Paul Rose

Shareholder Proposals in the Market for Corporate Influence

The period from 2003 to 2013 shows a remarkable shift in the use and effectiveness of shareholder proposals. Shareholders pursued many different types of proposals over the decade, eight of which are identified in this article as most important to corporate governance. The article then provides evidence on how these proposals were used and voted on by shareholders, helping to provide clarity to the role of shareholders in corporate governance. The evidence presented in this article shows that shareholders are increasingly willing to pursue proposals which enhance the accountability of managers. However, reflecting legitimate concerns with the risk of empowering minority shareholders who do not owe fiduciary duties to their fellow shareholders, voting patterns reveal that shareholders are cautious in how they allocate power. While most shareholders support measures that facilitate managerial discipline, they are more cautious in their support of proposals that empower other investors and augment their influence over managers. This article develops a theory of shareholder voting by suggesting that this behavior reflects shareholder concern over two types of costs. First, the majority of shareholders operate under information cost constraints as diversified investors that generally have significant informational asymmetries with respect to management. Therefore, such shareholders will tend to seek low-cost signals of firm performance, which would predict support for disciplining proposals that allow shareholders to key off basic financial performance measures such as market price; indeed, as other scholars have noted, the majority of shareholders are most interested in defensive, ex-post activism that reduces managerial entrenchment and exposes managers to the market for corporate influence and corporate control. Second, the significantly lower levels of support for empowering proposals may be explained by common agency costs — costs that arise as numerous shareholder-principals seek to influence a single set of manager-agents. The significant empowering proposals identified in the article have a common feature: they all promote shareholder influence in excess of a commensurate economic interest held by the activist shareholder. This raises concerns that activist shareholders will attempt to use their influence to extract private benefits at the expense of the other shareholder-principals. However, most shareholders appear to recognize the threat presented by a common agency in which small block holders are empowered to influence management, and such proposals receive significantly less support.

Sovereign Funds and External Asset Manager Fees: The Governance Connection

Sovereign wealth funds (SWFs) vary widely in how they use external managers, but nearly all SWFs make significant use of external managers, particularly for alternative asset classes that are difficult to access or demand labor-intensive investment strategies, such as private equity, venture capital, and hedge fund strategies. Many SWFs — and those interested in the performance of SWFs, including government officials and citizens — are now asking whether the returns, net of fees, are worth the fees charged by these external managers. However, while external asset managers — and hedge fund and private equity managers in particular — have been criticized for their high fees (and, in 2015 in particular, high fees often coupled with poor performance), the governance and management of asset owners themselves may contribute to the problem.

Sovereign Fund Selling, Market Volatility and Systemic Risk: Connections and Regulatory Possibilities

Sovereign wealth funds (SWF) have largely proven to be the gentle giants of the financial markets; they tend to be relatively patient, passive shareholders. In contrast to other activist hedge funds, when SWFs do engage with companies, they tend to work behind the scenes to maximize value for the long term. And yet, because they are funds owned by a sovereign, they often receive significant scrutiny, especially in developed markets, whenever they invest. To date, most of this scrutiny has occurred on the front end of investments, as host-country politicians and regulators question the motives of SWF investment in their markets. In some cases this scrutiny proves to be strict enough to encourage SWFs to look for other opportunities in other markets. As SWFs have continued to invest responsibly and regulators have become increasingly comfortable with SWF investment, the fear-mongering associated with SWF investment has decreased. Now, however, concerns have arisen not over how SWFs invest, but how they divest. Indeed, some reports seem to attribute depressed stock market prices and general market volatility to SWF divestment. A headline in Barron’s, for example, claimed that “Selling by sovereign wealth funds is a huge headwind for stocks,” and a headline for an article in the Financial Times declared that “Sovereign wealth funds drive turbulent trading.” Undoubtedly withdrawals from some SWFs — particularly Gulf SWFs — have had an impact on the markets, and particularly on stocks in which SWFs tend to overweight in their portfolios, such as stock in financial firms and some consumer goods companies. Perhaps the biggest impact has been felt by asset managers, which have seen their AUM deteriorate as SWFs withdraw funds.But how significant are SWF withdrawals from markets? Put in a slightly more pointed way, do SWF withdrawals create systemic risk for the markets? And if they do, what could be done about it? This brief analysis, prepared for the Universita Bocconis Sovereign Investment Lab 2016 Annual SWF Report, attempts to work towards an answer to those questions, and in doing so, also attempts to provide some perspective on the larger debate in the appropriate role of SWFs in global capital markets.

