Why are institutional investors important in today's business world?

Expert Answers

An illustration of the letter 'A' in a speech bubbles

A legend surrounding the late bank robber Willie Sutton has the by-then-incarcerated criminal responding to the question why he robs banks as replying, “because that’s where the money is.” This is not to suggest that institutional investors are criminals; they are not, except in rare circumstances in which they are...

Unlock
This Answer Now

Start your 48-hour free trial to unlock this answer and thousands more. Enjoy eNotes ad-free and cancel anytime.

Start your 48-Hour Free Trial

A legend surrounding the late bank robber Willie Sutton has the by-then-incarcerated criminal responding to the question why he robs banks as replying, “because that’s where the money is.” This is not to suggest that institutional investors are criminals; they are not, except in rare circumstances in which they are investigated for violations of securities regulations. The purpose of including the quote in this answer is to highlight the role of institutional investors in funding projects in today’s business environment. Institutional investors are usually, but not always, groups of investors, often pension and mutual funds, commercial banks, money managers, etc., who control very large amounts of money seeking investment opportunities for further growth and protection against taxation. Institutional investors are important today because that’s where the money is.

There is often a level of financial stability surrounding many institutional investors that may not exist among retail investors, individuals and small groups representing relatively minor amounts of cash. While the solvency of pension funds has been a problem in the past, they are usually fairly stable, as are money markets and investment banks. So, in addition to representing the source of major financing opportunities, institutional investors are usually not a high risk of insolvency. They are usually not going anywhere. They are, as the name suggests, institutions.

The above includes numerous qualifiers, such as “usually,” “relatively,” “fairly,” and “except in rare circumstances,” because risk cannot be entirely eliminated even in discussions of the largest corporations and investment firms. There have been too many scandals, such as the Arthur Andersen/Enron scandal and the demise of once-venerable financial services firm Lehman Brothers, the latter in the context of the 2007-8 financial collapse. As a rule, however, and for purposes of explaining the continuing role of institutional investors in today’s business environment, this category of investor remains the most desired source of funding. They have the money and they are looking for investment opportunities.

Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

Institutional investors are typically large group investors that make collective decisions, and they are incredibly valuable for businesses. A large group of investors in an institution is important for several reasons.

First and foremost, the polling of finances allows the institution to invest more funds than an individual could. Now, they won’t likely invest them all in one business or fund, but they can distribute wealth more effectively.

Second, they are going to be investing in very sound companies because they are private investors who want to secure long term stability. Because of this, their confidence is a good sign for the companies in which they’re investing.

Finally, their desire for long-term stability means they will be involved in the financial decisions for both the institution and company. Doing so helps these organizations improve and make better decisions, so they are very useful.

Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

The institutional investor is important in today's business world for one main reason: to make sure that businesses focus on long-term sustainable growth. If you look at the current business world, you will notice an interesting trend—people just want to make quick money and move on to something else. This is becoming a major problem in the corporate world.

Nowadays, most companies are focused on quarterly earnings because they want to meet their sales targets. Everybody wants to earn more money; managers work hard to meet their quarterly profit targets because they want a huge bonus at the end of the financial year. As a result, company's long-term performance suffers. The firm either goes bankrupt or is absorbed by a bigger company.

Institutional investors hold a lot of power in the corporate world because they invest as a group—most of them are high net worth individuals or families that want to safeguard their wealth for the long term. These people have the power to curb managerial short-terminism and encourage the management to focus on long-term goals.

Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

Institutional investors are entities that pool money from many individuals or other entities and invest it on their behalf. These sorts of investors can include banks, pension funds, insurance companies, mutual funds, and hedge funds. Currently, in the United States, approximately two-thirds of stocks are held by institutional investors. The decisions of institutional investors can affect stock prices. While some institutions, such as pension plans, have a fairly long horizon, others can be focused on short-term results. Many institutional investors can be risk averse.

Because institutional investors tend to be large and can hold significant amounts of stock in certain companies, they are increasingly active and influential as shareholders, demanding transparency, return on equity, high standards of corporate governance, and "say on pay." A company hoping to raise money through an IPO needs to think about appealing to institutional investors.

Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

This is a great question. First, it is probably best to define what institutional investors are. These are large funds that invest money in securities, such a pension funds, hedge funds, insurance companies, and the like.

These investors are important for the business world for at least two reasons. First, they have massive amount of money. In other words, they are cash heavy and they can use this money for immediate investments. This money, then, can be used by those companies that get this money to build their companies further. The idea is money can create more money.

Second, these institutional investor are important, because they have a lot of power. When they invest in companies, the boards of these companies may give them a large voice, because of the size of their investments.

Approved by eNotes Editorial Team