Power: The Squandered Asset?

A paper by two Norwegian institutional investment experts argues that asset owners should get active in corporate governance. 

(October 5, 2012) – Returns are great and all, but institutional investors could be doing more for their current and future members, a new paper out of Norway asserts. 

As authors Alexander Cappelen and Runa Urheim see it, when a pension or sovereign wealth fund (SWF) purchases a sizeable stake in a corporation, they’re buying influence in addition to equity. The paper, “Pension Funds, Sovereign Wealth Funds and Intergenerational Justice,” argues that asset owners in general could be leveraging that power on behalf of their members much more effectively, and lays out how. 

For pension and sovereign wealth funds, “the combination of a diversified portfolio and a long time horizon creates incentives to internalize intergenerational externalities,” Cappelen and Urheim write. But that’s not news to most large asset owners, who “are increasingly realizing that they need to play a more active role in the shareholder democracy in order to promote their interest[s].” 

Cappelen is a Norwegian School of Economics professor specializing in corporate governance and experimental economics. His co-author, Urheim, is a senior analyst with Norges Bank Investment Management and prolific institutional activist. 

At a minimum, the paper argues, major institutional funds ought to use their voting rights and actively participate in board selection and at shareholder meetings. “However,” the authors continue, “an effective corporate governance strategy would also have to involve an active dialog with the management and a willingness to make shareholder proposals. Pension funds and sovereign wealth funds should also engage in corporate governance activities to improve the shareholders’ ability to govern the companies they own.” 

These activities are rather similar to what many pension funds’ members engage in: collaborate and band together to increase their lobbying power. It’s already beginning to happen: “One example is the increased interest in the many formal and informal corporate governance networks among institutional investors that exists, such as the International Corporate Governance Network with more than 500 members holding assets exceeding $18 trillion.” 

To best serve very long-term objectives—mandates can stretch into perpetuity, particularly for SWFs—collaboration among major institutional investors needs to continue, Cappelen and Urheim conclude.

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