Institutional Investors and the New Corporate Governance

During the last decade, American capital markets have experienced a marked shift from a constituency made up primarily of household investors to one made up primarily of institutional investors. Institutional investors are fiduciary bodies such as pension funds, mutual funds, and employee stock ownership plans, representing large numbers of beneficiaries. As collective entitites, institutional investors often amass billions of dollars in assets, thus giving them the potential for substantial influence on the companies in which they invest. In recent years, some institutional investors have sought to use this influence to challenge traditional patterns of corporate governance, claiming that new patterns of decisionmaking will result in enhanced corporate performance. In this Article, Professor Jayne Barnard examines the most commonly- advanced institutional proposal for change-the shareholders\u27 advisory committee--as well as the larger question of the appropriate role of institutional investors in corporate governance. After analyzing the changing role of institutional investors, Professor Barnard considers some of the policy questions raised by increased shareholder activism and explores some of the positive and negative consequences which may follow from this trend. She concludes that while institutional participation in corporate governance may have some beneficial impact on management, institutions should abandon the redundant shareholders\u27 advisory committee, and focus instead on the composition and processes of the corporate board itsel