The Role of Institutional Investors within Public Limited Companies in the UKWithin the public limited companies in the UK, there has been an increasingly imperative external control means influencing their governance-the materialization of institutional investors as owners of equity in the company. For the last twenty years, institutional investors play an integral part in monitoring the corporate governance of public limited companies; they have the capacity to control the management activities openly via their company share as well as indirectly through shares trading. Such an indirect control is relatively strong, for example, the investors may act collectively to pass up investing in a certain corporation, and this may raise the cost of capital for the company.
The institutional investors also play a major in floatation’s and take-over mergers. The institutional investors have thus become an important, if not majority, constituent of equity markets. The Assets that institutional investors hold in the UK have increased and this means that although the institutional investors might not a very major role in markets, their plans have managed to control the financial investments of companies and consequently the capital markets in the economies.
Institutional have the ability to influence the action of companies because of their very size. According to Hampel Report (1997), 60% of UK companies, listed shares belong to UK institutions and thus is apparent from this that discussions of the shareholders role in corporate control mostly concern these institutions. Institutional investors are accountable for the owners of the funds in which they invest. The institutional investing arrangement, which exist in the UK, means that fund managers rather than the beneficial owners invest funds.
The institutional investors thus have a duty to maximize their investment returns. They are the major actors in the financial markets and they have grown in size and importance. Pension funds as well as insurance companies form the largest segment of the institutional market with about 90 percent in the UK (Mallin 2006). These two major types of investors are of particular importance because they offer a potential source of large funds. Moreover, the institutional investors provide a more stable source of finance than other non-bank private sources of funds because their investment is mostly in longer-term assets.
The pension funds and life insurance companies which households increasingly use as a means for saving more willingly than as a vehicle for transferring risk, have long-term liabilities. These investors thus usually tend to hold long-term assets to match these liabilities. Institutional investors clearly serve a significant role in mobilizing resources in the UK. The assets of the UK institutional investors have increased as a fast rate. Pension funds and insurance company assets have increased by over 300 percent during the last ten tears (Mallin 2006).
The institutional investors pool the funds of the market participants and use the funds to buy a portfolio of financial assets. Institutional investors are a source of funds for public limited companies. They invest their capital through private equity funds indirectly. They provide such capital to the companies with the intention of realizing risk-adjusted returns, which surpass the ones possible in the stock markets. The public companied surrender a part venture in the company in return for investment and the transaction generally include one or more positions as a board of director(s) (Noe 2002).
Since they are a major source of fund in the company, the institutional investors have a lot of influence in the public companies management as they are entitled to exercise their voting rights. They can choose to take part in the corporate governance actively and they have the freedom to buy and sell shares.