A business, such as a mutual fund, bank or insurance company, that holds shares in a publicly-traded company. Institutional shareholders are important to placing new issues of stocks and bonds, as they can afford to buy more of an issue than individual investors. If an institutional shareholder owns a majority of the shares in a company, the company is said to be under institutional ownership. Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets.
They can also include operating companies which decide to invest their profits to some degree in these types of assets. Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can actively engage in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under.
Influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management. Activist Institutional investors A shareholder or group of shareholders in a publicly-traded company that tries to make changes in management and/or operations in a way that suits the shareholder(s)’ interests. Activist investors deliberately acquire substantial stakes in certain companies and therefore wield enough influence that the company often must listen to them.
Activist investors may choose to negotiate directly with the company or indirectly though methods like proxy wars or public shaming. Activist investors may be motivated by ethical concerns; they may want the company to pay its workers better, for example. More often, they wish to change the company in a way that will maximize their own return. Activist investors may be investment companies, institutional investors, shareholder groups, or even wealthy individual shareholders. Takeover Rules In the UK, the activity of acting in concert is currently regulated by the Takeover Code.
The term ‘acting in concert’ is defined under the Takeover Code as where ‘persons coordinate with the offer or the offered company on the basis of an agreement, whether formal or informal, aimed either at acquiring control of the offered company or at frustrating the successful outcome of a bid. ’ If shareholder collective action towards a company is deemed to be ‘acting in concert’, relevant investors have to face the choice: to make a mandatory bid on the target company or place themselves in breach of the Takeover Code.
The Combine Code [UK Combined Code on Corporate Governance – in place for 10 years] also requires institutional shareholders to interact proactively and objectively with the companies in they are invested. There are three main principles for the institutional share holders to observe: 1. ) Institutional shareholders should enter into a dialogue with companies based on the mutual objectives of the company. (E. 1) 2. ) When Evaluating companies governance arrangements, particularly those relating to board structure and composition, institutional share holder should give due weight to all relevant factors drawn to their attention (E. ) 3. ) Institutional shareholders have a responsibility to make considered use of their votes. (E. 3) The Combined Code explicitly recommends that institutional investors should not accept a ‘box-ticking’ approach to corporate governance, and that their consideration of disclosure made by the company in relation to the Code should take into account the “size and complexity of the company and nature of the risks and challenge it faces” (supporting principle to E. 2)
The Combined Code recommends (supporting principle to E. ) that city [ie investing] institutions should follow the “Responsibility of Institutional Shareholders and Agents- Statement of Principles” which drawn up by the Institutional Shareholders’ Committee (ISC), whose associations represent virtually all UK Institutional Investors. The principles were the first Comprehensive statement of best practice governing the responsibilities of Institutional Shareholders and investment managers in relation to the companies in which they invest. They aim to secure value for ultimate beneficiaries – pension scheme member and individual saver- though consistent monitoring performance of those companies this is to be backed up by direct engagement where appropriate. The principles make it clear that if companies persistently fail to respond to concerns, institutional share holders and investment managers, ISC members will vote against the Board at general meetings.
The principles set out best practice for institutional shareholders and investment manager, under which they will: * Maintain and publish statements of their policies in respect of active engagement with the companies in which they invest; * Monitor the performance of and maintain a appropriate dialogue with those companies; * Intervene where necessary; * Evaluate the impact of their policies ; and * In the case of investment manager, report back to the client on whose behalf they invest. ” A Statement of Principle on the Responsibilities of Institutional Shareholders and Agents Statement of Principle) – was first issued by ISC in October 2002 and the latest version was published in 2007. The Statement of Principle was formed as a response to the Government’ argument that institutional investment industry can develop a voluntary approach to ensure their considerable power is being used responsibly. The Statement of Principle outlines best institutional investor practice, and identifies the responsibilities of institutional investors in respect of the companies in which they invest.
In particular, institutional investors are required to: (1) set out corporate governance policy; (2) monitor investee companies’ performance; (3) intervene, where necessary; and (4) evaluate and report how they discharged their responsibilities to their clients. The Statement of Principle was revised in 2009 and renamed as the Code on the Responsibilities of Institutional Investors. ISC’s Code on the Responsibilities of Institutional Investors – was published on 16 November 2009.
It sets out best institutional investor practice with regard to monitoring companies, dialogue with company boards and voting at general meetings. The Code is now adopted by the FRC as the Stewardship Code for institutional investors. Responsibilities of Institutional Investors, contains seven principles which institutions should respect, namely: 1. Publicly disclose their policies on how they will discharge their stewardship Responsibilities; 2. Have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed; 3. Monitor their investee companies; 4. Establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value; 5. Be willing to act collectively with other investors where appropriate; 6. Have a clear policy on voting and disclosure of voting activity; 7. Report periodically on their stewardship and voting activities.