The Systemic Governance Influence of Expectation Documents: Evidence from a Universal Owner

Can investors influence companies just by stating expectations?

Ruth V. Aguilera, Vicente J. Bermejo, Javier Capapé, and Vicente Cuñat examine how Norway's sovereign wealth fund's portfolio-wide governance guidelines affected investee firms' practices in their paper « The Systemic Governance Influence of Expectation Documents: Evidence from a Universal Owner ».

Specifically, they explore how the Norges Bank Investment Management (NBIM) fund's release of a corporate governance guideline in 2012 influenced corporate governance across its portfolio.

Their main conclusions include:

• Firms in the fund's portfolio significantly improved their governance after the announcement, with their governance index scores by roughly 9.5 percentile points more than comparable firms.
• NBIM walked the talk by rebalancing its portfolio and tilting towards companies with stronger governance, to show the market they did intend to enforce their guidelines.
• The fund chose to put governance principles over short-term profit: they tilted even though a high-governance stock portfolio underperformed a low-governance one by ~0.8%.
• Smaller, less liquid, and poorer-performing companies, which can be hard to reach via traditional engagement, showed the largest governance improvements in response to the guidelines' publication.

This article shows expectation documents are a powerful and low-cost activism tool allowing a universal owner can influence hundreds of firms simultaneously without expensive proxy fights or micromanaging each firm. Policymakers and regulators may support this soft-power activism by endorsing stewardship codes that encourage investors to articulate long-term governance and sustainability preferences. The study however faces a single-case focus with one sovereign fund's initiative in 2012 that only addressed governance issues and not the full ESG spectrum.