GLOBAL - An analysis of sovereign wealth funds (SWFs) has concluded that the time may be right for funds to both satisfy international concerns about corporate governance yet review a recent decision by some to stand back from exercising their shareholder voting rights.
A study conducted by State Street Global Advisors suggests there are now 37 SWFs across the globe each with more than £3trn (€2trn) in assets, some of which were created specifically to assist public pensions management.
However, when several SWFs bought into major banking and financial groups in 2007 many of these SWFs publicly stated they withhold their right to exercise shareholder votes in some companies, in a bid to appease political concerns around their motivations.
That decision now needs to be reversed and sovereign wealth funds need to get properly involved in the governance of the companies they invest in, according to John Nugee, managing director for the official institutions group at State Street Global Advisors, as the very act of withdrawing their rights is in fact supporting poor corporate governance.
"SWFs generally seem to be damned if they do and damned if they don't. In 2007 they were hounded as unwanted raiders of companies. This was not so much about their internal governance and their interaction with other SWFs but about their interaction with the companies they invested in," said Nugee.
"He continued: They observed some of the Western press as aggressive. And their response was to say we hear your pain, we share your concern, we will not use the votes we are entitled to use. It was meant as a friendly gesture. But a shareholder who doesn't exercise their vote is not a good shareholder, it is a friend to poor governance."
Much of State Street's anecdotal evidence concerning shareholder voting is based on its own experience with sovereign wealth fund clients. The pressure at the time led SWFs to develop and agree to governance best practice for sovereign wealth funds.
That said, SSGA has collected data showing of the 37 largest SWFs reviewed, at least eight of these are worth $100bn or more and 70% of this wealth originates from hydrocarbons such as gas and oil - making these funds significant shareholders who in many cases cannot exercise their voting rights.
The Norway Pension Fund Global, Europe's largest sovereign pension fund, is included in its analysis of SWFs as one of the five funds based in Europe.
Yet responses - or the lack of outraged response - to the Norway-Global fund's environmental and social governance activity suggests the double standard around SWF shareholder rights needs to be rectified as the recent economic crisis has the potential to strengthen relations between SWFs and Western culture, according to Nugee.
"Norway does not invest in companies it disapproves of. In one sense, they are imposing their cultural norms on everyone else. It is very difficult to avoid the feeling that when someone expresses a view matching it, the interpretation is this is fine. But when someone also tries to express their cultural norms, on an English company, for example, we disagree and it can be seen as interference," continued Nugee.
"SWFs need to tread very carefully in exercising their votes. The work ahead for the SWF community is to find the middle way between fulfilling their obligations and being passive, and on the other hand being accused of interfering and trying to impose themselves on the companies they invest in. The question is how to find that middle way. All sides now agree that is too passive as an investor. But now it is about the degree of acceptance," he argued.
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