The soft leverage of transparency

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Norway’s sovereign wealth fund owns 1.5 per cent on average of every listed company in the world. That means it enjoys a lot of soft power in the corporate world that it is increasingly keen to exercise.

Norges Bank Investment Management has long excluded altogether a few companies on human rights or environmental grounds, but has also over the years gradually become more hands-on when it comes to governance in companies it still invests in.

This is done openly, with how it voted on directors, compensation etc all made public on its website (you can search for examples here). Since 2020 it has included a rationale every time they voted against the board’s recommendation.

But in 2021 NBIM started to pre-disclose all voting intentions five days before any shareholder meeting, arguing that “a lack of information makes the market for voting advice not fully efficient”.

We now have the provisional results. From a paper published earlier this month, with Alphaville’s emphasis below:

We analyze the impact of a large shareholder disclosing its voting decisions prior to shareholder meetings on final vote outcomes for management and shareholder proposals. We find that pre-disclosures of against votes lead to an average increase of 2.7 percentage points in against votes by other shareholders. Voting pre-disclosures are more effective for proposals with a higher information demand, and if the large shareholder pre-discloses a decision that is not directly observable from its proxy-voting guidelines. The results highlight the potential for large institutional investors to use voting pre-disclosure as a tool for influencing other shareholders and, ultimately, companies.

Basically, Rüdiger Fahlenbrach of ECGI, Nicolas Rudolf of the University of Lausanne and Alexis Wegerich of NBIM found that by disclosing how it plans to vote the $1.3tn Norwegian SWF could in practice very roughly treble its clout on average.

Moreover, when NBIM comes out in favour of a shareholder proposal (which are virtually always opposed by management and the board) it increases the favourable vote by 3.6 percentage points.

The apparent leverage of transparency means that NBIM is a genuine player in AGM season, with influence beyond even its chunky shareholdings. Its CEO Nicolai Tangen — never shy to tout a win — celebrated the paper’s results by posting on LinkedIn: “We LOVE the power of transparency!”

However, this needs to be put in context. We’re still not talking massive power here, and it means that NBIM’s influence still trails WELL behind that of the main proxy advisers, Glass-Lewis and ISS. When these two companies recommend a vote against a proposal, the negative tally increases by 6.5 and 12 percentage points respectively.

And of course, in the modern era of dispersed shareholders, large public companies can be hard to control even for large and influential investors. Successful shareholder rebellions are incredibly rare.

But the occasional nudge can still have an impact. A good example is NBIM very publicly saying it would vote against Tim Cook’s 2022 near-$100mn pay package (after ISS had also recommended shareholders vote against it). It didn’t work, but Apple almost halved Cook’s comp for 2023 because of “balanced shareholder feedback . . . and a recommendation from Mr. Cook”.

Perhaps the power of large common owners might actually lead to a new era of corporate probity, if they just band together a bit more often?