Institutional Investors’ Power to Change Corporate Behavior: International Perspectives: Volume 5

Purpose – This chapter introduces this book’s topics, purpose, and key themes. It summarizes the purpose of the book which is to explore through both descriptive and conceptual means the use of power by institutional investors in bringing about changes to corporate behavior, so that corporations engage in improved environmental, social, and governance actions.

Methodology/approach – This chapter reviews literature and chapters and offers conceptual development.

Findings – The forces driving the actions of institutional investors are different from many other shareholders being determined by a unique set of costs, benefits, and objectives. As such three general categories of institutional elements constrain and guide this behavior: regulative elements which include constitutions, laws, and property rights; normative elements which include informal norms, values, and codes of conduct; and cultural-cognitive elements which include shared beliefs, identities, and mental models. It highlights the role of regulation and “soft” law, the impact of values and customs, and the way sense-making and cognition impacts on decisions and actions.

Practical/social implications – The chapter highlights the interplay between hard and soft law in progressing the agenda. It seems that hard law is a hygiene factor forming the base on which initial gains can be made in the application of institutional shareholder power. Moreover, the use of soft law such as the Global Reporting Initiative and the newly founded Sustainability Accounting Standards Board, institutional investors can gain improved disclosure of sustainability performance to incorporate into their investment decisions. Moreover, it highlights the gaps in the use of the power that exists. The movement is still emerging with the focus on corporate governance and environmental considerations primarily. There are still improvements to be made for institutional investors in the social aspects of the responsibility agenda as well in pushing companies to be more transparent, improve reporting, and engage in more long-term decision-making.

Originality/value – The chapter contributes to the debate on governance convergence between liberal market economies (LMEs) and coordinated market economies (CMEs). It is important to look beyond national characteristics alone and demonstrate that organizations, even though they are impacted by institutions, are not necessarily passive acceptors of their fate. Hence this chapter highlights that in expanding from a dyadic approach comparing LMEs and CMEs, the strategic choice of decision-makers, the power of the actors, and the processes used by institutional investors in changing corporate behavior are important considerations.

Purpose – This chapter investigates the role of enabling organizations in the processes whereby institutional investors collectively influence corporate managers on Environmental, Social and Governance (ESG) issues. We develop a framework combining stakeholder and collective action theory to explain how institutional investors influence corporations through collective engagement and to specify how enabling organizations influence this process.

Methodology/approach – To evaluate our framework, we investigate the role of the organizational platform provided by the United Nations-backed Principles for Responsible Investment (PRI) initiative in supporting institutional investors’ collaborative engagement with corporations on ESG issues.

Findings – Our findings clarify how investors enhance their sources of power, legitimacy and urgency and attract managers’ attention through collaborative engagement, and show how they manage these attributes to reshape the legitimacy and urgency of their claims in the eyes of managers. Our results also show how enabling organizations such as the PRI initiative facilitate the emergence of collective action by lowering barriers to entry and providing a mobilizing structure, support collaborative efforts by adding their own legitimacy, normative power and persistence to the collaborative engagement, and create conditions for a lasting dialogue between investors and managers by providing a hybrid organizational space.

Social implications – In explaining how to enhance institutional investors’ collective action on ESG issues, this paper shows how we could reorient financial market forces toward sustainability.

Originality/value of paper – The paper benefited from a unique access to confidential and internal data from the UN-PRI initiative and provides a new framework.

Purpose – The purpose of this chapter is to explore the role and influence of Australian institutional investors in Australian company decision-making and performance; and in particular their role in monitoring companies’ ESG performance.

Approach – The research uses interviews of a range of key executives in Australian companies and other bodies. Interviews were conducted in 2007–2008, 2009, and 2010 totaling 18 in number.

Findings – The data finds that institutional investors priortise engagement rather than exiting the market and this engagement tends to occur through discussion, behind-the-scenes, and covertly. This engagement is primarily focused on governance issues such as succession planning and remuneration, secondly on environmental considerations and thirdly on occupational, health, and safety (O, H, & S). There is evidence of engagement with supply chain issues which signals the importance of social risks becoming more important.

