Edited by Jennifer G. Hill and Randall S. Thomas
Chapter 4: Thirty years of evolution in the roles of institutional investors in corporate governance
A stylized fact that informs most writing about corporate governance in the US and the UK is that institutional investors became more important over the 20th century. Another is that institutions hold larger blocks than individuals. The implication is that shareholders of public companies are less dispersed and more apt to act collectively than was true previously. To be sure, legal constraints (e.g. Black 1992; Roe 1994) and economic disincentives (e.g. Rock 1991) impede collective action. But a belief that increased institutional ownership and decreased dispersion would lead to shareholders overall playing a more important and active role in corporate governance has long been conventional (e.g. Black 1990). More recently (e.g. Gilson and Gordon, Chapter 2 this volume) others have presented a more complex story in which the evolution of institutional ownership does signal increased power, but in less straightforward ways than aggregate reductions in dispersion. This chapter builds on that theme, presenting evidence that shifts in the composition and roles of institutions have been at least as important, if not more so, than aggregate increases in institutional ownership. Over the past 30 years institutions have come to play more varied roles in governance, due to increased specialization in institutional forms and functions, and particularly an increase in ‘layers’ of institutions – namely, institutions owning institutions.
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