The Role of Institutional Investors in Corporate Governance

In a corporation it is important to ensure effective corporative governance. This is
the responsibility of the boards of directors, institutional investors and shareholders.
The four main types of institutional investors in UK are pension funds, life insurance
companies, unit trusts and investment trusts. Institutional investors have a complicated
position in corporate governance. Institutional investors have a huge influence on
the company management and they make sure that the management interest matches
the shareholders interest. Another important role of institutional investors is that they
are responsible for monitoring the works of the company as they have huge ownership
concentration. Ownership concentration is an essential mechanism that deals with
agency issues and provides protection to the investors. However, there is a negative
effect on ownership concentration. They have access to privileged information which
creates an imbalance in the information between the institutional investors and
shareholders. Conflicts can arise due to the dissatisfaction between ownership and control
concentration.