Institutional ownership and board governance. A structured literature review on the heterogeneous monitoring role of institutional investors

Abstract

Purpose This paper aims to review empirical research on the relationship between institutional ownership (IO) and board governance (85 studies). Design/methodology/approach Based on agency and upper echelons theory, the heterogeneous monitoring function of specific types and the nature of institutional investors on board composition, compensation and chief executive officer (CEO) characteristics will be focused. Findings The author found that most studies have referred to archival studies, analyzed the impact of board governance on IO, focused on CEO characteristics, neglected IO heterogeneity and advanced regression models to address endogeneity concerns. In line with the theoretical framework, the relationship between total IO and board governance is heterogeneous. However, specific types such as foreign, dedicated and pressure-resistant institutions represent active monitoring tools and push for increased board governance. Research limitations/implications The author provided useful recommendations for future research from a content and methodological perspective, e.g. the need for analyzing the impact of IO on sustainable board governance and other characteristics of top management team members, e.g. the chief financial officer. Practical implications As many regulatory bodies implemented regulations to promote shareholder rights and board governance, this literature review highlights the connections of both corporate governance mechanisms. Managers should conduct a careful and timely investor analysis and change the composition and compensation of the board of directors in line with institutional investors’ preferences. Originality/value This analysis makes useful contributions to prior research by focusing on IO and board governance, whereas the author structured the heterogeneous variables and results within the structured literature review. The authors guides researchers, regulatory bodies and business practice in this corporate governance topic.