Considering the role of institutional investors in influencing
corporate governance is critical to effective corporate decision
making. Broadly, dissatisfied institutional investors choosing to
act can do one of the following: (a) intervene with management,
either cooperatively or uncooperatively as dissident shareholders,
or (b) exit by selling their shares. Many theories have been put
forward to explain investor conduct, but who better explain the
rationale behind it than investors themselves? In a new article
entitled Behind the Scenes: The Corporate Governance
Preferences of Institutional Investors
(Behind the Scenes), the authors survey
143 institutional investors worldwide to find out whether they are
more likely to intervene or exit, and what drives their
How are institutional investors choosing to act?
Intervention comes in varying forms and degrees. As set out in
Behind the Scenes, 63% percent of respondents surveyed
engaged in direct discussion with management in the past five
years. Moreover, nearly half had private conversations with a
company board when management was not present. In comparison,
dissident shareholder proposals had been brought by 16% of the
respondents, and legal action had been brought by 15%.
Threatening to exit was seen as effective by 42% of respondents
and the evidence indicates that institutional investors are not
afraid to follow through. Nearly half (49%) reported exiting
because of performance-related dissatisfaction, and 39% reported
exiting because of dissatisfaction with corporate governance.
While intervening or exiting are often seen as opposite
approaches, the authors note that these governance mechanisms are
often complementary – in the majority of cases, institutional
investors will attempt to intervene before making an ultimate
What influences their decisions?
The authors conclude that the events more likely to cause
institutional investors to intervene are fraud, inadequate
corporate governance, excessive management compensation and poor
corporate strategy. Long-term investors are more likely to
intervene, while short-term investors typically intervene less
frequently. Correspondingly, investors who cared more about
liquidity engaged less. Interventionist actions can thus be
understood as aimed at long-term goals, not short-term gain.
In choosing how to act, 60% of institutional investors surveyed
relied on proxy advisors, although they did not necessarily take on
a more passive role as a result. Instead, the respondents who used
proxy advisors still report that they make the final decisions
themselves. When choosing not to act, respondents similarly
provided a number of reasons, include insufficient incentive (for
instance, if their stake was low or the perceived benefit too
small) or legal concerns, particularly regarding the rules against
Ultimately, Behind the Scenes is clear that
dissatisfied institutional investors will, at a minimum, engage
management in a discussion. On the more extreme end, institutional
investors will take dissident action to influence corporate
governance to shape and challenge the management of a corporation.
In all cases, when trying to predict potential actions of an
institutional investor, the first step is understanding the
underlying rationale for potential courses of action.
The author would like to thank Kira Misiewicz, articling
student, for her assistance in preparing this legal
 Joseph A McCahery, Zacharias Sautner & Laura T.
Starks, "Behind the Scenes: The Corporate Governance
Preferences of Institutional Investors" (2015), Journal of
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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