Institutional Investors as Minority Shareholders: Do They Matter When Ownership is Concentrated?

Abstract

We shed new light on the corporate governance role of institutional investors in markets where concentrated ownership and business groups are prevalent. When companies have controlling shareholders, institutional investors, as minority shareholders, can play only a limited role in corporate governance. Moreover, the presence of powerful families who control many public companies through business groups creates new potential sources of conflicts of interests for institutional investors. Using hand-collected data on voting patterns of institutional investors in Israel, we establish four main stylized facts: (1) Legal intervention plays an important role in shaping voting behavior; (2) Voting against company proposals is more likely in compensation-related proposals, even when institutional investors are unlikely to influence outcomes; (3) Institutional investors with certain other business activities (e.g. underwriting) and those affiliated with a public company or business group are more likely to support insider-sponsored proposals than "pure-play," stand-alone investors; and (4) Large firms tend to enjoy a more favorable treatment from institutional investors, whereas firm performance has virtually no impact on voting. One possible implication of these results is that, in order for institutions to play a role in corporate governance, what matters most is not the legal power granted to minority shareholders but rather the absence of conflicts of interest.

Keywords: Business Groups, Corporate Governance, Corporate Law, Emerging Markets, Institutional Investors, Minority Shareholders, Mutual Funds, Shareholder Activism

JEL Classification: G20, G30, K20, K22