Institutional Investors as Minority Shareholders*

We examine the role of institutional investors in corporate governance in an environment where ownership is concentrated. The presence of dominant shareholders alters the role of institutional investors by limiting their voting influence; by shifting the focus from shareholder-manager conflicts (when ownership is dispersed) to conflicts between controlling and minority shareholders (when ownership is concentrated); and by creating new potential conflicts of interest when business groups are present. Using hand-collected data on voting by institutional investors in Israel, which adopted far-reaching measures to empower minority shareholders, we find that: (1) Institutional investors rarely vote against insider-sponsored proposals even when the law grants them special voting power; (2) Institutional investors are more likely to vote against compensation-related proposals than against other related party transactions even when minority shareholders lack the power to influence outcomes; and (3) Institutional investors with potential ownership and businessrelated conflicts of interest are less likely to vote against insider-sponsored proposals than standalone institutional investors, both when minority shareholders have power and when they do not. One interpretation of these findings is that the power granted to the minority plays a role only in the selection of proposals brought to a vote but not in voting on existing proposals; another is that, in order for institutions to play a valuable role in corporate governance, granting voting power to minority shareholders is unlikely to be effective unless conflicts of interest are addressed.