Research Handbooks in Corporate Law and Governance series
Edited by Randall S. Thomas and Jennifer G. Hill
Chapter 12: Institutional Investor Preferences and Executive Compensation
Joseph A. McCahery and Zacharias Sautner 1 INTRODUCTION Over the last two decades, institutional investing has become an important component of financial markets (e.g., Gillan and Starks (2007)). The increase in institutional ownership has been accompanied by an enhanced role played by institutions in monitoring the corporate governance behavior of companies. Among other things, institutional investors ascertain whether companies comply with the best practice standards elaborated in the guidelines established by corporate governance bodies, pursue proxy voting challenges at annual meetings or conduct coordinated shareholder activism. Prior research has studied the participation of institutional investors in targeting poorly performing firms and pressuring boards of directors to improve corporate performance. In recent years, activist institutions in the United States (US) have made use of a federally mandated privilege to submit shareholder proposals included in the management’s annual proxy statement for a vote at the annual general meeting (see Thomas and Cotter (2007)). The proposal process provides a mechanism for shareholders to raise corporate governance and performance concerns and to pressure boards to implement the proposed changes. Most proposals submitted by investors (other than hedge funds) relate to the elimination of anti-takeover devices, executive compensation, the board of directors and voting rules. In the last decade, hedge funds have embraced activist strategies, taking investment stakes in underperforming firms and directly engaging management to undertake changes that are favorable for outside shareholders and their financial agenda (e.g., Brav et al. (2008)). The evolving role of institutional investor participation in corporate governance is likely...
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