Research implications – From this work further research is highlighted, namely to conduct through qualitative methods a broader survey of the range of Australian institutional investors and companies to investigate the range of factors that investors take into account, their methods of engagement and the effect on company decision-making and ESG performance.

Value – The chapter concludes that the power of institutional investors is recognized and the evidence presented here points to scope for investors through their fund managers and their own actions to be more active and in the future to use their power in a more transparent manner.

Purpose – This chapter reviews the influence that institutional investors have on corporate climate change disclosures and related reporting regimes.

Approach – We overview recent research undertaken by the authors that provides evidence of the influence of institutional investors on voluntary reporting of climate change information in annual and sustainability reports. In addition, this chapter considers the influence of institutional investors on climate change disclosure regulation and the use of climate change information by investors.

Findings – The material presented in this chapter indicates that institutional investor coalitions have been internationally influential in determining the extent and content of climate change disclosures of large corporations. The CDP annual questionnaire has been particularly influential. The influence of other initiatives such as development of the CDSB reporting framework is not yet clear. Further, the ability of institutional investor coalitions to influence the regulation of climate change disclosure is uncertain, since most national governments have not yet headed requests for greater regulation.

Research implications – Several avenues for future research are identified including a consideration of the trade-offs between investor information demands, costs of compliance and a desire for concise reporting; investor decision making processes as well as the impediments to use of the information currently available; and the validity of the perception that increased disclosure requirements assists with driving emissions reductions and ensuring adequate consideration of climate change risks.

Value – The material presented in this chapter is expected to be useful for informing the continuing debate around the regulation of and/or provision of guidance to companies about the disclosure of climate change related information to investors and other stakeholders.

Purpose – To investigate whether investor interest in climate issues affects the carbon behavior of the corporations in which they may invest (target corporations).

Methodology/approach – We developed the Finance and Climate Database, merging data on ownership, carbon disclosure, and investor climate interest from several sources, with 30,840 shareholder unit observations. We supplemented analysis of this with interviews.

Findings – Climate-interested investors (CIIs) account for well over a third of the ownership of the world’s very large corporations. More activist CIIs may make a difference to carbon behavior of target corporations where their shareholdings are large enough to enable them to exert power, at or above around 1.5 percent of a target company’s shares. Share price volatility also strongly affects carbon behavior, and the balance of power in investment presently favors the short term over the long term.

Research limitations/implications – More precise proxies for carbon interest and carbon behavior would benefit future research.

Social implications – There is potential for far greater influence by individual CIIs. The most important factor in shifting the balance of power from the short term to the long term would be global agreement on a carbon pricing system.

Originality/value of chapter – This is the first time such a database has been developed or used for this purpose.

Purpose – Investor activism is the attempt by a dissident shareholder to alter firm behavior by filing a shareholder resolution with the firm. Faced with a shareholder resolution, management can either oppose it or attempt to negotiate a settlement. This study examines the factors that would cause a firm to adopt a compromise position with a dissent investor.

Methodology – A logistic regression is run in which the result of the shareholder resolution (whether or not a compromise has been researched) is a function of the topic of the resolution, the proposer of the resolution, and the firm’s history of compromising on previous shareholder resolutions. The model is tested using a sample of 762 shareholder resolutions filed in Canada over an eleven-year period from 2000 to 2010.

Results – The results indicate that compromise is more likely to occur when the shareholder resolution addresses an environmental or social responsibility issue, and when the dissident shareholder is an investment or mutual fund.

Practical implications – Institutional and mutual funds control the financial resources necessary for the firm’s survival. As such, firms are more likely to compromise when these powerful investors put forward shareholder resolutions. Furthermore, firms are more likely to compromise when the resolution does not address the core activities of the firm.

Originality – This study examines the factors that encourage Canadian firms to adopt a compromising strategy when confronted by dissident shareholders.

Purpose – The global surge in institutional investors in the past decade or so has aroused interest in the role institutions play, or should play, in regard to the monitoring of the company financial performance. This study explores the nature of the relationship that exists between institutional ownership, corporate governance, and company financial performance.

