HomeChapter 5: The Convergence of Boards5.4 The Role of Institutional Investors

5.4 The Role of Institutional Investors

In addition to initiatives from stock exchanges and emerging European legislation, institutional investors are increasingly putting pressure on corporations to alter the composition and structure of boards. According to McCarthy (1996), it is hard to ignore the pressures from institutional investors on corporate governance practices of listed corporations. According to the author, “there is no denying the new wave of pension fund shareholder activism” (McCarthy, 1996:16). Russell Reynolds Associates indicate: “The sudden flood of shareholder proposals that began in the United States in the late 1980s, has evolved into a steady stream of investor activism . . . investors from many different nations have strengthened their power to influence boardrooms – not only in markets where corporate governance issues have long received attention but also in those that previously might have considered themselves beyond the concern of boardroom reformers” (Russell Reynolds Associates, 1998:3).

Especially institutional investors and large pension funds in the US, such as CalPERS, CalSTRS, TIAA-CREF, NYC and SWIB[1] have taken the lead in shareholder activism. According to Pomeranz (1998), institutional investors - which account for some 80 percent of all share trading in the US and which had 51.5 percent of the total market value of US equity securities in 1994 - have a potential to exert significant influence on corporations via the exercise of voting rights. As one of America’s largest and most active public pension funds, with over USD 133 billion in assets, the California Public Employees’ Retirement System (CalPERS) can be seen as one of the founders of the shareholder activism movement. Its famous corporate governance program in the US targeted corporations such as IBM, General Motors, American Express, Kmart and Sears.

Some studies indicate that shareholder activism indeed may pay off. CalPERS - for example - claims that an investment of some USD 500,000 in shareholder activism leads to additional earnings of tens of millions US dollars annually (Pomeranz, 1998). CalPERS has also been active in building alliances with other pension funds through the Council of Institutional Investors to assure that public funds are becoming more actively involved in proxy voting in the US (Hemmerick, 1998).

The activities of CalPERS are not limited to financial markets in North-America. The public fund targets some 24 percent of its assets to international investments. To safeguard its investments, CalPERS has established global principles of governance with “minimum requirements” of sound corporate governance for markets throughout the world. Through its “International Corporate Governance Program”, adopted in 1996, CalPERS aims at establishing governance principles that recognize differences in markets in the UK, France, Germany and Japan. According to Kayla J. Gillan, CalPERS’ General Counsel: “CalPERS hopes that [the, eds.] international program will stimulate further debate and discussion about proper governance practices. We recognize that we cannot change corporate governance in Europe, but we can use our voice to support European investors and officials who can. By working with investors within Europe, we hope to influence all companies to focus on maximizing shareholder value” (Gillan, 1997:478). The six aspects of CalPERS’ International Corporate Governance Program are summarized in table 5.1.

Other institutional investors have followed the initiatives of the large pension funds in the US. Especially in the UK, institutional investors affiliated with the National Association of Pension Funds have become more actively involved in corporate governance. HERMES, a subsidiary of the British Telecom Pension Scheme and one of largest institutional investors in the UK, published “A Statement on Corporate Governance and Voting Policy” in July 1998. In response to the publication of the Combined Code of the LSE, this statement contains provisions on the independence of corporate boards, the separation of chairman and chief executive positions, the formation of board committees and the appointment of senior non-executive directors to boards of directors in the UK. Also in the Netherlands, the first signs are to be seen that institutional investors are gaining interest in corporate governance.

The ABP, one of the largest Dutch pension funds, - for example - has drawn up corporate governance guidelines (Pension and Investments, September 1, 1997). Although it is also too early to indicate that shareholder activism has a positive impact on the formal independence of corporate boards in the US, Europe and other financial regions, and although it is also too early to discriminate fundamental changes in corporate governance systems from ceremonial and cosmetic changes, the first initiatives from institutional investors may indicate the start of an inevitable process in which listed corporations are increasingly confronted with pressures from the market place to transform their boards into more independent board structures.


Table 5.1

CalPERS’ Global Corporate Governance Principles


Duty to shareholdersThe board of directors or the supervisory board must be accountable to shareholders;

Oversight boardsBoards should have the ability to monitor management and investors should have the ability to monitor boards;

Executive compensationExecutive compensation should be tied to company’s long term performance.


OpennessGlobally-competitive markets depend on openness and reliability of information provided by corporations;

Accounting standardsCompanies should recognize international accounting standards;

Compliance reportingCompanies should report to shareholders their compliance to Codes of Best Practices.


Equitable treatmentCompanies should also respect minority shareholders. They should provide equitable treatment to all shareholders;

One share/one voteEvery share of stock should entitle the holder to one vote in shareholder meetings.

Voting methods:

Proxy materialsThese should be clear, concise and should provide adequate information for shareholders;

Ballot countingAll shareholder votes, whether cast in person or by proxy, should be formally counted, with the vote outcome formally announced;

TechnologyNew technology should be utilized to make the process of proxy voting easier.

Codes of best practices:

DevelopmentAll markets should develop an appropriate Code of Best Practices, by which corporate directors and executives can regulate themselves;

ApplicationCompanies should adhere to the principles in Codes of Best Practices;

Review and improvementMarket participants should periodically review Codes of Best Practices.

Long-term vision:

ContentCorporate directors and management should have a long-term strategic vision which at its core emphasizes sustained shareholder value.


Source: based on CalPERS at www. calpers.ca.gov/invest/corpgov/whycg.htm (Jan. 1999).


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Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.