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It is widely believed that investing institutions can have a considerable impact on management behavior of those companies in which they invest. Investor behavior and the relationships between investors and management practice have acquired new significance because of the rise of shareholder value as the measure of corporate performance, enforcement of higher standards of financial responsibility, and investors' grievances about some key aspects of management practice (Black [1998]; Karpoff [2001]). I carry out case study research to examine the influence of financial institutions and markets on company management practice, including innovation strategy and investment in human capital. The assumption behind this work is that investors, in order to maximize their returns from their investment, will pay considerable attention to strategic and human resource practices.
The relationship between investor behavior and human and organizational development (involving different types of investors, including private trusts, private equity investors, and institutional investors) has only recently become an active area of research interest. "Investor activism" is used in this literature as a term for the use of power by an investor to influence actively the management processes or outcomes of a given portfolio company (Romano [2002]). This can be contrasted with a traditional "arms-length" approach to investment that relies mainly on the threat by the investor of "exit" and executive incentive contracts to align the interests of investors or owners and managers. The literature suggests that other governance tools are necessary for the efficient control of agency costs and the management of risks. Investors can reduce such problems by directly engaging with the company. Engagement therefore is a means of matching investor expectations and actual company practice.
This article examines these relationships, drawing upon two investee company cases. The results of this research suggest that investor engagement is alive and well, in the form of both shareholder activism and the more direct and active form of investor participation in company management decisions. The case studies further suggest that there are significant returns to investor engagement, particularly when investors have considerable expertise in the areas in which they are investing. My research found no evidence of a negative effect of investor activism through an overly short-termist approach on the part of investor funds. The business models vary from one investor...