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Purpose – Examine the role of institutional investors in accelerating the development of capital markets and economies abroad, the determinants of their investment, both in the domestic and foreign markets, and their importance in promoting good corporate governance practices worldwide and facilitating increased financial integration.

Methodology/approach – Review and synthesize recent academic literature (1970–2011) on the process of international financial integration and the role of foreign institutional investors in the increasingly global financial markets.

Findings – Despite the concern that short-term flow of international capital can be destructive to the emerging and developing market economies, academic evidence on a destabilizing effect of foreign investment activity is limited. Institutional investors’ systematic preference for stocks of large, well-known, globally visible foreign firms can explain the presence of a home bias in international portfolio investment.

Research limitations – Given the breadth of the two literature streams, only representative studies (over 45 published works) are summarized.

Social implications – Regulators of emerging markets should first improve domestic institutions, governance, and macroeconomic fundamentals, and then deregulate domestic financial and capital markets to avoid economic and financial crises in the initial stages of liberalization reforms.

Originality/value of paper – A useful source of information for graduate students, academics, and practitioners on the importance of foreign institutional investors.

Purpose – This study explores the probability of expropriation of minority shareholders by controlling shareholders in the form of CEO compensation under an imperfect governance institution by using a novel Chinese dataset over 2001–2010.

Design/methodology/approach – We use a direct method to gauge controlling shareholders’ tunneling and expropriation of minority shareholders, and we present a simple model to link corporate governance and the degree of entrenchment by the largest shareholder. We use both Logit and Probit models to predict the likelihood of tunneling and use two-stage least square (2SLS) regression to address the endogeneity issues.

Findings – There are significant deterioration effects between controlling shareholder's tunneling and firm performance. Firms with more tunneling activities typically have larger controlling ownership, greater evidence of state control, less balance of power among large shareholders, and weaker board characteristics.

Research limitations/implications – The positive relationship between controlling shareholders’ tunneling and executive compensation implies that the controlling shareholder might divert personal benefits from the public firms at the expense of minority shareholders.

Originality/value – We focus on the effects of corporate governance restructuring on executive compensation and controlling shareholders’ tunneling in the Chinese context, and we also investigate whether these effects are stronger with the involvement of state ownership. We empirically address the issues between executive compensation and expropriation of minority shareholders.

Purpose – To investigate whether investor interest in climate issues affects the carbon behavior of the corporations in which they may invest (target corporations).

Methodology/approach – We developed the Finance and Climate Database, merging data on ownership, carbon disclosure, and investor climate interest from several sources, with 30,840 shareholder unit observations. We supplemented analysis of this with interviews.

Findings – Climate-interested investors (CIIs) account for well over a third of the ownership of the world’s very large corporations. More activist CIIs may make a difference to carbon behavior of target corporations where their shareholdings are large enough to enable them to exert power, at or above around 1.5 percent of a target company’s shares. Share price volatility also strongly affects carbon behavior, and the balance of power in investment presently favors the short term over the long term.

Research limitations/implications – More precise proxies for carbon interest and carbon behavior would benefit future research.

Social implications – There is potential for far greater influence by individual CIIs. The most important factor in shifting the balance of power from the short term to the long term would be global agreement on a carbon pricing system.

Originality/value of chapter – This is the first time such a database has been developed or used for this purpose.

This chapter examines China’s corporate governance and accounting environment that shapes the adoption of internationally acceptable principles and standards. Specifically, it examines international influences, including supranational organizations; foreign investors and international accounting firms; domestic institutional influences, including the political system, economic system, legal system, and cultural system; and accounting infrastructure. China’s convergence is driven by desired efficiency of the corporate sector and legitimacy of participating in the global market. Influenced heavily by international forces in the context of globalization, corporate governance and accounting practices are increasingly becoming in line with internationally acceptable standards and codes. While convergence assists China in obtaining legitimacy, improving efficiency is likely to be adversely affected given that corporate governance and accounting in China operate in an environment that differs considerably from those of Anglo-American countries. An examination of the corporate governance and accounting environment in China suggests heavy government involvement within underdeveloped institutions. While the Chinese government has made impressive progress in developing the corporate governance and accounting environment for the market economy, China’s unique institutional setting is likely to affect how the imported concepts are interpreted and implemented.

Scanning both the academic and popular business literature of the last 40 years puzzles the alert reader. The variety of prescriptions of how to be successful (effective, performing, etc.) 1 Organizational performance, organizational success and organizational effectiveness will be used interchangeably throughout this paper.1 in business is hardly comprehensible: “Being close to the customer,” Total Quality Management, corporate social responsibility, shareholder value maximization, efficient consumer response, management reward systems or employee involvement programs are but a few of the slogans introduced as means to increase organizational effectiveness. Management scholars have made little effort to integrate the various performance-enhancing strategies or to assess them in an orderly manner.

