Korea Capital Market Institute

Any shareholder of a company can exercise his shareholder right freely. However, there is a long existing controversy about whether it is justifiable for an institutional investor, in other words, a fiduciary who indirectly owns shares on behalf of investors, to exercise shareholder rights. The argument about whether the exercising of shareholder rights by the fiduciary conforms to the principle of good faith has been at the center of the controversy. However, since the Employee Retirement Income Security Act (ERISA) in the US legalized fiduciaries` execution of shareholder rights and put an end to the controversy in 1988, proxy voting has become a major concern for pension funds. Since then, countries around the world followed suit and enacted laws regarding proxy voting. Voting rights grant all minority shareholders, including even those who hold a single share, an independent right to vote. On the other hand, however, they are passive rights in the sense that they only allow shareholders to give yes or no answers.
There are some institutional investors who exercise their shareholder rights more actively and directly as per their fiduciary duty. Some of them secure an exclusive or group communication channel with executives and express their views on specific matters, such as nominating outside directors, and other corporate issues. In rare cases, institutional investors attempt to dispatch an outside director to a firm they invest in. Sometimes, they exercise the rights of minority shareholders through shareholder proposals or shareholder derivative suits either alone or jointly with other minority shareholders. All these actions can primarily be seen in major global pension funds, private equity funds that pursue shareholder activism, hedge funds, and some mutual funds that advocate socially responsible investing.