Institutional Shareholders' Split Personality on Corporate Governance: Active in Proxies, Passive in Ipos

Abstract

For well over a decade, institutional shareholders have fought proxy battles with corporate management over matters of corporate governance. They have opposed takeover defenses and advocated such structures as independent boards and board committees, confidential voting, and the separation of the CEO and chairman positions. At the same time, however, hundreds of companies whose shares those same institutions own, through venture capital and other private equity funds, have gone public with charters containing the same takeover defenses that institutions oppose when the institutions are in the proxy battle mode - and without the governance provisions that they advocate. This article reports data on the apparently inconsistent behavior of institutional investors and asks the question: Why do institutional investors actively advocate their view of good governance in the proxy context but passively accept what they consider bad governance among the companies in which they invest through private equity funds? The article concludes with some potential (but ultimately unsatisfying) explanations.