Methodology/approach – Using Ordinary Least Squares (OLS) regression technique on 391 company-year observations between 2005 and 2010 to examine the nature of the relationship that exists between firm performance (PER) and ownership variables, and test whether this relationship is significant.

Findings – Our evidence provides support for the view that top five institutional shareholders take a longer-term view and are more involved with governance suggesting that the size of shareholdings has an effect when it comes to monitoring managerial decisions.

Research limitations/implications – Due to the small sample size, caution should be exercised when interpreting the results of this study. Also, it is to be noted that this study is based on a small country with an open capital market where there is high proportion of institutional ownership.

Practical implications – The results provide useful insights into the role different types of institutional investors play in terms of enhancing both governance and firm performance. Our analyses suggest that in mitigating principal-agent conflicts, size of ownership has an influence.

Originality/value of chapter – Our study adds to the literature by focusing on the role institutional investors’ play in New Zealand. Our study adds to the theory by showing that ownership type is important for mitigating agency conflicts.

Purpose – This chapter presents the results of an exploratory study carried out on activist institutional investor strategies. It aims to identify the way in which different types of institutional investors are reacting to new institutional pressures in the French context.

Design/methodology/approach – Our methodology is based on a series of semi-directive interviews, combined with additional relevant data.

Findings – The interpretation of results makes use of institutional theory, more specifically the work of Oliver (1991). Our study shows that active institutional investors may opt for different responses when confronted with new institutional pressures, and that these responses would seem to depend on antecedents underlined by Ryan and Schneider (2002), which in turn depend on the nature of their business relationships with the firm in which they invest. Whereas pressure-sensitive investors (such as banks and insurance companies) generally adopt acquiescence responses, pressure-resistant investors (such as pension funds and investment funds) pursue joint strategies of co-optation, influence or control with key actors such as local and international proxy advisors and French investor associations. Acting conjointly, certain pressure-resistant investors are often considered as institutional entrepreneurs in that they initiate changes and actively participate in the implementation of new norms in the field of shareholder activism in the French context. In parallel to this ongoing professionalization, other pressure-resistant investors such as activist hedge funds seem to lack sufficient legitimate power to be effective.

Originality/value – This chapter illustrates that the level of institutional investor activism depends largely on the relevant national legal framework. It also shows how institutional investor coalitions take advantage of new institutional pressures to enhance their legitimacy or increase the effectiveness of their action.

Purpose – Institutional investors are facing increased pressure and threats of legislation from the European Union to abandon passive ownership strategies. This chapter investigates the legal prerequisites for active ownership among institutional investors in two Scandinavian countries to highlight differences in the legal framework that potentially account for apparent dissimilarities in the practice of shareholder activism.

Design/methodology/approach – Data on shareholder proposals from Danish and Swedish annual general meetings from 2006 throughout 2010 suggest that institutional investors are approximately a thousand times more active in Sweden than in Denmark.

Findings – The comparative study of the legal framework for shareholder activism shows diminutive legal distance in general, however, we find that the shareholder-based nomination committee employed in Sweden constitutes an exception. This is relevant, as such a setup transfers power from the board of directors to the owners. Presumably, this reduces the impact of free-rider and collective action problems, and increases the shareholders’ inclination to make proposals, which is also what we find. Moreover, we find other differences in the legal framework that support the transfer of power to the owners.

Research implications – We contribute to literature by investigating the importance of local governance mechanisms created by the legal framework – an area where research is scarce. The chapter discusses how two classical theoretical dilemmas – free-rider problems and collective action problems among shareholders – can be reduced by the implementation of local corporate governance elements.

Originality/value – The chapter outlines the actual practice of shareholder activism, in terms of proposals, in Denmark and Sweden, and highlights divergent legal elements which theoretically transfer power to the shareholders. Thus, regulators should be aware of the impact by local governance mechanisms, and how shareholders react under different legal prerequisites.

Purpose – This study investigates the relationship between the ownership structure and the corporate social responsibility (CSR) policies of the Italian listed banks. In particular, it focuses on the impact that institutional investors characterized by a philanthropic orientation (banking foundations) exert on the socially oriented management of the Italian financial institutions.

