The Power of Pensions: Global Scheme Activism at CalPERS, Japan's GPIF, Noway, Others

The clearest issue connected with a fund’s shareholder guidelines is the degree of equity investment, according to a newly released academic paper.

(March 12, 2012) — Public pensions, with assets worth over US$4 trillion globally, have the power to exercise considerable influence over equity markets — an influence that can extend to shareholder activism, and can be at odds with other corporate owners.

This strong claim comes from a newly released academic paper that characterizes public pension funds as some of the world’s largest, most powerful institutional investors, commanding substantial ownership and influence over corporate governance and strategy. 

The paper — titled “Global Pension Fund Activism: A Review of the Largest Government Pension Systems” by Siona Robin Listokin of George Mason University’s School of Public Policy, compares formal fund guidelines for socially responsible investing and ownership, along with shareholder actions such as proxy proposals, class action lawsuits, and communication with corporate management in North America, Western Europe and Asia.

According to Listokin’s research, state and local government pension funds in the United States, for example, own between 10% and 20% of the US equity market. By comparison, “as early as two decades ago, very few public funds were actively investing in foreign equity markets. As investment in and engagement with equity markets has increased, public pension plans, like other institutional investors, are in positions to wield considerable leverage over corporate managers,” the whitepaper asserts.

Listokin continues: “There is no international consensus as to when and how this power should be exercised. As large shareholders, institutional investors in countries with strong corporate governance laws and norms have the power to choose the agents (generally, the corporate board) that will monitor corporate management. In addition, shareholders can express opinions through the owner voting system. Of course, all shareholders including institutional investors can sell their shares. Institutional investors are often large enough shareholders to make these monitoring actions worthwhile, which is not always the case with inconsequential individual shareholders.”

The paper delves into case studies of the following schemes in terms of their level of shareholder engagement: the California Public Employee Retirement System, the Japan Government Pension Investment Fund, the South Korea National Pension Service, the Netherlands Civil Pension System, the Norway Government Pension Fund Global, the Quebec Caisse de depot en placement du Quebec and India’s New Pension System. 

According to the paper, CalPERS — with assets totaling $207 billion and around 65.7% of the assets invested in global equities as of July 2010, is generally considered a leader in public pension fund engagement and activism. “A look at the fund’s investment policy can be confusing, however. The policy is aimed at maximizing long‐term investments to cover obligations efficiently and effectively, and the fund insists that corporate governance activisms help maximize investment return,” the paper says, noting that while CalPERS is a signatory to the Global Sullivan Principles — designed to increase the active participation of corporations in the advancement of human rights and social justice — the fund limits its corporate governance activities to those that will impact financial returns. Meanwhile, CalPERS does have exclusion lists, which generally involve investments in unstable countries which violate the fund’s human rights standards. The fund also takes an active engagement with companies that may violate human rights in dealings with Sudan.

In contrast, Japan’s GPIF, the world’s largest aside from the US Social Security Trust Fund with assets worth around $1.43 trillion, generally shies away from active engagement. “The GPIF is a passive investor, and asset composition is reviewed every five years. An unusually high percentage of the fund’s assets are externally managed, thus additionally distancing the fund from active engagement,” according to the paper. 

Unlike CalPERS, the paper claims that the GPIF does not appear to wield excessive influence over its investment corporations regarding corporate governance, performance, or payout, which is not unusual in Japan, where the “Western” activist shareholder model does not totally apply. Furthermore, the GPIF has a lack of independence from the central government, which has played a part in the fund’s investment strategy, generally in support of industry developed or economic stability. Following the 1997‐1998 Asian financial crisis, for instance, the funds were pressured to support equity markets and provide investment funds for public infrastructure projects.

The paper concludes that the most obvious characteristics that could be tied to shareholder engagement are fund size (both nominal and relative to the national equity market), and independence from the sponsor government. “Equity investment will be maintained or increase, and shareholder engagement will continue to play ever more important roles in the management activities of the funds. Surely, taxpayers, retirees and elected governments will be monitoring the results,” Listokin concludes. 

To download the full paper, click here.