This study classifies organizational strategies by the importance each strategy attaches to different constituencies in the firm’s environment. A number of researchers divide an organization’s environment into various constituency groups and argue that these groups constitute – as providers and recipients of resources – the basis for organizational survival and well-being. Some theoretical schools argue for the foremost importance of responsiveness to certain constituencies while stakeholder theory calls for a – situation-contingent – balance in these responsiveness levels. Given that maximum responsiveness levels to different groups may be limited by an organization’s resource endowment or even counterbalanced, the need exists for a concurrent assessment of these competing claims by jointly evaluating the effect of the respective behaviors towards constituencies on performance. Thus, this study investigates the competing merits of implementing alternative business philosophies (e.g. balanced versus focused responsiveness to constituencies). Such a concurrent assessment provides a “critical test” of multiple, opposing theories rather than testing the merits of one theory (Carlsmith, Ellsworth & Aronson, 1976).

In the high tolerance level applied for this study (be among the top 80% of the industry) only a handful of organizations managed to sustain such a balanced strategy over the whole observation period. Continuously monitoring stakeholder demands and crafting suitable responsiveness strategies must therefore be a focus of successful business strategies. While such behavior may not be a sufficient explanation for organizational success, it certainly is a necessary one.

We take a state-stewardship view on corporate governance and executive compensation in economies with strong political involvement, where state-appointed managers act as responsible “stewards” rather than “agents” of the state.

We test this view on China and find that Chinese managers are remunerated not for maximizing equity value but for increasing the value of state-owned assets.

Managerial compensation depends on political connections and prestige, and on the firms’ contribution to political goals. These effects were attenuated since the market-oriented governance reform.

Economic reform without reforming the human resources policies at the executive level enables the autocratic state to exert political power on corporate decision making, so as to ensure that firms’ business activities fulfill the state’s political objectives.

As a powerful social elite, the state-steward managers in China have the same interests as the state (the government), namely extracting rents that should adhere to the nation (which stands for the society at large or the collective private citizens).

As China has been a communist country with a single ruling party for decades, the ideas of socialism still have a strong impact on how companies are run. The legitimacy of the elite’s privileged rights over private sectors is central to our question.

Chinese executive compensation stimulates not only the maximization of shareholder value but also the preservation of the state’s interests.

The resolution of conflicts between shareholders and managers, at minimal cost, is the goal of corporate governance. In 1999, an intriguing series of events occurred that dramatically reshaped the Canadian airline industry. This clinical study considers these events in relation to four corporate governance mechanisms. The results of this clinical study suggest that these four mechanisms may not be sufficient to control a management team that is committed to a course of action and to retaining their positions. In practice, corporate governance can be severely limited, even when the majority of board members are outside directors. In addition, institutional shareholders may not be the disciplining force that theory and logic suggests. Overall, the results imply that managerial entrenchment is a powerful motivating force that may be impossible to counter even for a large, poorly performing corporation that is subject to a very attractive takeover offer.

Purpose – Institutional investors are facing increased pressure and threats of legislation from the European Union to abandon passive ownership strategies. This chapter investigates the legal prerequisites for active ownership among institutional investors in two Scandinavian countries to highlight differences in the legal framework that potentially account for apparent dissimilarities in the practice of shareholder activism.

Design/methodology/approach – Data on shareholder proposals from Danish and Swedish annual general meetings from 2006 throughout 2010 suggest that institutional investors are approximately a thousand times more active in Sweden than in Denmark.

Findings – The comparative study of the legal framework for shareholder activism shows diminutive legal distance in general, however, we find that the shareholder-based nomination committee employed in Sweden constitutes an exception. This is relevant, as such a setup transfers power from the board of directors to the owners. Presumably, this reduces the impact of free-rider and collective action problems, and increases the shareholders’ inclination to make proposals, which is also what we find. Moreover, we find other differences in the legal framework that support the transfer of power to the owners.

Research implications – We contribute to literature by investigating the importance of local governance mechanisms created by the legal framework – an area where research is scarce. The chapter discusses how two classical theoretical dilemmas – free-rider problems and collective action problems among shareholders – can be reduced by the implementation of local corporate governance elements.

Originality/value – The chapter outlines the actual practice of shareholder activism, in terms of proposals, in Denmark and Sweden, and highlights divergent legal elements which theoretically transfer power to the shareholders. Thus, regulators should be aware of the impact by local governance mechanisms, and how shareholders react under different legal prerequisites.

To demonstrate how the Society of Jesus (Jesuits) in the United States through the “National Jesuit Committee on Investment Responsibility” played a significant role as a socially conscious institutional and religious investor in influencing Chevron’s Human Rights Policy 520 and to analyze the factors that contributed to a successful shareholder engagement with the company.

Case study based on firsthand information.

1. Our conclusion offers support for Allen et al.’s (2012) conclusion of legitimacy (credibility) being the dominant force in a successful engagement.

2. We found that coalition-building is a significant moderating variable in increasing shareholder salience. This finding contradicts the study by Gifford (2010).

Our conclusion offers support for Allen et al.’s (2012) conclusion of legitimacy (credibility) being the dominant force in a successful engagement.

We found that coalition-building is a significant moderating variable in increasing shareholder salience. This finding contradicts the study by Gifford (2010).

The chapter is based on the actual process of shareholder engagement with Chevron Corporation that led to the human rights policy and is written mainly based on firsthand information.