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date: 06 July 2022

Abstract and Keywords

This chapter examines the role of institutional investors in corporate governance and whether regulation is likely to encourage them to become active stewards. It considers the lessons that can be learned from the US experience for the EU’s 2014 proposed amendments to the Shareholder Rights Directive. After reviewing how institutional investors fit within the historical evolution of finance, the chapter documents the growth in institutions equity holdings over time. It explains how institutional investors are governed and organize share voting before turning to two competing hypotheses to account for the relative passivity of institutional investors: the excessive regulation and the inadequate incentives hypotheses. In evaluating these hypotheses, it reviews the results of the SEC’s attempt to incentivize mutual funds to vote their shares. The chapter concludes by highlighting the role of hedge funds in catalyzing institutional shareholders, along with some of the risks associated with such highly incentivized actors.

Keywords: institutional investors, corporate governance, regulation, EU, Shareholder Rights Directive, share voting, incentives, Securities and Exchange Commission, mutual funds, hedge funds

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