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OECD – The Role of Institutional Investors in Promoting Good Corporate Governance.pdf

Please cite this publication as:

OECD (2011),The Role of Institutional Investors in Promoting Good Corporate Governance, Corporate Governance,
OECD Publishing.
http://dx.doi.org/10.1787/9789264128750-en

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Corporate Governance

The Role of Institutional Investors in Promoting
Good Corporate Governance
Contents

Executive Summary

Assessment and Recommendations

Part I Overview
Chapter 1. The Structure and Behaviour of Institutional Investors

Part II In-depth Country Reviews on the Role of Institutional Investors in Promoting Good Corporate
Governance
Chapter 2. Australia: The Role of Institutional Investors in Promoting Good Corporate Governance

Chapter 3. Chile: The Role of Institutional Investors in Promoting Good Corporate Governance

Chapter 4. Germany: The Role of Institutional Investors in Promoting Good Corporate Governance

Annex A. The Questionnaire of the OECD Corporate Governance Committee

Annex B. The Data Requested in the Questionnaire of the OECD Corporate Governance Committee

ISBN 978-92-64-12874-3
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Corporate Governance

The Role of Institutional
Investors in Promoting Good
Corporate Governance

Corporate Governance

The Role of Institutional
Investors in Promoting

Good Corporate
Governance

This work is published on the responsibility of the Secretary-General of the OECD. The

opinions expressed and arguments employed herein do not necessarily reflect the official

views of the Organisation or of the governments of its member countries.

This document and any map included herein are without prejudice to the status of or

sovereignty over any territory, to the delimitation of international frontiers and boundaries

and to the name of any territory, city or area.

ISBN 978-92-64-12874-3 (print)
ISBN 978-92-64-12875-0 (PDF)

Series: Corporate Governance:
ISSN 2077-6527 (print)
ISSN 2077-6535(PDF)

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use
of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli
settlements in the West Bank under the terms of international law.

Photo credit: Cover © Chrisharvey/Dreamstime.com.

Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda.

© OCDE 2011

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Please cite this publication as:
OECD (2011), The Role of Institutional Investors in Promoting Good Corporate Governance, Corporate
Governance, OECD Publishing.
doi: 10.1787/9789264128750-en

mailto:[email protected]

mailto:[email protected]

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FOREWORD
Foreword

This report presents the results of the second thematic peer review based on the OECD Principles
of Corporate Governance. The report is focused on the role of institutional investors in promoting

good corporate governance practices including the incentives they face to promote such outcomes. It

covers 26 different jurisdictions, including in-depth reviews of Australia, Chile and Germany.

The report is based in part on a questionnaire that was sent to all participating jurisdictions in

January 2011 (see Annex A). All countries were invited to respond to the first question so as to

provide an overall context within which the review would take place. The three jurisdictions that

were subject to the in-depth review were invited to complete all questions.

The report first reviews what is known about the institutional investor landscape including the

behavioural codes and legal framework. It then describes what is known about the incentives that

condition their actions before considering the record of engagement and voting. The second part

comprises the three country reviews. The report was prepared by Grant Kirkpatrick, Héctor Lehuedé

and Kenji Hoki with inputs from Simon Wong and Marco Morales and approved for publication

under the authority of the OECD Corporate Governance Committee in August 2011.

The OECD corporate governance peer review process is designed to facilitate effective

implementation of the Principles and to assist market participants and policy makers to respond to

emerging corporate governance risks. The reviews are also forward looking so as to help identify, at

an early stage, key market practices and policy developments that may undermine the quality of

corporate governance. The review process is open to OECD and non-OECD jurisdictions alike.
THE ROLE OF INSTITUTIONAL INVESTORS IN PROMOTING GOOD CORPORATE GOVERNANCE © OECD 2011 3

TABLE OF CONTENTS
Table of Contents

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Assessment and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Part I

