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, the institutional investors can then acquire a larger share of the market. Institutional investors owned over 73% of all the outstanding equity of the 1,000 largest U.S. corporations in 2009 (“Institutional investors: Power and responsibility”, 2013). This also allows institutional investors to create their own goals, strategies, and impact on the companies whose shares they own. Institutional investors can both positively and negatively influence many aspects of a company’s corporate governance by continually monitoring the company operations, exercising their voting power, and controlling executives pay; all of which will affect whether or not the company is on the right track to success.
The market has experienced a drastic growth during the past couple of decades, largely due to institutional investors, and so have the roles and responsibilities that come with it. Institutional investors own such a significant share of individual companies; therefore, they have more incentive to become active in monitoring the company. The trend of a more active role in corporate governance has come about mostly due to the corporate scandals in 2001 and 2002. Institutional investors play such a vital role in corporate...