Disincentives to Activism by Institutional Investors in Listed Australian Companies

Abstract

Several commentators have expressed the view that a greater level of monitoring by institutional shareholders would be a positive development in corporate governance. However, such commentators often rely upon mere exhortation as a means of achieving that end. The central aim of this paper is to show that there is an array of disincentives to the performance of detailed firm-level monitoring by institutional investors in listed Australian companies. The paper analyzes the barriers to detailed monitoring under three headings: (i) legal barriers; (ii) economic barriers; and (iii) practical and political barriers. It is argued that economic barriers are the most significant of these three types. The paper incorporates the results of an interview study conducted by the author in 1994. The interviewees were the senior executive, or a senior fund manager, of 13 major Australian investment management firms. These firms included the five largest, and seven of the eight largest, managers of listed Australian equities at the end of 1993.

JEL Classification: G32, G34