Methodology – This chapter adopts a case study approach. It examines the CSR of the bank Monte dei Paschi di Siena and the role that its controlling shareholder (Fondazione MPS) plays in promoting the social strategy implemented by the Italian bank.

Findings – The Monte dei Paschi di Siena CSR strategy appears to be strongly influenced by the activity of its institutional investor. The skills, knowledge, and the cultural proneness toward social issues of the Fondazione MPS are successfully transferred to the bank and shape its social strategy.

Research limitations – This chapter suffers of the limitations generally associated to the case study research methodology. In particular, the findings of this study can be extended to other cases only after a detailed examination of market wide, institutional and corporate governance differences.

Social implications – The positive relationship between nonprofit institutional investors and the CSR strategy effectiveness unveils corporate governance mechanisms useful to increase the overall value creation process of the organizations.

Originality/value of the chapter – This study contributes to the CSR literature by analyzing if and how the philanthropic nature of the blockholders affect the CSR policies carried out by the entities they control.

Purpose – To discover how SRI develops in the Asian context.

Methodology/approach – Extended search of SRI initiatives analyzed with Scandinavian neo-institutional approach on how ideas travel and Buddhist Economy.

Findings – Chinese SRI-initiatives imitate western peers, but the imitation results in partial isomorphism that will probably have a weak influence on Chinese companies in ESG.

Research limitations/implications – A limitation of the study is a lack of information and transparency on Chinese homepages.

Practical implications – Chinese SRI is in an early state, and will need back-up and push to become active if it will be able to influence Chinese companies.

Social implications – It is important to have a critical stance, and not trusting optimistic statements about SRI in China as a mean to integrate ESG activities in Chinese companies.

Originality/value of chapter – One of the first overviews and critical analysis of SRI in China.

Purpose – Responsible investor (RI) engagement seeks to change corporate strategic priorities while balancing the financial imperative. This chapter uses an institutional theory framework to explore the tension between financial performance and environmental, social, and governance (ESG) issues in RI engagement.

Methodology – Discourse of the proponent, supporters and opponents of Australia’s first climate change shareholder resolution – a minority proposal, will be analyzed using framing analysis.

Findings – Framing indicated that the discourse emphasized the dominant financial performance logic while often omitting the ESG logic. One possible explanation is that the process of shareholder proposal nomination and the financial imperative of investment organizations effectively co-opted the engagement.

Research limitations – A case of responsible investment engagement is used to illustrate multiple logics in the investment field. Although there are significant limitations to drawing inferences from a single example, the discussion is relevant to RI support for engagement initiatives such as the UN Principles of Responsible Investment clearinghouse and Carbon Disclosure Project Carbon Action. This chapter argues that attempts to change corporate strategic actions on climate change by RI through engagement will be less effective while the financial performance logic provides relatively more legitimacy to investors.

Practical implications – Integrating the ESG logic with the financial logic is vulnerable to co-optation due to incommensurability. Operationalizing both logics requires establishing a boundary between ESG and financial logics to develop legitimacy.

Social implications – RI engagement on climate change has the potential to be an important part of the social response to the sustainability agenda.

Originality – In applying institutional theory to RI climate change activism this chapter presents original insights into the potential of engagement to effect change.

Purpose – These last three years, the global reputation of microfinance has been damaged by some major crises, notably in India. The Microfinance Investment Vehicles (MIVs), funded by public money and socially inclined investors, are believed by observers to be part of the causes of the crises (von Stauffenberg & Rozas, 2011). As a consequence, they now have to demonstrate their commitment to the social mission of microfinance. This chapter aims at putting forward the debate on MIVs’ ability to effectively contribute to the social mission of microfinance by analyzing how they integrate social performance in their investment decisions.

Methodology/approach – Analysis of interviews with microfinance fund managers based on a framework of recognized impediments to a socially responsible approach in investing.

Findings – While social performance is recognized by respondents to be an important topic for the industry, fund managers still do not give a strong role to social criteria in investment decisions. The findings of the qualitative analysis in the chapter demonstrate that this is linked to a number of major impediments such as the tendency to believe that microfinance is social per se, the lack of standardization in social performance tools, and also a loose regulation regarding social reporting.