Public Fund Governance and Private Fund Fees

In a continuing low-interest rate environment that stifles fixed income returns, pension funds are under increasing pressure to produce strong returns from other asset classes, including alternative assets like interests in hedge funds, private equity funds, and venture capital funds. As private funds themselves struggle for returns in a hyper-competitive market, pension funds have realized, according to one official, that “the most sure-fire way to enhance returns is to reduce fees.” As a result, public pension funds have begun to press private funds to provide more transparency of their fees. What may be most surprising to observers of this heightened focus on fees is that such requests have to be made at all. Shouldn’t pension funds already know how much they are paying in fees to private funds? In fairness to pension funds, private funds have numerous ways of concealing fees. For example, a private equity fund might hide fees through related-party transactions. It is therefore tempting to see high and hidden private fund fees as simply a deception by private funds on unsuspecting pension funds. While not attempting to justify private funds’ actions, this article, prepared for the 2016 Private Fund Conference at UCLA School of Law, offers a different perspective: high private fund fees are, in part, a result of poor governance by state legislators and pension funds themselves.

North American Dream: The Rise of U.S. and Canadian Sovereign Wealth

On March 8, 2014, the West Virginia Legislature approved the creation of a West Virginia “Future Fund,” the latest in a series of North American sovereign wealth funds (SWFs) created in recent decades. Following a model used by other states and provinces, under the West Virginia legislation, 3% from all severance taxes on coal, oil, natural gas, minerals and timber will be diverted to a permanent trust fund. West Virginia joins a large number of U.S. states and Canadian provinces to create a sovereign wealth fund. And West Virginia’s will almost certainly not be the last SWF: recent estimates by the U.S. Energy Information Administration place the amount of undeveloped, technically recoverable shale oil and shale gas in the United States alone at 862 trillion cubic feet in deposits from New York to California. Saskatchewan is also preparing to launch a wealth fund, using revenues from the same natural resource reserves enjoyed by its southern neighbors. This article will briefly consider the phenomenon of North American funds — their creation, history, goals, and differences — with a particular focus on their governance and investment decision-making. Although the creation of new funds like West Virginia’s Future Fund and North Dakota’s Legacy Fund have received significant popular attention in recent years, many North American funds have existed for decades, and the legislative history of some funds dates back to 1785 (two years prior to the adoption of the U.S. Constitution). And, with significant oil, natural gas, and mineral wealth remaining to be tapped in the United States and Canada, West Virginia and Saskatchewan’s funds may just be the latest in a continuing wave of North American SWFs.

Sovereign Shareholder Activism: How SWFs Can Engage in Corporate Governance

As the number of, and assets controlled by, sovereign wealth funds (SWFs) has increased dramatically in recent years, so too has scrutiny about how SWFs are making use of these assets. A consensus appears to be developing that large institutional investors, including SWFs, should be aware of corporate governance issues at their portfolio companies, even if they choose not to actively attempt to influence management. Because they are long-term investors and often under political and regulatory scrutiny that makes them less likely to sell, SWF capital tends to be captive capital. Thus, protecting long-term returns by monitoring governance is a priority for many sovereign investors. The difficulty for most SWFs -- and the issue this brief paper addresses -- is how to hold mangers accountable without selling or directly engaging in ways that would concern regulators.