How large investors shape corporate behavior

The second day of the conference maintained the high standard of the opening sessions, highlighting critical issues around the role of institutional investors in corporate governance, sustainability, and market efficiency. The papers presented provided valuable insights into the mechanisms through which large investors shape corporate behavior, but they also raised significant concerns about the potential for misaligned incentives, reduced competition, and inefficiencies in capital allocation. 

Divestment and Engagement: The Effect of Green Investors on Corporate Carbon Emissions
Matthew E. Kahn, John G. Matsusaka, and Chong Shu 

Chong Shu and his co-authors tackled a timely issue—whether green investors can influence corporate behavior, specifically carbon emissions, through divestment or engagement strategies. Their findings challenge the conventional wisdom that divestment leads to lower emissions, showing instead that active engagement by green investors is far more effective at reducing greenhouse gases. By focusing on public pension funds, their study offered a unique empirical approach, using state-level political shifts as a natural experiment to isolate the effects of green versus non-green ownership on emissions. They provide robust evidence that green engagement leads to more substantial emissions cuts than divestment, a critical insight for policymakers and activists advocating for shareholder-driven climate action. However, the paper raises important questions about the scalability of this strategy and whether engagement is a sustainable long-term solution without complementary regulatory changes.

On a Spending Spree: The Real Effects of Heuristics in Managerial Budgets
Paul H. Décaire and Denis Sosyura 

Denis Sosyura and his co-author explored the inefficiencies in capital budgeting, revealing how managerial heuristics—such as nominal rigidity and budget deadlines—lead to wasteful spending and suboptimal investment decisions. Their empirical work, grounded in daily transaction-level data, highlighted how managers with budget surpluses engage in last-minute spending sprees, resulting in lower project efficiency and negative NPV investments. The insight that budget deadlines induce managers to invest excess funds in value-destroying projects is a powerful critique of the rigid budgeting practices employed by many corporations. This study points to a broader governance issue: the misalignment of managerial incentives with long-term value creation. The findings suggest a need for reform in corporate budget practices to reduce wasteful spending and improve investment efficiency, especially in firms with complex hierarchies and more rigid structures.

Delegated Blocks: Institutional Investors and Corporate Monitoring
Amil Dasgupta and Richmond Mathews' 

Amil Dasgupta and his co-author's study explored the dynamics of institutional investors holding large equity blocks and how their monitoring incentives are shaped by contractual arrangements. The study's key finding was that institutional investors holding delegated blocks monitor less aggressively than proprietary investors with similar risk-bearing capacity. This result has significant implications for corporate governance, suggesting that simply holding large blocks does not ensure active monitoring or alignment with long-term shareholder interests. The paper calls for a reevaluation of the monitoring role institutional investors play in corporate governance and raises important questions about how to design contracts that incentivize more active engagement.

Sustainable Organizations: Stakeholder Governance and the Role of Pro-Social Preferences
Thomas Geelen, Jakub Hajda, and Jan Starmans 

Jan Starmans and his co-authors took a theoretical approach to understanding how pro-social stakeholders—managers, employees, and investors—affect the sustainability of organizations. Their model suggested that a top-down approach, where control rights are held by more pro-social owners, tends to improve organizational sustainability. Conversely, a bottom-up approach, where pro-social managers have control, can sometimes lead to conflicts of interest that harm sustainability. This study adds an important theoretical framework to the growing body of literature on ESG and sustainability, offering practical insights for firms aiming to balance social responsibility with profitability. However, it also underscores the challenges of aligning diverse stakeholder interests, particularly in complex organizations where control rights are diffused.

Institutional Mobility in Global Capital Markets
Rachel M. Hayes and Roger Silvers 

Roger Silvers and his co-author addressed the complexities of cross-border mergers and acquisitions (M&A) in the context of global capital markets, focusing on how fragmented regulatory authority exposes foreign investors to risks. By analyzing cooperation between national regulators, the paper demonstrated that coordinated enforcement mechanisms, such as the International Organization of Securities Commissions' (IOSCO) Multilateral Memorandum of Understanding, play a crucial role in enhancing the efficiency and security of cross-border transactions. This study is especially relevant for institutional investors navigating the complexities of global markets, as it sheds light on how country-pair-level institutional features can significantly affect economic outcomes. However, the challenge remains in aligning regulatory frameworks across jurisdictions, especially as global financial markets become increasingly integrated.

The Benefits of Access: Evidence from Private Meetings with Portfolio Firms
Marco Becht, Julian Franks, and Hannes F. Wagner 

Marco Becht and his co-authors examined the role of private meetings between asset managers and portfolio firms, a practice often critiqued for its opacity and potential conflicts with disclosure regulations. Through a rich dataset covering over 4,700 private meetings, the authors showed that these interactions generate soft information that fund managers use to make profitable trading decisions. The study’s granular approach, tracking both governance specialists and fund managers, provided strong evidence that private meetings lead to significant trading advantages and abnormal returns. However, the paper also touched on the ethical concerns around selective disclosure, raising critical questions about the fairness of capital markets. While the findings underscore the importance of private engagement for institutional investors, they also highlight the need for more transparent reporting mechanisms to ensure that such information is accessible to a broader range of market participants.

Delegated Voters
Nathan Herrmann, John McInnis, Brian Monsen, and Laura Starks 

Laura Starks and her co-authors investigated the impact of delegating proxy voting rights from asset managers to external fund managers and shareholders, focusing on Vanguard’s 2019 policy change. The study challenges assumptions about passive voting, revealing that delegated voters are more likely to oppose management, particularly on contentious ESG proposals, than Vanguard’s centralized stewardship group. This contradicts the belief that major asset managers impose their own ESG agendas at the expense of shareholder value, showing that delegated voters are actually more supportive of ESG initiatives. The study highlights the complexity and heterogeneity in voting behaviors among delegated voters. While some follow proxy advisor recommendations, many vote independently, which underscores the importance of understanding how decentralized voting can shape corporate governance. It provides important insights into the growing trend of proxy vote delegation and its potential to shift the dynamics of corporate governance in favor of more active shareholder engagement.

The Proxy Advice Industry and Common Owners' Coordination
Tove Forsbacka

Tove Forsbacka’s study on the proxy advice industry and its impact on corporate governance added a new layer to the ongoing debate about common ownership and competition. By focusing on Institutional Shareholder Services (ISS), the dominant proxy advisor in the U.S., Forsbacka showed how common ownership can lead to coordinated actions that reduce competition among firms. The paper provided compelling evidence that ISS, in fulfilling its fiduciary duty to its clients, promotes decisions such as mergers and director interlocks that soften competition. This insight highlights the broader implications of common ownership in undermining competitive market dynamics and calls for more stringent antitrust scrutiny of the proxy advice industry. The study raises important policy questions about the role of proxy advisors and whether they should be subject to additional regulation to prevent anti-competitive outcomes.

By the end of the second day participants had explored a range of topics central to corporate governance, institutional investors, and sustainability. On a departing note, it is hard to deny that conferences such as this one underscore the importance of continued research and policy development to ensure that corporate governance practices evolve to meet the challenges of modern financial markets.

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This article is Part Five of a five-part blog series covering insights from the SHoF-ECGI Corporate Governance Conference. Explore the rest of the posts: read Part One here, read Part Two here, read Part Three here, read Part Four here.