Standard setting, best

practices and
corporate governance
reform
Institutional investor
 Institutional investor is a term for entities which pool
money to purchase securities, real property, and other
investment assets or originate loans.
 Institutional investors include banks, insurance companies,
pensions, hedge funds, REITs, investment advisors,
endowments, and mutual funds. Operating companies
which invest excess capital in these types of assets may
also be included in the term. Activist institutional investors
may also influence corporate governance by exercising
voting rights in their investments.
 A hedge fund is an investment fund that pools
capital from a limited number of accredited
individuals or institutional investors and invests in
a variety of assets, often with complex portfolio-
construction and risk-management techniques.
 A real estate investment trust (REIT) is a company
that owns, and in most cases operates, income-
producing real estate. REITs own many types of
commercial real estate, ranging from office and
apartment buildings to warehouses, hospitals,
shopping centers, hotels and even timberlands.
Some REITs also engage in financing real estate.
 A Registered Investment Adviser (RIA) is an investment
adviser (IA) registered with the Securities and Exchange
Commission or a state's securities agency. The numerous
references to RIAs within the Investment Advisers Act of 1940
popularized the term, which is closely associated with the term
investment advisor (spelled "investment adviser" in U.S.
financial law). An IA is defined by the Securities and Exchange
Commission as an individual or a firm that is in the business of
giving advice about securities.
 A financial endowment is a donation of money or property to a
non-profit organization for the on-going support of that
organization. Usually the endowment is structured so that the
principal amount is kept intact while the investment income is
available for use, or part of the principal is released each year,
which allows for the donation to have an impact over a longer
period than if it were spent all at once. An endowment may
come with stipulations regarding its usage.
 A mutual fund is a professionally managed investment
fund that pools money from many investors to
purchase securities. While there is no legal definition
of the term "mutual fund", it is most commonly
applied to open-end investment companies, which are
collective investment vehicles that are regulated and
sold to the general public on a daily basis. They are
sometimes referred to as "investment companies" or
"registered investment companies".
Activist Shareholder
 An activist shareholder is one using an equity stake in a
corporation to put public pressure on its management. The
goals of activist shareholders range from financial (increase of
shareholder value through changes in corporate policy,
financing structure, cost cutting, etc.) to non-financial
(disinvestment from particular countries, adoption of
environmentally friendly policies, etc.) The attraction of
shareholder activism lies in its comparative cheapness; a fairly
small stake (less than 10% of outstanding shares) may be
enough to launch a successful campaign. In comparison, a full
takeover bid is a much more costly and difficult undertaking.
Forms of activist shareholder
 Shareholder activism can take any of several
forms: proxy battles, publicity campaigns,
shareholder resolutions, litigation, and
negotiations with management.
Proxy fight
 A proxy fight or proxy battle is an unfriendly contest for the
control over an organization. The event usually occurs when
corporation's stockholders develop opposition to some aspect
of the corporate governance, often focusing on directorial and
management positions. Corporate activists may attempt to
persuade shareholders to use their proxy votes (i.e., votes by
one individual or institution as the authorized representative
of another) to install new management for any of a variety of
reasons. Shareholders of a public corporation may appoint an
agent to attend shareholder meetings and vote on their behalf.
That agent is the shareholder's proxy.
Shareholder resolutions
 Shareholder resolutions are proposals submitted by shareholders for a
vote at the company's annual meeting. Typically, resolutions are opposed
by the corporation's management, hence the insistence for a vote.
 Shareholders submit resolutions dealing primarily with corporate
governance, such as executive compensation, or corporate social
responsibility issues, such as global warming, labor relations, tobacco
smoking, human rights, and animal welfare.
 Shareholder resolutions have been an important part of activist
campaigns in several cases. For example, resolutions were effective at
raising public awareness and thereby pressuring corporate management
about investments in apartheid South Africa, nuclear power, and labor
disputes.
Institutional Investors: What Is Their Role as
Owners of Public Companies?
 Defining the role of institutional shareholders
depends on whether the shareholders contribute
capital, information, and monitoring, or whether
they only contribute capital.
 Institutional investors are a complex,
heterogeneous group. The common characteristic
is that institutional investors are not physical
persons; instead they are legal entities.
 The Organisation for Economic Co-operation and
Development (OECD) recently released a
corporate governance working paper on
“Institutional Investors as Owners: Who Are They
and What Do They Do?” The paper has been
written from a public policy perspective and
considers the role of ownership engagement in
effective capital allocation and monitoring of
corporate performance.
Diversity and Complexity of
Institutional Investors
 Character, quality, and degree of institutional investor engagement across
the globe vary widely because of the different categories of institutional
investors and their business models. The OECD report authors have
analyzed the complex landscape of institutional investors by bifurcating
them as traditional (i.e., pension funds, investment funds including mutual
funds, and insurance companies) and alternative (i.e., sovereign wealth
funds, private equity, hedge funds, and exchange-traded funds).
 Asset managers have been added as a separate class due to the rapid growth
of outsourcing to asset managers, as reflected in the UK Stewardship Code.
The report defines asset managers (as opposed to asset owners) as having
the day-to-day responsibility of managing investments; they are not
expected to invest in their own name but directly in their clients’ name and
based on their clients’ investment policy. The report’s authors recognize that
other categories like closed-end investment companies, proprietary trading
desks of investment banks, foundations, and endowments could be added
but have been conspicuously omitted due to lack of reliable data.
Four Broad Categories of
Ownership Engagement
1. No Engagement:  This category comprises
institutions that do not monitor individual investee
companies actively or do not actively engage in any
dialogue with the management of investee
companies.  One example would be institutional
investors that are subject to engagement limitations
or an outright prohibition to vote their shares.
Four Broad Categories of
Ownership Engagement
2. Reactive Engagement: This relies on buying
advice and voting services from external providers,
such as proxy advisers, or may include reactions to
engagement based on other active shareholders. One
example would include mutual funds that are subject
to legal requirements to vote their shares with the
help of proxy advisers.
Four Broad Categories of
Ownership Engagement
3. Alpha Engagement: This engagement level is
associated with ownership engagement that seeks to
support short- or long-term returns above market
benchmarks. Both active hedge funds and private
equity funds can be examples of alpha engagement.
Four Broad Categories of
Ownership Engagement
4. Inside Engagement: This encompasses
fundamental corporate analysis, direct voting of
shares, and often assuming board responsibilities.
One example would be a closed-end investment
company like Berkshire Hathaway, which is the
largest shareholder in Coca-Cola and is represented
on the board of Coca-Cola by one of its directors.