Doctoral Student at Indian Institute of Management Bangalore, India
Corporate governance is essential to ensure transparency between the organization and its stakeholders. Boards and ownership are two mechanisms complementing and substituting each other for effective corporate governance of the firms. This paper builds a theoretical understanding around the two mechanisms and proposes three levers of ownership governance through which owners work with the boards. We demonstrate these levers on institutional investors, the largest equity ownership class for the world's firms, and their relationship with independent directors. Further, we exploit the differences among the institutional investors to show how the ability and incentive to monitor the management varies with the investment orientation and horizon of these investors. These variations lead the investors to select specific governance levers or use the same lever for differentiated objectives with the investee firms. These choices suggest that owners have three governance levers, and owners' obligations may influence the choice of these levers and their usage as substitutes. We use the context of voluntary environmental disclosures for S&P 500 firms over ten years to support our findings.