Overview

Chapter 1. The Structure and Behaviour of Institutional Investors . . . . . . . . . . . . . . . . 19
1.1. Background, objectives and issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

1.2. The institutional investor landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

1.3. Codes, legal frameworks and disclosure requirements . . . . . . . . . . . . . . . . . . . 32

1.4. Co-operation between investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

1.5. Investment behaviour of institutional investors: the driving forces . . . . . . . . 40

1.6. The voting and engagement record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Part II

In-depth Country Reviews
on the Role of Institutional Investors

in Promoting Good Corporate Governance

Chapter 2. Australia: The Role of Institutional Investors in Promoting Good
Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
2.1. Institutional investor landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

2.2. Legal rules and other guidance relating to shareholder rights
and responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

2.3. Exercise of shareholder rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

2.4. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Annex 2.1: Summary of legal provisions relating to the fiduciary
responsibilities of institutional investors in Australia . . . . . . . . . . . . . . . . . . . . . . . . 86

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Chapter 3. Chile: The Role of Institutional Investors in Promoting Good
Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
3.1. The corporate governance landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

3.2. Legal and regulatory framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
THE ROLE OF INSTITUTIONAL INVESTORS IN PROMOTING GOOD CORPORATE GOVERNANCE © OECD 2011 5

TABLE OF CONTENTS
3.3. Exercise of shareholder rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

3.4. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

Chapter 4. Germany: The Role of Institutional Investors in Promoting Good
Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
4.1. The corporate governance landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

4.2. Institutional investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

4.3. Exercise of shareholder rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

4.4. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

Annex A. The Questionnaire of the OECD Corporate Governance Committee . . . . . . . 131

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

Annex B. The Data Requested in the Questionnaire of the OECD
Corporate Governance Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

Tables

1.1. Financial assets by institutional investors in other jurisdictions . . . . . . . . . . . 29

1.2. Largest global investment managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

1.3. Ownership structure of India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

1.4. Historical average holding period (years) by type of investors in TSE . . . . . . . 32

1.5. Summary of the status of the Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

2.1. Australia’s superannuation industry (as at Dec 2010) . . . . . . . . . . . . . . . . . . . . . 71

2.2. Recent trends in the number of Australian superannuation
industry by entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

2.3. IFSA Blue Book – Summary of guidelines for fund managers . . . . . . . . . . . . . . 75

2.4. ACSI guide for superannuation trustees on the consideration
of ESG risks in listed companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

2.5. ACSI guide for fund managers and consultants on the consideration
of ESG risks in listed companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

2.6. Substantial no votes in remuneration reports in 2009 . . . . . . . . . . . . . . . . . . . . 84

3.1. Ownership concentration (average per year) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

3.2. Pension funds’ Investments in Chilean corporate Assets . . . . . . . . . . . . . . . . .     97
3.3. AFPs ownership in companies renewing boards per year . . . . . . . . . . . . . . . . . 103

3.4. Companies renewing their boards by year and by size of the board . . . . . . . . 103

3.5. Directors elected by AFPs by company according to % of votes . . . . . . . . . . . . 103

3.6. Percentage of companies where AFPs elected one or more directors
per year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

3.7. Independent directors’ profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

4.1. Ownership concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

4.2. Average shareholder turnout is reasonable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

4.3. Shareholder dissent remain low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

4.4. Shareholder dissent depends on the type of resolution . . . . . . . . . . . . . . . . . . . 125
THE ROLE OF INSTITUTIONAL INVESTORS IN PROMOTING GOOD CORPORATE GOVERNANCE © OECD 20116

TABLE OF CONTENTS
Figures

1.1. Ownership structure in selected OECD countries . . . . . . . . . . . . . . . . . . . . . . . . 20

1.2. Financial assets under management by institutional investors
in OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

1.3. Type of financial assets managed by the industry (in trillion USD) . . . . . . . . . 27

1.4. Shares and other equity by class of institutional management . . . . . . . . . . . . 27

1.5. Percentage of assets held as “shares and other equity” by type
of institutional asset owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

