Institutional investors often have specific preferences that they would like to convey to the companies in their portfolio. These preferences can concern a variety of issues, such as sustainability or maximising their investment. Investors have various mechanisms for influencing companies, including private communications with directors and management, proposals at the general shareholders’ meeting, proxy fights, etc. These mechanisms require them to dedicate time and resources, which can be quite costly for investors with a lot of companies in their portfolio and, thus, a lot of companies whose decisions they wish to influence. For universal investors (investors with thousands of companies in their portfolio or who invest in almost all the world’s listed companies), expectation documents are an increasingly popular tool for conveying their preferences to all the companies in their portfolio at once.
Expectation documents are issued by institutional investors and lay out their preferences on certain subjects. These documents are an efficient way for precisely such investors to exert influence for several reasons. First, the investor announces its preferences to the market and, in making them public, not only shows its commitment to them, but also puts pressure on the market to take them into account. Second, universal investors have market dissemination platforms that allow them to reach thousands of companies with a single document. It is much less costly to issue a single document laying out their preferences than to contact each company separately. Universal investors such as BlackRock, Vanguard, State Street or NBIM all use them. Larry Fink’s famous annual letters to CEOs are a clear example of how an institutional investor can share its preferences with the entire market through a single document.
In a recent study, we examined the effectiveness of expectation documents by analysing a note published in 2012 by Norges Bank Investment Management (NBIM). NBIM is responsible for the operational management of Norway’s sovereign wealth fund. In this note, it underscored the importance of good corporate governance to good financial performance. The Norwegian sovereign wealth fund is currently the world’s largest, managing assets valued at more than one trillion dollars, equivalent to more than 1.5% of the shares in all the world’s listed companies.
The study’s main findings were as follows. First, companies in the NBIM portfolio improved their corporate governance in keeping with the preferences that NBIM published in the note. Furthermore, the companies’ responses were heterogeneous, depending on various characteristics. For example, the larger the ownership percentage held by the sovereign wealth fund in a company, the more its corporate governance improved. Additionally, smaller companies and those with the poorest financial performance improved their corporate governance the most.
Second, the study showed how the fund decided to modify its investment strategy to increase corporate governance quality across its investment portfolio. To this end, after publishing the note, the fund decided to purchase shares in companies with good corporate governance and withdraw its investments in companies with poor corporate governance.
Finally, it showed that the fund was willing to maintain its investments in companies with poorer financial performance provided it is offset by good corporate governance
In sum, this expectation document urging companies to improve their corporate governance affected not only the investment fund’s strategy, but also the companies’ governance strategies. These documents are thus an increasingly popular lobbying tool for universal investors as they allow them to influence all their companies systematically and at a low cost. Given the importance of these investors in terms of both the size of the market they control and the fact that their investments are usually long-term, it is essential to understand the tools they use to influence the market and ensure their preferences are implemented.
 This article summarizes the conclusions of the article written along with three other co-authors: Ruth V. Aguilera (ESADE Business School & Northeastern University), Javier Capapé (Instituto de Empresa) y Vicente Cuñat (The London School of Economics). El artículo fue galardonado en 2018 con el Premio CNMV durante el 25º Foro de la Asociación Española de Finanzas (AEFIN).
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