A business, such as a mutual fund, bank or insurance company, that holds shares in a publicly-traded company. Institutional shareholders are important to placing new issues of stocks and bonds, as they can afford to buy more of an issue than individual investors. If an institutional shareholder owns a majority of the shares in a company, the company is said to be under institutional ownership. Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets. Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can actively engage in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under. Influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management.
Activist Institutional investors
A shareholder or group of shareholders in a publicly-traded company that tries to make changes in management and/or operations in a way that suits the shareholder(s)' interests. Activist investors deliberately acquire substantial stakes in certain companies and therefore wield enough influence that the company often must listen to them. Activist investors may choose to negotiate directly with the company or indirectly though methods like proxy wars or public shaming. Activist investors may be motivated by ethical concerns; they may want the company to pay its workers better, for example. More often, they wish to change the company in a way that will maximize their own return. Activist investors may be investment companies, institutional investors, shareholder groups, or even wealthy individual shareholders.
In the UK, the activity of acting in concert is currently regulated by the Takeover Code. The term ‘acting in concert’ is defined under the Takeover Code as where ‘persons coordinate with the offer or the offered company on the basis of an agreement, whether formal or informal, aimed either at acquiring control of the offered company or at frustrating the successful outcome of a bid.’ If shareholder collective action towards a company is deemed to be ‘acting in concert’, relevant investors have to face the choice: to make a mandatory bid on the target company or place themselves in breach of the Takeover Code.
The Combine Code [UK Combined Code on Corporate Governance – in place for 10 years] also requires institutional shareholders to interact proactively and objectively with the companies in they are invested. There are three main principles for the institutional share holders to observe:
1.) Institutional shareholders should enter into a dialogue with companies based on the mutual objectives of the company. (E.1) 2.) When Evaluating companies governance arrangements, particularly those relating to board structure and composition, institutional share holder should give due weight to all relevant factors drawn to their attention (E.2) 3.) Institutional shareholders have a responsibility to make considered use of their votes. (E.3)
The Combined Code explicitly recommends that institutional investors should not accept a ‘box-ticking’ approach to corporate governance, and that their consideration of disclosure made by the company in relation to the Code should take into account the “size and complexity of the company and nature of the risks and challenge it faces” (supporting principle to E.2)
The Combined Code recommends (supporting principle to E.1) that city [ie investing] institutions should follow the “Responsibility of Institutional Shareholders and...