1.6. Share of financial assets held by institutional asset managers in 2009 . . . . . . 28

1.7. Ownership by domestic institutional investors and foreign investors
in selected countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

1.8. Average holding period on major stock exchanges (number of years) . . . . . . . 31

1.9. Voting decision making authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

1.10. Voting process in Europe (simplified) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

1.11. Estimated minority shareholder turnout in Europe . . . . . . . . . . . . . . . . . . . . . . 57

1.12. Clustering of shareholder meetings in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

2.1. Equity holdings by all types of investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

3.1. Chilean listed market capitalisation to GDP (%) . . . . . . . . . . . . . . . . . . . . . . . . . . 92

3.2. Number of Chilean listed companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

3.3. Turnover on Chilean listed market (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

3.4. Market ownership concentration (three largest shareholders) . . . . . . . . . . . . . 95

3.5. Assets under administration by type of Institutional Investors . . . . . . . . . . . . 96

3.6. Evolution of pension fund portfolios (per sector) . . . . . . . . . . . . . . . . . . . . . . . . . 96

3.7. Pension fund investment in Chilean corporate assets
(as % of total assets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

4.1. Equity holdings by all types of investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
THE ROLE OF INSTITUTIONAL INVESTORS IN PROMOTING GOOD CORPORATE GOVERNANCE © OECD 2011 7

The Role of Institutional Investors in Promoting

Good Corporate Governance
© OECD 2011
Executive Summary

The OECD Principles of Corporate Governance embrace the underlying assumption that
shareholders can best look after their own interests, provided they have sufficient rights

and access to information. The increased presence of large institutional investors in the

last decade fostered the expectation that a new breed of highly skilled and well resourced

professional shareholders would make informed use of their rights, promoting good

corporate governance in companies in which they invest. Those prospects are reflected in

Principles II.F and II.G, added in 2004 to cover disclosure of voting policies, managing

conflicts of interest and co-operation between investors. However, institutional investors

are not like other shareholders but have a unique set of costs, benefits and objectives.

Accordingly, they have not always behaved as desired. This report investigates their

behaviour by way of three peer reviews on the implementation of Principles II.F and II.G

(Australia, Chile and Germany) and a general review of academic research and country

experience.

Institutional investors are financial institutions that accept funds from third parties

for investment in their own name but on such parties’ behalf. They include pension funds,

mutual funds and insurance companies. By 2009, they manag ed an estimated

USD 53 trillion of assets in the OECD area, including USD 22 trillion in equity. Additionally,

there are large investments made by the fund management industry directly under their

client’s name. This makes institutional investors a major force in many capital markets.

With the goal of optimising returns for targeted levels of risk, as well as for prudential

regulation, institutional investors diversify investments into large portfolios, many of them

having investments in thousands of companies. Some managers pursue active investment

strategies, but increasingly, they passively manage against a benchmark, resorting to

indexing. At the same time, the investment chain has lengthened by outsourcing of

management, further distancing investee companies from the beneficial owners. As a

result, incentives do not always stimulate institutional investors to engage in monitoring

the corporate governance practices of investee companies.

Unlike in the case of private equity and hedge funds, most institutional investors are

not remunerated on the basis of the performance of portfolio companies, but on the basis

of the volume of assets under management. Moreover, fund performance against a

benchmark is reviewed often by investors on the basis of mandates not exceeding three

years. Taken together, these factors favour a focus on increasing the size of assets under

management and on investing them in indices, rather than on improving the performance

of portfolio companies. Incentives for churning of assets and strong conflicts of interest

add to those factors and create a challenging context for the notion of institutional

shareholder engagement and their promotion of better governance practices. The costs of

monitoring a large number of companies are significant, while the benefits are shared with
9

EXECUTIVE SUMMARY
all shareholders, creating a free rider problem. This often leads to sub-optimal monitoring

and analyst coverage of companies unless collective action is achieved.

