Finance and Institutional Investors

Abstract

Institutional investors have come to play a central role in financial markets since the early 1970s. They controlled about three out of ten shares of Fortune 500 companies in 1970. Today they control seven out of ten. The aging of the baby boom generation, coupled with new fiduciary requirements for defined benefit pension plans, contributed to this change. Agency theory offered a litany of innovations designed to ensure that executives pursued the interests of shareholders, rather than feathering their own nests. Institutional investors promoted the theory with a vengeance, encouraging firms through shareholder proposals and private bidding to put its prescriptions into place. This article examines the role of institutional investors in promoting changes in corporate management under the banner of shareholder value. It reviews evidence that these changes did little to promote share value and that they resulted in several disadvantages for the American worker-owner.