Institutional investors consisting of insurance companies, pension funds, investment trusts, mutual funds, and investment management groups often hold substantial outstanding shares of public companies. Institutional investments in the United States have grown significantly in the past five decades and will continue to grow as more employees participate in pension funds.

Institutional shareholders normally monitor their holdings by using a screening system based on financial performance (e.g., benchmarks), identifying problem areas and concerns, and determining causes and effects of the problems Institutional shareholders play an important role in corporate governance by (1) exercising their right to elect directors, (2) raising their concerns about the company’s governance by either selling their shares or voicing their dissatisfaction, (3) improving the efficiency of the capital markets by transmitting private information they obtain from management to the financial markets, and (4) reducing agency problems by possessing resources and expertise to monitor the managerial and oversight functions as well as reduce information asymmetry between management and investors.

Financial institutions Are agents of individual shareholders with the fiduciary duty of managing these funds for the best interest of their individual investors (principals) AND own and manage public companies’ stocks, which make them responsible for monitoring public companies’ governance THAT creates dual responsibilities and potential for the conflict of interests. To ensure that institutional investors protect the interests of their beneficiaries or trustees, they should disclose their corporate governance and voting policies as well as potential conflicts of interest and how they manage them.