GCGC (1) The motivation and effectiveness of institutional investors
The Global Corporate Governance Colloquia (GCGC) is a global initiative to bring together the best research in law, economics and finance relating to corporate governance at a yearly conference held at 12 leading universities in the Americas, Asia and Europe. The 2019 event was hosted by the Research Center SAFE (Sustainable Architecture for Finance in Europe) at the House of Finance and Goethe University. This article is the first in a four-part summary of the conference which seeks to highlight some of the interesting new work and research questions that were addressed at the event.
Can institutional investors be considered right or left wing?
New research suggests that the answer to this question is affirmative. In an innovative paper presented by Prof. Enrichetta Ravina (Kellogg School of Management, at Northwestern University), institutional investors are mapped onto a left-right dimension based on their proxy voting records in publicly listed Russell 3000 firms for the fiscal year 2012, using a scale where far-left are socially responsible and the far-right are “money-conscious” investors. It provides a theoretical background on shareholders’ objectives, profit maximization as well as implications of non-takeover-threats on shareholders’ willingness not to maximize their profits. In the paper, if significant ideological differences are observed, this reflects an absence of shareholder unanimity. The paper also finds that the proxy adviser ISS makes voting recommendations that place it in the centre while public pension funds and other investors on the left support a more social and environment-friendly orientation of the firm and fewer executive compensation proposals. The prediction accuracy of the paper was found to be very high.
Reorienting the Index Fund debates through the lens of agency-cost theory
By emphasising that stewardship decisions are made not by the fund’s beneficial investors but by investment fund managers, Prof. Lucian Bebchuk (Harvard Law School) presented an agency-cost theory of Index fund stewardship decisions while identifying a range of policy implications. Furthermore, the paper finds that Index funds have both incentives to under-invest in stewardship and incentives to be excessively deferential to corporate managers. The paper suggests that stewardship amongst the 'Big Three' Index Fund families focuses on the existence of deviations from their governance principles and that such deviations serve the private interests of the Big Three by enabling economies of scale that reduce required investments in stewardship. The body of evidence presented is shown to be consistent with and can be explained by the agency-costs analysis. It further argues that this analysis should reorient important ongoing debates regarding common ownership and hedge fund activism.
Active Ownership - does it have an impact?
This study which was presented by Prof. Vicente Cuñat (London School of Economics) contributes to the question of whether active ownership investors, specifically Sovereign Wealth Funds, can affect firm policies. The study examines the impact of an unexpected announcement, in November 2012, by Norway’s sovereign wealth fund (NBIM) that it would enhance corporate governance in its portfolio firms by articulating specific governance expectations. The effect of the announcement on the overall governance level of NBIM portfolio companies was found to be positive, with a 5 % overall improvement in governance.
The practicalities of Sustainable Finance
Sustainable Finance, with a focus on the provision of finance to investments taking into account environmental, social, and governance considerations, was the subject of a panel discussion during the event with Carine Smith Ihenacho (Norges Bank Investment Management), Monica Mächler (Zurich Insurance Group) and Christian Thimann (Athora Germany Holdings) participating. The panellists observed that climate targets can only be reached if capital flows are going to be reoriented and responsible investments can generate long-term value. This requires successful ESG integration regarding all actively managed asset classes, which requires adequate data and includes active ownership practices, such as voting practices. The panel emphasised the imperative that sustainable finance becomes a multi-channel mainstream approach with institutional investors striving to improve market standards and create impact through voting decisions and company dialogue, i.e., exercising ownership; in addition to supporting academic research. The need for better sustainability disclosures by companies to allow for appropriate company assessments and the ability to conduct sustainable investment decisions was also stressed. Regarding pricing, the panel noted that so far prices do not reflect ideas of sustainable finance (e.g., regarding prices for different energy sources). Therefore, property rights would have to be assigned for pollution pricing. They observed that companies seem to be slightly concerned about their potential for exclusions from investments as they could be put on observation lists and rehabilitate as their exclusion criteria are no longer valid.
The next GCGC Conference will take place on 12-13 June 2020 at Seoul National University, South Korea. Submissions are now being accepted (deadline 13 September). Click here for details.
Bolton, Patrick and Li, Tao and Ravina, Enrichetta and Rosenthal, Howard, Investor Ideology (June 30, 2019). Columbia Business School Research Paper No. 18-21; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 557/2018. Available at SSRN: https://ssrn.com/abstract=3119935 or http://dx.doi.org/10.2139/ssrn.3119935
Bebchuk, Lucian A. and Hirst, Scott, Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy (May 31, 2019). European Corporate Governance Institute (ECGI) - Law Working Paper No. 433/2018; Forthcoming, Columbia Law Review, Vol. 119, 2019; European Corporate Governance Institute (ECGI) - Law Working Paper No. 433/2018; Harvard Law School John M. Olin Center Discussion Paper No. 986. Available at SSRN: https://ssrn.com/abstract=3282794 or http://dx.doi.org/10.2139/ssrn.3282794
"Active Owners and Firm Policies" Ruth V. Aguilera; Vicente J. Bermejo; Javier Capapé; Vicente Cuñat (2019)
GCGC Conference Hosts by year:
2015 – Stanford University, USA
2016 – Swedish House of Finance, Sweden
2017 – University of Tokyo, Japan
2018 – Harvard University, USA
2019 – Frankfurt University, Germany
2020 – Seoul University, Korea
2021 – Yale University, USA
2022 – University of Oxford, UK
2023 – Peking University, China
2024 – Columbia University, USA
2025 – Imperial College London, UK
2026 – National University of Singapore
GCGC Secretary General
Professor Marco Becht
About the Global Corporate Governance Colloquia (GCGC)
The Global Corporate Governance Colloquia (GCGC) is a conference series, which, for an initial period of 12 years, brings together the best research in law and finance relating to corporate governance each year. The conferences, which are organised by the ECGI, are held in turn at 12 major universities that are leaders in the fields of law and finance in the Americas, Asia and Europe.
These conferences attract invited and contributed research papers of the highest scholarly quality. It includes at least one session devoted to the region or country where the conference takes place. These events are primarily “academic to academic” conferences with a few high profile participants from industry and the public sector.
The launch conference was held at Stanford University in June 2015, and since then has also convened in Stockholm, Tokyo, Harvard and Frankfurt. Each University partner of the series will host the conference once in a 12 year period.
The 12 hosting institutions are:
Columbia University, Goethe University Frankfurt, Harvard University, Imperial College London, National University of Singapore, Peking University, Seoul National University, Stanford University, Swedish House of Finance, University of Oxford, University of Tokyo and Yale University.
The aim of the conference series is to attract current research papers of the highest scholarly quality in the field of corporate governance. The conferences are primarily 'academic to academic' events with some participants from industry and the public sector including the practitioner partners of GCGC and other invited panelists. The current practitioner partners are Zurich Insurance Group, and Japan Exchange Group (JPX) and others may be considered.
About the European Corporate Governance Institute
The ECGI is an international scientific non-profit association which provides a forum for debate and dialogue between academics, legislators and practitioners, focusing on major corporate governance issues and thereby promoting best practice.
Its primary role is to undertake, commission and disseminate research on corporate governance. Based upon impartial and objective research and the collective knowledge and wisdom of its members, it can contribute to the formulation of corporate governance policy and development of evidence based best practice.
In seeking to achieve the aim of improving corporate governance, ECGI acts as a focal point for academics working on corporate governance in Europe and elsewhere, encouraging the interaction between the different disciplines, such as economics, law, finance and management.