Purpose: This article reviews 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 CEO characteristics will be focused.
Findings: We found that most studies have referred to archival studies, analyzed the impact of board governance on IO, focused on CEO characteristics, neglect IO heterogeneity and advanced regression models to address endogeneity concerns. In line with our theoretical framework, the relationship between total IO and board governance is heterogeneous. However, specific types as foreign, dedicated, and pressure-resistant institutions represent active monitoring tools and push for increased board governance.
Research limitations/implications: We provide 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 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 we list the heterogeneous variables and results within our structured literature review. We guide researchers, regulatory bodies, and business practice in this corporate governance topic.