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Benefits of Institutional Investors on Corporate Life

Updated on January 9, 2018

Warren Buffet

What are Institutional Investors?

Introduction

The definition of an institutional investor is non-comprehensive. Institutional investors comprise of a range of legal entities including, but not limited to; investment funds, pension funds, hedge funds, and insurance companies. Institutional investors buy equitable stakes in companies and can typically be broken into two categories; profit-driven or society-driven. The two categories ultimately aim to make a positive return on investment however society-driven institutional investors aim to do this while improving the corporate social responsibility (CSR) of the firm.

This paper will be focusing on the operation of the society-driven Interfaith Center on Corporate Responsibility (“ICCR”). It is worth noting that in the US, where ICCR are based, the Securities and Exchange Commission (“SEC”) provide and enforce legislative rules for shareholders seeking to put forth a motion to be voted on at shareholder meetings. These requirements include a minimum shareholding of $2,000 for a period of no less than one calendar year.

ICCR

Positive Impact

Interfaith Center on Corporate Responsibility

The ICCR is a conglomerate of investors with similar values that aim to create more imperishable and financially irrepressible companies by improving corporate practices on “vital environmental, social and governance concerns”.

Positive Force in Corporate Life

The ICCR has had many successful activist movements as an institutional investor; the impact of some will be looked at later. A main attributing factor to their success is the nature in which they, in general, publically remain loyal to the firm. However, privately they voice their member’s concerns from a position of power to the board members. This type of ‘voice’ differs to the status quo of actively altering public perception of a company through media reports and protests as was endorsed by Albert Hirschman.

Altering Company Policy

Ferrero and Beunza describe a meeting they held with Pat Daly, a member of the ICCR, who recalls the many engagements that she had with Ford Motor Group. The ICCR were enchanted with actively reducing carbon emission in light of climate change revelations. Ford, on the other hand, were financially supporting lobby groups that claimed climate change didn’t exist. Ms Daly requested the lobbying expenditure of the company. Ford recognised the threat that now faced them and promptly withdrew support for the lobbying party. In the following years Ford and the ICCR were actively involved in making the company one of the most environmentally friendly car manufactures. This was noted by other manufacturers that followed suit.

This example excellently portrays the effectiveness of having a voice within the company and the lack of necessity to publically harm the firm’s reputation. As a result Ford’s reputation has only been enhanced and they would have been viewed as environmental innovators at the time.

Deters Board Complacency

It has been argued that having institutional investors within a company can help to deter board members and CEOs acting irresponsible or becoming complacent in their positions. As institutional investors are an agent for a collective group of people, that individually would have an insignificant voice, they speak on behalf of the ordinary person.

The ICCR were a testament to this when they met with Wal-Mart CEO Lee Scott. In a heated engagement issues such as the treatment of ethnic minorities and minimum wage were brought to light. These issues prompted an emotional reaction from Mr Scott. Subsequent to this meeting Mr Scott released a report regarding the ethnic and gender issues brought forth by the ICCR. This was welcomed by the ICCR and they encouraged other companies to follow the path paved by Wal-Mart. Similarly to the above scenario with Ford, Wal-Mart was seen as an innovator in releasing this report. The discussions held behind closed doors meant that the public were not aware of shareholder dissatisfaction and therefore the company could release this report as a united front.

Encourages Transparency

The ICCR are advocates for transparency in the operations of the companies in which they own a share. This can be seen through the Wal-Mart example given above. In more recent times they have also publically been asking for transparency for the increase in price for pharmaceutical products for the 17 drug companies they have equity in. As mentioned above it is not the usual protocol of the ICCR to publically criticise their companies; however, this exhibits that if they feel as though they are not being heard internally they will seek public support in order to enhance their case.

Conclusion

The impact that institutional investors can have on the companies that they have equity in can be substantially more effective than their minimal shareholding would suggest. The above examples illustrate how just one group (ICCR) is altering some of the largest companies in the world through their activist approach. The policies and reforms that the investors are seeking to enact may not always be the most viable or beneficial to the firm’s financial position. However, the overall objective of increasing the firms CSR and public perception can have advantageous effects on the stock price of the firm which benefits every shareholder regardless of their objective.

© 2018 John Wolfgang

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