Corporate Governance, Corporate Ownership, and the Role of Institutional Investors: A Global Perspective

By Gillan, Stuart L.; Starks, Laura T. | Journal of Applied Finance, Fall 2003 | Go to article overview

Corporate Governance, Corporate Ownership, and the Role of Institutional Investors: A Global Perspective


Gillan, Stuart L., Starks, Laura T., Journal of Applied Finance


We examine the relation between corporate governance and ownership structure, focusing on the role of institutional investors. In many countries, institutional investors have become dominant players in the financial markets. We discuss the theoretical basis for, history of, and empirical evidence on institutional investor involvement in shareholder monitoring. We examine cross-country differences in ownership structures and the implications of these differences for institutional investor involvement in corporate governance. Although there may be some convergence in governance practices across countries over time, the endogenous nature of the interrelation among governance factors suggests that variation in governance structures will persist. [G30, G34]

* The need for corporate governance arises from the potential conflicts of interest among participants (stakeholders) in the corporate structure. These conflicts of interest, often referred to as agency problems, arise from two main sources. First, different participants have different goals and preferences. Second, the participants have imperfect information as to each others' actions, knowledge, and preferences. Berle and Means (1932) address these conflicts by examining the separation of corporate ownership from corporate management-commonly referred to as the separation of ownership and control. They note that this separation, absent other corporate governance mechanisms, provides executives with the ability to act in their own self-interest rather than in the interests of shareholders.1

However, executives' activities are potentially constrained by numerous factors that constitute and influence the governance of the corporations that they manage. These factors include the board of directors (who have the right to hire, fire, and compensate managers), financing agreements, laws and regulations, labor contracts, the market for corporate control, and even the competitive environment. In general terms, these factors can be thought of as either internal control mechanisms (such as the board) or external control mechanisms (such as the market for corporate control). An increasingly important external control mechanism affecting governance worldwide is the emergence of institutional investors as equity owners. Institutional investors have the potential to influence management's activities directly through their ownership, and indirectly by trading their shares. An institution's indirect influence can be quite strong. For instance, institutional investors may act as a group to avoid investing in a particular company, thereby increasing that company's cost of capital. In this paper we consider the role of institutional investors in corporate governance, the motivation for that role, and how the role has changed during the recent past.2

Before assessing the role of institutional investors in corporate governance, we must first define what we mean by the term, corporate governance. Recent research has viewed the concept in different ways. Gillan and Starks (1998) define corporate governance as "the system of laws, rules, and factors that control operations at a company." A firm's governance, they say, comprises the set of structures that provide boundaries for the firm's operations. This set of structures includes participants in corporate activities, such as managers, workers, and suppliers of capital; the returns to those participants; and the constraints under which they operate. Shleifer and Vishny (1997) define corporate governance in terms of the economic interests of the participants. In particular, they refer to corporate governance as dealing "...with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment." Similarly, Zingales (1998) defines corporate governance as "...the complex set of constraints that shape the ex-post bargaining over the quasi-rents generated by the firm."

As the corporate environment has changed, so too have corporate governance practices. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Corporate Governance, Corporate Ownership, and the Role of Institutional Investors: A Global Perspective
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.