How Pension and Wealth Funds Redefine Shareholder Activism Worldwide

How Pension and Wealth Funds Redefine Shareholder Activism Worldwide

Shareholder activism can take many shapes. The concept is mostly associated with go-getter investors like Carl Icahn, storming into a company’s board demanding change or ousting ineffective CEOs.

But there are other ways in which investors and shareholders exercise influence on company boards. More and more lately, shareholders have more specific demands from companies they invest in – demands that revolve around environmental, social, and governance (ESG) principles.

Activist Pension Funds

Foremost in such board activism tend to be investors like sovereign wealth funds or pension funds. The California Public Employees’ Retirement System (CalPERS) was one of the first such funds to lay down governance and sustainability principles for investee companies.

“[We] firmly embrace the belief that strong, accountable corporate governance means the difference between long periods of failure in the depths of the performance cycle, and responding quickly to correct the corporate course,” the fund states.

Among CalPERS’s recommendations for companies are having clear CEO succession processes, appointing independent directors to review significant transactions (ensuring they align with the company’s best interests), and assurances of voting rights for shareholders on major company decisions.

The fund has seen steady returns of about 7 percent on its investments over the last 20 years, which lends credence to its practices. In the process, it has inspired other similar institutions to follow its lead.

Its New York counterpart, the New York State Common Retirement Fund, has been pressuring Exxon Mobil’s executives to do more on climate change, including creating a climate change committee on the board. In a filing in May, they said that Exxon’s response on climate change was “inadequate,” which was a “serious failure of corporate governance.”

The Scandinavian Touch

Across the Atlantic, Norway’s Government Pension Fund Global places great emphasis on governance and corporate responsibility in the companies it invests in. “We aim to contribute to well-functioning markets and good corporate governance,” reads one of its mission statements.

The fund expects good governance particularly in areas like climate and the environment, anti-corruption, tax and transparency, and human rights. It has invested in 9,000 companies across 70 countries, which gives it a global outlook.

“The dialogue we have with companies and their boards is among the most important tools we have as an investor,” says Carine Smith Ihenacho, Chief Corporate Governance Officer for the fund.

If a company does not fulfil the stated standards, the fund is not afraid to take a firm stance. It has excluded companies for missteps like gross corruption, environmental damage, and human rights violations – things that happen because of bad governance.

Collaboration is harder when a company operates in a specific sector – for example, “sin” markets like tobacco and alcohol. Norway’s KLP pension fund announced last month it would divest from companies in alcohol and gaming, such as AB InBev and LVMH.

There isn’t a lot these companies can do in such an extreme case, short of changing their businesses altogether. But they can still control their messaging to show what efforts they are making to be sustainable and responsible, despite being part of “sinful” sectors.

Long-term Relationship

What can company management take away from such investors?

In a 2015 interview, McKinsey partner Tim Koller recommended that companies should look at themselves from the point of view of an activist and ask what they would do differently in order to create value.

“Why am I not doing that, and am I comfortable not responding to what even a hypothetical activist would do? Am I the best owner of the businesses? Am I growing the businesses adequately? Am I cutting costs where they need to be cut? Am I returning cash to shareholders when I don’t need it? So it’s much more a matter of doing it yourself,” Koller mused.

Koller emphasised that activist investors that are there for the long haul can bring a lot of benefit to the company. “They may hold onto an investment for five to seven years, work with management… They’re well prepared, they ask good questions, they do research. And they have a longer horizon perspective, so it’s not just about cutting costs,” he said.

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