The changing face of corporate ownership: Do institutional owners affect firm performance?

This dissertation examines the interrelationships among the major participants in corporate governance--owners, boards of directors, and top management teams, and how these interrelationships may affect corporate decision making and, ultimately, firm performance. Specifically, this study investigates implications of changes in corporate ownership structure caused by the increasing presence of institutional investors. Institutional owners include private and public pension funds, mutual funds, bank trusts, insurance companies, endowments, and foundations. These institutional owners differ substantially with regard to their owners/beneficiaries, economic motivations, and legal, regulatory, and political contexts. These differences may lead institutions to use their ownership power to pursue different philosophies and actions. Some institutions follow a passive governance policy, while others adopt an activist role. Recognizing the potential power of institutions to influence corporate decisions, this study sought answers to four questions: (1) Are institutional owners actively involved in the strategic affairs of companies in their portfolios? (2) Which forms of activism do institutional owners employ (either confrontational mechanisms, such as filing shareholder proposals, or relationship building mechanisms)? (3) Which forms of activism employed are most effective? and (4) Does the institutional type affect its pursuit of shareholder activism? The results of analyses of archival and survey data gathered from a sample of 118 institutional owners suggest that (1) most institutions follow a passive policy; only about 10% report the practice of confrontational activism or relationship investing with boards; (2) some institutions (about 30%) actively attempt to influence firms by establishing relationships with top managers; (3) the portfolio returns of institutions that report attempts to influence are lower than those that report making no such attempts; and (4) activism is not related to specific institutional types or investment philosophies (e.g., maximizing financial returns only or maximizing financial and other returns). Most responding institutional owners (over 54%) hire external fund managers. This creates a situation of agents watching agents watching agents which suggests that fund management may be a significant determinant of institutional activism. The study also supports the importance of recognizing institutional owners as a heterogeneous group. Finally, contrary to what the reports of the few activities by a small number of institutional owners may suggest, this study generally concludes that institutions are not active. Moreover, when they are, their activism does not benefit their portfolios their activism does not improve corporate performance