the market value of all stock on the New York Stock Exchange (NYSE) was around $94 billion, and in 2012 the number has increased to more than $14 trillion. (“Institutional investors: Power and responsibility”, 2013) With this significant increase in the market, it has led to an increasing role for institutional investors. The main issue surrounding institutional investors is whether they should be more or less involved in the companies whose shares they own. When looking at the important roles along with the influence over corporate governance, we can see that institutional investors have an overall positive impact on the company and the individuals that trust them with their investments.

Before getting into the specific roles of institutional investors, it is important to first discuss what institutional investors are and how they affect publicly traded companies. Investopedia defines institutional investors as:

A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. Institutional investors face fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves (“Institutional Investors Definition”, 2014). Institutional investors come in a variety of forms. The most common Institutional investors are mutual funds, exchange traded funds, pension funds, insurance companies, and hedge funds. Through most of these institutional investors, individuals pool their money and allow the fund managers to choose what to buy and sell. With these pools of money...

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