Research limitations/implications – The findings of the study are limited due to the relatively small sample size and the focus on fund managers’ answers only. Future research could investigate the viewpoints of different stakeholders in the investment process, such as the back investors of microfinance funds or the regulatory institutions.

Originality/value – To the best of our knowledge, this is the first attempt to get insights on the impediments to a stronger focus on social performance by MIVs, with the application of a recognized framework from the Socially Responsible Investment (SRI) literature.

Purpose – Institutional investors need to move beyond first- and second-generation interpretations of Corporate Social Responsibility (CSR) and Socially Responsible Investment (SRI) (based on negative filters), and also beyond third and fourth generations (based on positive and integrated filters), which are more sophisticated but still limited, and toward a fifth generation of SRI and CSR. A fifth-generation model systematically incorporates critical intangibles, such as human capital analysis, into the Environmental, Social, and Governance (ESG) investment process.

Methodology – This chapter incorporates a literature review and draws on a range of qualitative research and case studies on the current and potential role of regulators to regulate nontraditional measures of value.

Findings – The power of institutional investors is currently based on incomplete information from listed companies on how they create value, yet it rests on superior knowledge and insight into the workings of the companies in which they invest, and is only as strong as the quality of the information it uses to make investment decisions on behalf of clients.

Research implications – More research on the role of human capital analysis, and its regulatory consequences, is required.

Practical implications – Regulators need to act within the context of these fifth-generation models in order to create the environment for more transparent investment recommendations.

Originality of chapter – This chapter contributes a qualitative and conceptual perspective to the debate on the role of regulation beyond the global financial crisis.

Purpose – The financial crisis has exposed a behavioral paradox: although asset managers are putting significant effort into meeting institutional pressures to demonstrate transparency and responsible behavior, their actual investment behaviors seem to remain inconsistent with responsible ownership. We seek to understand asset managers’ motivations to use externally defined environment, social, and governance (ESG) information to engage in sustainable investment.

Methodology/approach – We draw on insights from the sensemaking literature, as well as institutional, behavioral, and cognitive theories to shed new light on asset managers’ motivations to demonstrate conformance with ESG criteria.

Findings – The more asset managers demonstrate conformance, the less likely they are to make an effort to integrate sustainability and long-term, return-making concerns in their investment behaviors. As a result of the organization’s decoupling strategy, asset managers who are obliged to justify responsible behavior tend to have a limited sense of responsibility for encouraging long-term changes in corporate behavior.

Practical implications – We argue that calls for greater transparency in investment decisions under the guise of demonstrating conformance to ESG information requirements will not lead to more sustainable investment behavior.

Originality/value – This chapter challenges the assumption in the sustainable investment literature that the common use of ESG criteria enables investors to pressure and empower companies in the long term.

Purpose – The purpose of this chapter is to explore the proactive role played by investor relations officers (IROs) in enhancing the quality and delivery of corporate social performance (CSP) information to social responsibility investment (SRI) analysts and investors, thereby improving the link between CSP and corporate financial performance (CFP). The increasing pressures on corporations to produce and communicate CSP information will be described, as well as how the timely and meaningful communication of CSP can improve CFP.

Methodology/approach – Subsequent to a review of relevant literature, three case examples from McDonald’s, Nestlé, and Stora Enso illustrate Hockerts and Moir’s grounded theory framework that suggest how IROs can improve communication of CSP.

Findings – This chapter illustrates three levels of communicating CSP information. First, IROs target SRI investors and respond to ESG inquiries and surveys. At the second level, IROs integrate ESG information into business strategy and financial results. At the third level, IROs actively market CSP and create a two-way proactive dialogue between SRI investors and senior management and the board.

Practical implications – This chapter provides practical examples to improve ESG activities and their communication via the IRO to SRI analysts and investors.

Originality/value of chapter – This chapter contributes to the literature on the CSP–CFP link by illustrating how proactive IROs are improving the CSP information channel to SRI securities analysts and investors. Furthermore, it advances the theory and research concerning the impact of the information channel between IROs and securities analysts behind the CSP–CFP link.