Ownership structure and shareholder engagement: Reflections on the role of institutional shareholders in the financial crisis

Abstract

The central role of shareholders in corporate governance is embodied in company law and corporate governance codes around the world. Company law in the UK, for example, states that a primary duty of directors is to run the firm in a way that promotes the success of the company for the benefit of its shareholders.The quid pro quo for the shareholder primacy in corporate governance is an expectation that shareholders will carefully monitor the activities of the company, and potentially intervene if they have concerns about the performance or motivations of the board of directors. In most countries, the law provides them with voting and other shareholder rights to enable them to fulfil this role.However, in the years leading up to the financial crisis, there appears to have been a widespread acquiescence by institutional investors – the dominant form of shareholder in many developed economies – in respect of rapidly rising levels of leverage at banks and other financial institutions.