Institutional investors as stewards of the corporation: Exploring the challenges to the monitoring hypothesis

• Date: 01 April 2017
• Author: Mila R. Ivanova
• Published date: 01 April 2017
• DOI: http://doi.org/10.1111/beer.12142

ORIGINAL ARTICLE

Institutional investors as stewards of the corporation: Exploring

the challenges to the monitoring hypothesis

Mila R. Ivanova

Post-Doctoral Research Fellow,

Management, Employment and Organisation

section, CardiffBusiness School,Cardiff

University, UK

Correspondence

Mila R. Ivanova, Aberconway Building,

CardiffBusiness School, CardiffUniversity,

Colum Dr, CardiffCF10 3EU, UK.

Email: IvanovaMR@cardiff.ac.uk

Funding information

Economic and Social Research Council,

Grant/Award Number: ES/J500197/1

Abstract

The study explores the challenges UK-based institutional investors face when trying to monitor

investee companies and influence their social, environmental, and governance practices. Consist-

ent with previous research, I find that misalignment of interests within the investment chain and

dispersed ownership are factors which inhibit investor activism. However, other underexplored

challenges include lack of investee company transparency and investor experience in activism, as

well as low clientdemand for engagement and internalconflicts of interest. The results contribute

to the literature on institutional investor activism by using direct empirical evidence to systemati-

cally discuss the challenges to stewardship. Given the intensification of media and regulatory

attention on shareholders in the post-global financial crisis era, coupled with investors’growing

awareness and practice of stewardship, the research opens new avenues for enquiry which go

beyond the on-going debate about the monitoring versus short-termism roles of institutional

investors.

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INTRODUCTION

The global financial crisis of 2008 has given a new impetus toward

rethinking the fundamental principles of corporate governance. It is

now widely accepted that one of the causes of the downturn can be

attributed to institutional investors’failure to monitor their investee

companies. The Walker Review, commissioned by the UK government

to investigate corporate governance standards of UK financial institu-

tions followingthe banking crisis, concluded thatrisky business models

went unchallenged by major investors in the pursuit of short-term

gains to the detriment of the economy (Walker, 2009).

In a recent study, Manconi, Massa, and Yasuda (2012) find evi-

dence that theportfolio decisions made by liquidity-constrainedinvest-

ors contributed to the spread of the crisis from the securitized to the

corporate bond market. The economic recession,alongside recent con-

troversies around tax avoidance and fossil fuels, have highlighted the

need for more active monitoring by institutional investors (comprised

of banks, pension funds, insurance companies, and other bodies that

trade in large share quantities and invest money on behalf of share-

holders). A number of UK government reviews (for example, Kay,

2012; Myners,2001) put an emphasis on the responsibility of investors

to act as “stewards”ofthe companies they hold shares in, which entails

“holding the board to account for the fulfilment of its responsibilities”

(Financial Reporting Council, 2012,p. 1).

The literature on institutional investors is dominated by a debate

concerning their role and behavior. Two opposing views exist, which

are labeled by Callen and Fang (2013) as “monitoring”and “short-

termism.”Themonitoring perspective suggests thatinstitutional invest-

ors are focused onmaximizing long-term value, as opposed to generat-

ing short-term profits, and they engage with management in order to

achieve this objective (Dobrzynski 1993; Monks & Minow 1995; Shlei-

fer & Vishny 1986, 1997). Previous research provides evidence of the

positive effectsthat institutional ownership hason: CEO turnover (Hel-

wege, Intintoli, & Zhang, 2012), research and development spending

(David, Hitt,& Gimeno, 2001),firm performance (Elyasiani & Jia, 2008),

corporate governance (Aggarwal, Erel, Ferreira, & Matos,2011), execu-

tive compensation(Janakiraman, Radhakrishnan, & Tsang, 2010; Zheng,

2010), and market wide negative shocks (Cella, Ellul, & Giannetti,

2013). Empirical evidence consistent with the monitoring view also

reveals that institutional shareholder activism results in improved firm

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, pro-

vided the original work is properly cited.

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C2017 The Authors. Business Ethics: A European Review published by John Wiley & Sons Ltd

BusinessEthics: A Eur Rev. 2017;26:175–188 wileyonlinelibrary.com/journal/beer

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Received:4 May 2016

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Revised: 18 November2016

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Accepted:22 November 2016

DOI 10.1111/beer.12142