History and Investor Stewardship

Much literature is devoted to exploring the factors that shape institutional investors’ engagement in corporate governance. Agency theory, in particular, provides a key analytical framework, highlighting the constraints created by investors’ business models and competitive pressures in the funds management sector. Legal requirements, political pressure, and transnational developments can also influence investors’ approach to stewardship.[1]

But what about history? To what extent do an institutional investor’s origins influence their present-day behaviour?

This issue has intrigued me in relation to a significant Australian institutional investor: the industry superannuation fund. Industry funds are pension funds which manage contributions made on behalf of employees under Australia’s compulsory retirement savings scheme. Originally, the funds were established to manage retirement savings of employees within particular industries or sectors of the economy – hence their description as ‘industry’ funds. Although the funds are now open to employees from any industry or sector, the name ‘industry fund’ has stuck.

Industry funds adopt a distinctly activist stance in Australian corporate governance. This was highlighted on the international stage when, in 2020, a group of industry funds led a global investor revolt against the Australian/London listed resources company, Rio Tinto. The intervention, which prompted senior management and board changes, was in response to Rio’s destruction of ancient indigenous rock art in Western Australia and serious corporate governance shortcomings revealed by the incident. 

Industry funds’ activism attracts considerable political scrutiny in Australia because of the funds’ historical ties to the Australian trade union movement and the ongoing presence of union representatives on fund boards. Right-of-centre politicians and commentators regard the funds as financial Trojan horses for the unions and progressive politics. Industry funds and their supporters retort that the funds are apolitical investment vehicles focused on their members’ best interests.

As a consequence of substantial in-flows into superannuation, industry funds are on track to become some of the most powerful investors in Australia. It is critical that policy makers and researchers understand the implications of this development for Australian corporate governance. This requires a nuanced assessment of the funds and their role in Australian corporate governance which moves beyond the one-dimensional political debate referred to above.

As part of a current research project into industry funds, I have applied a historical lens to investigate the factors that underpin the funds’ prominent role in Australian corporate governance. This research has revealed an origin story that has several unique features. 

• First, the industry funds are not a capital markets innovation but a product of Australian industrial (labour) relations. They emerged in the 1980s as a part of a union campaign to compel employers to contribute to workers’ retirement savings. For pragmatic reasons, unions involved employer groups in the management of the funds and, to this day, fund boards contain both union and employer representatives. This arrangement gives the funds a unique connection to Australia’s labour markets and the business sector. 
• Second, the unions wanted to differentiate the industry funds from Australia’s financial services sector and therefore minimised the involvement of commercial financial services organisations in the operation of the funds. Unions and employer groups typically own the fund trustees and operate them on a not-for-profit basis. This structure has in turn influenced the ethos of the industry funds. The funds perceive of themselves as a distinct and unique feature of Australia’s finance sector — it is sometimes said that they consider themselves to be a social and capital markets ‘movement’.
• Third, the industry funds have faced sustained commercial and political scrutiny since their establishment. The funds have largely withstood this scrutiny. Their returns have regularly outperformed pension funds operated by banks and other financial services organisations and they have emerged largely unscathed from high-profile government and judicial inquiries.  
• Lastly, the industry funds embraced the strategic use of collective action from the early days of their existence. Among other things, this has involved the funds establishing a distinctive collective identity through joint marketing campaigns and founding an ecosystem of service providers and supporting organisations. The latter include the Australian Council of Superannuation Investors, a body which undertakes corporate governance advocacy and interventions on behalf of the funds.

The industry funds’ distinctive origin story sets them apart from other major actors in the Australian capital markets and likely goes some way to explaining the industry funds’ distinct style of stewardship. As highlighted by the Rio intervention, this style is characterised by attentiveness to investee company performance, an emphasis on ‘E’ and ‘S’ issues as well as ‘G’ issues, a willingness to take the lead in forceful engagement activities, and the strategic use of collective action. 

Applying a historical lens to the industry funds also raises an important question about the future. To a significant extent, the funds’ unique institutional DNA is a product of historical circumstance and is not hard-wired into the funds’ constituent documents or governing legislation. However, the funds are now evolving into major financial institutions with global operations. Will their institutional character change as they become globally significant investors and move further away in time from their origins? How will they change as senior leaders, who joined the funds in their formative years, retire in coming years? These questions merit careful consideration in light of forecasts which indicate that industry funds are on track to dominate the Australian capital markets.