How Does Board-Shareholder Engagement Really Work?

Board-shareholder engagement plays an important role in corporate governance. In the last decade, investors have increasingly influenced business decisions, and their activities have extended beyond the formal submission of shareholder resolutions for voting at annual meetings. On their part, directors and managers have kept an open channel of communication. Yet, much of board-shareholder engagement consists of private interactions and, as a result, very few details about it are reported.

We seek to fill this gap in a new paper that sheds light on closed-door board-shareholder engagement with a survey of SEC-registered corporations. The survey was circulated among corporate secretaries, general … Read more

The Role of Institutional Investors in Stakeholder Capitalism

Institutional investors are increasingly playing a major role in the shift toward stakeholder capitalism.  They are also facing pressure from their clients and others to focus more on ensuring that their investments promote corporate sustainability. Such expectations are reinforced by leading institutional investors’ commitments – such as those included in BlackRock CEO Larry Fink’s 2020 annual letter – to do well by doing good.

In a recent article, I shed fresh light on the role of leading institutional investors in the transition toward stakeholder capitalism. I show that, while institutional investors may encourage the adoption of sustainability-oriented policies by corporations, … Read more

The Case for Institutional Investors’ Collective Engagements

Shareholder cooperation is on the rise as a tool for active corporate ownership and a way to effectively voice concerns about corporate governance and performance. While “wolf packs” of activist hedge funds that aim to bring about significant corporate change at targeted companies have attracted the most attention, there are other forms of shareholder coordination that are not activist-driven.

One is collective engagement by institutional investors guided by the recommendations in stewardship principles adopted in several countries. Over the last few years, representative organizations such as, to some extent, the Council of Institutional Investors (CII) in the U.S. and, to … Read more

How to Enhance Directors’ Independence at Controlled Companies

While director independence has become a topic of global importance, the definition of independence and the role of independent directors remain unsettled, depending largely on ownership patterns, industry structure, and regulatory goals. The main agency problem in diffusely owned firms is opportunism on the part of the management, and independent directors are required to protect the interests of shareholders vis-à-vis the management, In controlled firms, however, independent directors are mainly called upon to protect minority shareholders vis-à-vis controlling shareholders. Therefore, in a context of concentrated ownership, independent directors are mainly responsible for vetting operations involving conflicts of interest and preventing … Read more

Corporate Governance Consequences of Passive Investing

The popularity of index funds, which automatically track an index of stocks, is continuing to grow in the U.S, and, albeit less intensely, in the EU. Due to the high concentration of the index funds industry, the exponential rise of mutual funds designed to track stock indices has had significant corporate governance implications. Specifically, passive investing significantly affects listed companies’ ownership on both sides of the Atlantic. The three leading passive fund managers (BlackRock, Vanguard, and State Street) make up an increasingly important component of the shareholder base of listed companies, as they hold relevant stakes (usually not exceeding 5 … Read more

Preserving Capital Markets Efficiency in the High-Frequency Trading Era

Automation and new technology have dramatically changed trading on equity markets over  the past 20 years, and algorithmic and High-Frequency Trading (HFT) have become prominent in U.S. and European financial markets, while regulation has been slow to adapt. Despite increasing liquidity, narrowing spreads, and diminishing short-term volatility, HFT can lower market quality and stability and render marketplaces more vulnerable, especially during crises or periods of uncertainty.

Regulations affecting HFT have prioritized, in both the U.S. and Europe, preventing market disruption and manipulation, while failing to closely consider how HFT-related inequalities in information interact with the allocative function of price discovery. … Read more

How to Encourage Dialogue Between Boards and Institutional Investors in the U.S. and the EU

With institutional shareholders playing a growing role in corporate governance, dialogue between boards and shareholders is increasingly common in the U.S. and Europe. Talking with boards is essential to institutional investors’ stewardship functions, and engaging with institutional investors has become a focus of listed companies’ communication strategies. Empirical analysis shows that private discussions with directors have become institutional investors’ preferred method of engagement, and they resort to shareholder proposals, public criticism, and similar practices only if private conversations fail.

Nevertheless, meetings between directors and institutional investors raise legal concerns in the U.S. and the EU, because they may lead to … Read more