Emphasising the role that institutional shareholders can proactively play in promoting good governance among listed companies, The Walker Review on the role of corporate governance in the banking crisis, says that: ‘Early initiative under the rubric of preventive medicine will in many cases save substantial time and money at a later stage’ Walker Review, Section 5.29 p. 70.
Critically evaluate this statement in the light of empirical evidence on shareholder activism in the UK and elsewhere, like the US. Also, comment on whether you think the latest Stewardship Code for institutional investors is likely to be effective in increasing shareholder engagement and good governance in the investee companies in UK.
"Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society" (Sir Adrian Cadbury in 'Global Corporate Governance Forum', World Bank, 2000)
Corporate governance is concerned with the structure and relationships which determine the direction and aims of the companies within the corporate world. The main control is normally with the board of directors which is closely tied with shareholders and management. It is important that the board of directors are closely linked to the shareholders and management and that the corporate aim is aligned to all of their aims as closely as possible. Corporate governance also includes the employees, customers, suppliers etc. It is important that corporate governance exists in the big picture for the economy as it will increase economic efficiency.
It increases the accountability of individuals within organisations through mechanisms to reduce the principal-agent problem. Corporate governance has increased in recent years due to large corporations such as Enron Corporation collapsing. By increasing the legislations and having more parties involved should lead to higher public confidence in corporate governance. Over the years corporate governance has become broader and a larger number of issues are now focussed on.
Shareholders play a large role in corporate governance, and in the 20th century they have become more active in the running of a company in which they have invested in. This is referred as shareholder activism. As corporate governance became more important to the smooth running of large corporations and the social economy, shareholder activism also became important.
Shareholders invest in companies; there are two types of shareholders, individual and institutional. Individual shareholders are investors who buy shares for themselves. Institutional shareholders are larger groups, such as banks and pension funds. Institutional investors usually buy larger amounts or shares and it is normally funded by others.
In the past shareholders believed in investing in short term investments which would yield profits in short time periods. This is normally a bit more risky than long term investments. Recently shareholders now prefer long term investments, as the shareholder will now be holding shares for a longer period it makes a difference what the company goals and objectives are. This has resulted in shareholders wanting to become more involved with the company and its governance.
Normally it was institutional shareholders who played a larger role in influencing companies to perform better and increase its market value compared to individual shareholders who had little say as they only had a small proportion of the shares.
Shareholder activism is when the shareholders intervene in the running of a company. Normally a company is run by the directors and shareholders have little impact on the...