A key problem identified in the report is that domestic investors in many jurisdictions

do not vote their foreign equity. This is important because foreign shareholders make up

around 30% of ownership in many jurisdictions. Barriers to cross-border voting that raise

the costs of exercising voting rights remain, but evidence shows that there is also a lack of

knowledge by institutional investors about foreign companies in their portfolios. This

could in principle be solved by making use of proxy advisors, but this raises other concerns.

There is the view that the proxy voting industry is already too influential leading to voting

and voting recommendations that are “tick the box” in nature and not sufficiently

differentiated by country and by company. There is also the question of conflicts of interest

prevalent in the industry.

Another relevant aspect of this review deals with whether institutional investors are

becoming increasingly short-term investors, or at least promoting short-term thinking by

investee companies. Pension funds, especially defined-benefit schemes should be able to

make long term investment to match liabilities to their beneficiaries that stretch over

many years. But a number of large institutional investors are not acting in this way.

Nevertheless, the review also points out that large institutional investors are often locked

into the shareholding of most large companies on a long-term basis, since for regulatory or

other reasons, diversification and index investing is the norm. Thus they are long-term

shareholders even if they buy and sell on a regular basis, or lend their shares for a fee. In

principle they have incentives to encourage good corporate governance but such

engagement still needs to be encouraged and facilitated.

The nature of institutional investors has evidently evolved over the years into a

complex system of financial institutions and fund management companies with their own

corporate governance issues and incentive structures. The OECD Principles make useful

recommendations in the direction of more transparency and management of conflicts of

interest by institutions, and co-operation between investors. However, the old question of

shareholder oversight of company boards needs to be re-examined in this new context.

A great deal can be done both by private agents and policy makers to improve the

corporate governance outcomes of institutional investors’ behaviour. In the private sector,

enhancing collaboration among institutional investors, as by establishing industry

associations to share the costs of monitoring and voting have shown positive results. On

the public policy side, prudential regulations sometimes excessively limit holdings by

institutional investors in individual companies and restrictions on incentive schemes may

also change their behaviour in an unintended manner. This review shows that given the

right set of conditions, institutional investors can play an important role both in

jurisdictions characterised by dispersed or concentrated ownership, their role facilitated by

private and/or public policy action. Australia is a good example of the former using a

private solution: an association of pension funds that conducts background research and

advises on proxy voting. In Chile, characterised by concentrated ownership and dominant

company groups, policy has increased the powers of institutional investors and created

incentives that they often lack in other jurisdictions, with encouraging results.
THE ROLE OF INSTITUTIONAL INVESTORS IN PROMOTING GOOD CORPORATE GOVERNANCE © OECD 201110

The Role of Institutional Investors in Promoting

Good Corporate Governance
© OECD 2011
Assessment and Recommendations

The proposition that shareholders can best look after their own interests subject to
having sufficient rights and access to information is basic to the OECD Principles and

domestic law in many jurisdictions. Nevertheless, at the time of the last revision of the

OECD Principles of Corporate Governance in 2004, the need to deal with the emerging reality of

large institutional shareholders was already apparent and led to several new principles

being agreed by consensus, especially Principles II.F and II.G covering disclosure of voting

policies, managing conflicts of interest and co-operation between investors. The

Annotations to the Principles went on to note that,

“the effectiveness and credibility of the entire corporate governance system and

company oversight will… to a large extent depend on institutional investors that can

make informed use of their shareholder rights and effectively exercise their

ownership functions in companies in which they invest.”

However, the forces driving the actions of institutional investors are different from many

other shareholders being determined by a unique set of costs, benefits, and objectives. This

report therefore not only investigates the implementation of the principles covering

institutional shareholders by way of three peer reviews (Australia, Chile, Germany) and a

general review of academic research and country experience, but also examines the forces,

regulatory and economic, driving the actions of institutional investors. Not every

constellation of costs and benefits can be expected to lead to good corporate governance

outcomes. This approach is based on Principle I.A that was introduced in 2004: “the

corporate governance framework should be developed with a view to its impact on overall

economic performance, market integrity and the incentives it creates for market

participants and the promotion of transparent and efficient markets.”

