Institutional Investors, Corporate Governance and the New International Financial Architecture

The Asian financial crisis has led to attempts to better understand the dynamics of the global financial system. International economic institutions have identified principles of corporate governance as an essential element in improving the global financial architecture. This chapter explores the links between the new international financial architecture and corporate governance and then considers the impact of the growth of institutional investors on corporate governance practices. The chapter is in two main sections. In the first section, the authors examine the role of corporate governance in improving the international financial architecture. They consider definitions of corporate governance and their implications; the international interest in corporate governance and the development of corporate governance principles by organisations such as the Organisation for Economic Co-operation and Development (OECD) and the Organisation for Asia-Pacific Economic Co-operation (APEC). They also consider why corporate governance is important and examine various corporate governance mechanisms. In the second section, the authors turn to consider the role of institutional investors in corporate governance. They commence this section by documenting significant differences between countries and also between regions in the shareholdings of institutional investors. Institutional investment in a number of Asian countries has been much lower than that of countries as the United Kingdom, the United States and Australia. They then turn to consider the implications of institutional investment for corporate governance. Although there has been a substantial increase in institutional shareholdings in many countries, the evidence is mixed in relation to whether institutional investors have been more actively involved in corporate governance matters. As part of considering reasons for this, the authors examine the views of institutional investors on corporate governance issues at both an international level and also in Australia.