When (and Where) Activist Investing Goes Wrong
Activist investments by sovereign wealth funds (SWFs) can lead to deteriorating company performance, new research has found.
While evidence has shown that activist shareholders can boost company performance, this effect is dampened when the investor in question is a SWF, according to a study by finance professors Bernardo Bortolotti (Università di Torino), Veljko Fotak (University at Buffalo), and William Megginson (University of Oklahoma).
“Sponsoring governments may impose noncommercial, political objectives, not fully consistent with the shareholder wealth maximization typically pursued by private firms.”On average, the authors found that the difference in initial returns between investments made by SWFs and private sector investors was roughly $60 million. Investments by “highly politicized” SWFs—those under strict government oversight, usually by nondemocratic regimes—were the lowest performing.
“We found that the worst returns were associated with funds whose governance structure allowed for significant government interference, especially when those funds acquired large or controlling stakes and took a seat on the company’s board,” said Fotak.
According to the study, “sponsoring governments may impose noncommercial, political objectives, not fully consistent with the shareholder wealth maximization typically pursued by private firms.”
However, not all SWFs in the study behaved as activist investors. In fact, many were found to “refrain from taking an active corporate governance role in target companies in order to not generate political opposition or regulatory backlash,” the report continued.
Fotak and his co-authors found that SWFs were reluctant to take board seats, with funds appointing directors in just 9% of investments—compared to a quarter of private sector investments.
In particular, they found the lowest scores of political interference among SWFs originating from advanced countries such as Norway, Australia, and Korea.
This finding is backed by another recent study, which found that SWFs are less likely to be activist than their institutional peers due to their size and legal restrictions.
But even as passive investors, SWFs still did not perform as well as their private-sector counterparts: According to the research, passive SWFs “at best, do not contribute to the effective monitoring of target firm managers and, at worst, help to entrench underperforming management teams.”
Notably, investments from the Norway Government Pension Fund—Global were not associated with any negative effects—it being “widely seen as a more sophisticated and nonthreatening investor than many of its peers.”
“We cannot treat Norway’s government fund the same as funds from less democratic regimes,” Fotak said. “We must recognize differences in their behavior and provide incentives for them to act as transparent, conscientious investors.”
Access the study, “The Sovereign Wealth Fund Discount: Evidence from Public Equity Investments”, via Oxford Journals.