Corporate Governance and Financial Crisis
April 3, 2025
The ongoing financial crisis has proved that Corporate America and the Corporates in other countries around the world have exhibited behavior that can be described as mismanagement and not keeping in tenets of good corporate governance. In this respect, some of the criticism that has been directed at corporate leaders and the bankers in particular…
The field of corporate governance exists in a symbiotic relationship between the management and the board of directors. It is impossible to talk about corporate governance without taking into account the roles and duties of the board of directors and the expectations from the management. To explain this fully, it would be useful to consider…
The previous articles discussed how good corporate governance is imperative to the existence of a structured and functioning economy. In this article, we look at the ways in corporate governance is practiced in the developed economies of the West and in the developing economies in the rest of the world. To start with, the ongoing…
We have discussed how corporate governance and the practice of ethical and normative business practices are essential for companies to stay the course and reap longer term benefits.
In this article, we look at how institutional investors or the investors who are not individuals but large fund managers and investment houses play a major role in promoting good corporate governance.
At the heart of the issue about institutional investors and corporate governance is the fact that there is something called an agency problem that creeps up with professionally managed organizations.
What this agency problem indicates is that managers have conflicting responsibilities to themselves and the organization and in most cases; they seek to promote their interests at the expense of the organization’s interest.
The point here is that managers by nature seek to maximize their benefits in relation to the profits and hence there is a need for counterbalancing this with other forces.
These forces or the countervailing balance is brought about by the institutional investors who have an interest in promoting the longer term health of the company.
The point here is that institutional investors often represent large chunks of shareholders and hence they can be an effective check to the tendency of the managerial class to put their own interests first.
In most annual general meetings, we can see small investors raise questions related to corporate governance. In some cases, these concerns are addressed whereas in most cases, the small shareholders despite voicing objections are overruled because they do not have the numbers.
This is where institutional investors come into the picture since they represent humungous numbers of shareholders and hence have the bargaining power needed to make a difference.
Of course, the flipside to this is that institutional investors do not usually pursue radical changes and instead focus on maintaining the financial and operational efficiencies of the organization and promoting good corporate governance.
Further, in the case of Vedanta, institutional investors made sure that the company followed social and environmental norms and did not ride roughshod over its obligations to society and the government.
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