This paper analyzes the process of private negotiations between financial institutions and the companies they attempt to inf luence. It relies on a private database consisting of the correspondence between TIAA-CREF and 45 firms it contacted about governance issues between 1992 and 1996. This correspondence indicates that TIAA-CREF is able to reach agreements with targeted companies more than 95 percent of the time. In more than 70 percent of the cases, this agreement is reached without shareholders voting on the proposal. We verify independently that at least 87 percent of the targets subsequently took actions to comply with these agreements.FINANCIAL INSTITUTIONS ARE WIDELY BELIEVED to play an increasingly important role in corporate governance. Black~1992! and Pound~1992a, 1992b!, for example, have argued that because of the demise of the 1980s hostile takeover market, the "market-based model" of corporate governance has evolved into a "political-based model." Understanding the way in which institutions inf luence firms clearly is an important research topic in corporate governance.The process by which firms and institutions interact is much more involved than a casual reading of the current academic literature would imply. When an institution has an issue it is concerned about, it typically will contact a firm privately about the issue first. Depending on the firm's response, the institution will determine whether to file a proxy resolution. The process potentially is repeated for several years until either the firm changes its policy or the institution decides not to pursue matters further. One reason why existing research does not capture the intertemporal nature of this relationship is that the details of the negotiations between the institution and the firm, and often the very existence of such negotiations, are private and * All authors are at the University of Arizona. We are extremely grateful to Dick Schlefer and Rita Gorman at TIAA-CREF for their help throughout the research process, especially in gathering the sample we use in this paper. We are also grateful to Virginia Rosenbaum of the Investor Responsibility Research Center for providing us with data to verify corporate governance changes. We thank

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All comments welcome. Preliminary, please do not quote without permission. We thank Teachers Insurance and Annuity Association for providing the data on private placement bonds, Merrill Lynch & Co. and Jerome Fons of Moody's Investor Services for providing the data on publicly offered bonds, participants at the Federal Reserve System Conference and the AFA Annual Meeting for helpful comments. The views expressed in this paper represent the authors' views only and do not necessarily represent the views of the Federal Reserve Bank of San Francisco or the Federal Reserve System.

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