Analyzing Institutional Investors Impact on Corporate Governance

This essay examines the significant role institutional investors play in enhancing corporate governance practices within companies they invest in, emphasizing their fiduciary responsibilities and influence due to privatization and market capitalization. It also discusses the importance of Corporate Social Responsibility (CSR) and its connection to corporate governance principles, particularly Principle 7, which relates to risk management. The essay advocates for mandatory disclosure of CSR policies to facilitate comparison between organizations and encourage smaller organizations to adopt responsible practices. It highlights the advantages of CSR disclosure, including enhanced goodwill, reduced environmental inefficiency, community growth, stakeholder engagement, and risk management.

Corporate governance

Table of Contents
Part A.........................................................................................................................................3
Part B..........................................................................................................................................3
References..................................................................................................................................5

PART A
An institutional investor can be referred as a financial institution which accepts funds from
parties and invests at their own name on behalf of third parties (McCahery, Sautne and
Starks, 2016). A few examples of institutional investors are mutual funds, unit trust,
insurance companies etc. I totally agree with the fact that institutional investors can play a
significant role in enhancing corporate governance practices of the companies in which they
invest. The main reason behind same is that as an institutional investor has provided them
with a resource to invest thus, the companies required to be assured that their investors are
satisfied. Even their influence has been enhanced due to privatization and demutualization in
market capitalization. Fich, Harford and Tran, (2015) asserted that a core bond exists
between good governance and performance of an organization. Thus even they appropriately
focus on application of corporate governance in the companies which they have invested so
that they can attain appropriate return on same. Most of the institutional investors act as
fiduciaries for the organization in which they have invested. As in some cases they are
trustees or fund manager who are having fiduciary relationship with the investor.
Thus, it can be accessed from above discussion that they are attaining a higher and senior
position in the organization in which they have invested. Further, they have the power to
decide the manner in which things are to be done or organized. Therefore, it would be
appropriate to say that if institutional investors want then they can appropriately evolve
corporate governance in organizations, they have invested.
PART B
Corporate Social Responsibility can be linked with the responsibility of the company
regarding the manner in which they manage and report the economic, social and
environmental impact of their activities (Tricker and Tricker, 2015). Principle 7 of corporate
governance principles and recommendation relates to recognising and management of risk.
The reason behind recommending disclosure of the policies followed by the organization is to
let the reader of report ascertain the manner in which operations of the company are affecting
other environmental variants. In case it becomes mandatory for the organization to provide a
summary of activities it will be easy to compare between organizations of the similar
industry. Disclosure of summary of policies might be taken as an encouragement for smaller

organization regarding the policies which they should follow relating to social responsibility.
As per the assessment of Armstrong (2015), it could also be ascertained that which
organization is making efficient efforts in aligning with provisions of corporate governance
principals. In case the summary is being provided in the report that organizations become
more specific in attaining a higher rate of efficiency as the same would impact the quality of
the report. The advantages which can be attained by the organization through disclosure of
corporate social responsibility are as follows:
 Enhancement of goodwill of organization.
 Attainment of decreasing rate of environmental inefficiency and waste
 Growth in community and economy.
 Evolving with stakeholders.
 Appropriate management of risk.

REFERENCES
Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., 2015. Corporate
governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1),
pp.1-17.
Fich, E.M., Harford, J. and Tran, A.L., 2015. Motivated monitors: The importance of
institutional investors׳ portfolio weights. Journal of Financial Economics, 118(1), pp.21-
48.
McCahery, J.A., Sautner, Z. and Starks, L.T., 2016. Behind the scenes: The corporate
governance preferences of institutional investors. The Journal of Finance, 71(6). Pp.2905-
2932.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and
practices. Oxford University Press, USA.