Shareholders, and more particularly institutional shareholders, can play an important role in ensuring that companies adhere to sound and effective corporate governance standards. Institutional shareholders are particularly important to the purchasing of shares, as they can afford to buy a larger volume than individual investors.
The board of directors of a company perform certain acts of management and agency. The directors are appointed by the members in an annual general meeting and the general meeting may also be used to remove directors from an office by way of a general resolution.
Institutional shareholders have an important role to play in the management of a company and due to their size, institutional shareholders can potentially play a large role in ensuring good corporate governance standards. Institutional shareholders own large blocks of shares and have an incentive to develop specialised expertise in making and monitoring investments. Holding these large blocks of shares therefore gives them the power to hold management accountable for actions that do not promote the shareholders’ welfare. It is furthermore much easier for institutional shareholders to have meetings with the directors of a company on a regular basis than it is for individual shareholders.
Institutional shareholders also hold a duty to act in the best interests of their clients, as in addition to their duties arising from a contract and statutory obligations, institutional shareholders and their clients are in a fiduciary relationship.
Institutional shareholders also play an important role in enhancing corporate governance principles. This is owing largely to the size of their shareholding and the fact that their influence is likely to increase over time. The consideration of the interests of other stakeholders, in accordance with good corporate governance principles, will be in the best interests of shareholders over the long term. The primary obligation of institutional shareholders can therefore said to be to monitor a company’s management and to ensure that the interests of their clients are protected.