A debate about the role of institutional investors was a major part of the corporate governance controversy of the 1990s. Steadily since the late 1950s in the UK, the percentage of institutional investors, ownership in the corporate sector has increased and at present institutional investors are the single largest block holders in the economy. The USA has followed in the footsteps of the UK in this respect. Given their targe presence, it was felt that institutional investors were ideally placed to overcome the problem of shareholder apathy or powerlessness. A strong, activist role by institutional investors was therefore advocated. At the same time, it was also felt that institutional investors were behind the stability of German – Japanese corporate governance systems and so the appealing idea of relational investment could be practised through them. Thus Cadbury Committee asked institutional investors to look upon voting rights as an asset and to use them in monitoring and improving efficiency of portfolio companies.

Among the three dominant perspectives on corporate governance viz. organization-control, capital market-control and stakeholder-control perspectives, the first two take diametrically opposite positions on causes of the governance problem and the role of capital market. According to organization-control perspective, threat of takeovers and recourse to high dividend payout to avoid them have been responsible for diverting managers' attention from organizational investment and learning in the long run. This is thought to be reflected in the declining competitive position of the American industry. In other words, capital market is the root cause of the problem. Capital market-control perspective concentrates on agency costs and the divergence of interest of shareholders and managers.