Institutional investors, those financial institutions accepting funds from other parties for

investment by the institution in its own name but on their clients/beneficiaries behalf,

such as pension funds, mutual funds and insurance, are now a major feature of many

jurisdictions and are significant players in the global economy. According to the latest

available data, they managed some USD 53 trillion of assets in 2009 in the OECD area,

including some USD 22 trillion in equity. In addition, the funds management industry that

does not invest in its own name is also highly significant. In a number of jurisdictions, an

explicit policy goal is to further the development of institutional investors via, for instance,

pension funds so as to foster domestic capital markets. However, in other jurisdictions the

institutions are seen as a weak link in the company landscape related to short termism and

to the pursuit of political ends. Thus some see them as already too powerful and their

effects possibly pernicious. Others by contrast, see them as not being robust enough in
11

ASSESSMENT AND RECOMMENDATIONS
promoting good corporate governance and corporate accountability. Not all the arguments

in this debate relate to good corporate governance per se but to their potential for

underpinning growth and development, and addressing other issues such as

environmental and social goals. However, there is a close relationship between good

corporate governance that promotes company performance and accountability, and

addressing these broader issues.

With the goal of optimising returns for targeted levels of risk, institutional investors pursue

a range of portfolio diversification strategies, which in some cases have led to highly

diversified portfolios, many of them having investments in several thousand companies.

Though many managers pursue active investment strategies and use benchmarks for the

purpose of assessing performance, some investors seek portfolios that are passively

managed against a benchmark, in which case managers typically must purchase all the

equities in the share index (e.g. S&P 500). The level of diversification can therefore be

extreme. With the emergence of a broad universe of professional investment managers

and increasing access to information, some studies have shown that active strategies, on

average, do not significantly outperform the market on a net-of-fees basis. At the same

time, and possibly as a result of these studies, investors have increasingly channelled

funds into lower cost, passive diversification funds. This trend towards passive

diversification may not be conducive to the promotion of good corporate governance.

Diversification is, in a number of cases, also driven by prudential regulation such as

capping the percentage of a company’s equity that can be held by an institutional investor,

and not just by individual investor concerns. The review of Chile noted the benefits of

permitting pension funds to take a significant stake in companies (up to 7%). Other

jurisdictions might want to examine their restrictions to see if they are economically

efficient. At the same time, the investment chain has lengthened by outsourcing of

management to include investment managers and sub-advisors, further distancing

investee companies from the ultimate “beneficiaries”. As a result, at every stage of the

process there are possibilities that incentives will not encourage institutional investors to

take an interest in the corporate governance practices of investee companies.

Institutional investors acting as agents for ultimate beneficiaries are very often not directly

Requirements Weekly Assignment

Students must submit three true-false questions prior to each class based on the assigned reading for the week.
· You must include answers and supporting rationale
· Each question must come from a different part of the assigned reading
· The template of true-false question please check the following examples which are two parts, almost 100 words for each question, therefore three true- false questions will be almost 300 words in total.

True false question examples here (Two parts in each question)
Part 1. True or False:

Disclosure requirements are a regulatory response to the information asymmetry issue between financial product providers and consumers.

True. Required disclosures help consumers understand the nature of the products they are considering and therefore make better informed decisions based on the price and risk of services provided.
Part 2. True-False Questions for Responses (supporting rationale)
1. Capital adequacy requirements are an example of competition regulation.
2. Shadow banking systems tend to occur in financial systems that have minimal regulations.
3. Limiting bank deposits per person that are protected by the Federal Deposit Insurance Corporation to a relatively modest amount (e.g. $250,000) serves to reduce the moral hazard of the program.

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