WHEN SHAREHOLDERS of Swiss mining giant Xstrata ratified the
company’s September 2012 takeover by Swiss
commodities trader Glencore International, they had one
reluctant activist investor to thank: Qatar Holding (QH). The
global investment firm, a subsidiary of the
emirate’s sovereign wealth fund, Qatar Investment
Authority (QIA), played a critical role in getting Glencore to
agree to better terms. QH also galvanized efforts by other
Xstrata shareholders, including sovereign wealth fund peers
Government of Singapore Investment Corp. (GIC) and
Norway’s Norges Bank Investment Management (NBIM),
to lobby for better management of the combined entity.
This display of activist shareholder power
wasn’t the first time that a sovereign wealth fund
had exercised its right to influence a corporate takeover, but
it was unusual for its high drama and protracted intensity.
Most sovereign funds are still reluctant to be seen as activist
investors because they don’t want their stock
purchases to spark controversy and create resistance in
countries where common myths about their political motivations
seem to persist. Unwilling to risk reputational damage, many
funds hang back, content to remain largely passive investors in
listed companies.
"Most of them are still very reluctant about being in the
limelight," says Simon Wong, adjunct professor of law at
Northwestern University in Chicago and a visiting fellow at the
London School of Economics and Political Science. "They are
sensitive to their actions being misinterpreted."
But QH’s actions may signal a shift in attitude
among some of the world’s largest sovereign wealth
funds. Over the past two years, as these funds have begun to
make more direct investments, buying sizable stakes in public
and private companies, they’ve become increasingly
aware of the importance of good governance in achieving
positive investment outcomes. That realization has spurred some
of them to become more engaged, despite their caution about
being perceived as activist investors. "Few of them want to
take a board seat," says Wong, "even if their stakes may be
large enough to warrant asking for one."
In the Glencore-Xstrata deal, however, QH
didn’t need a board seat to influence the outcome
of the proposed merger, whose terms benefited all of
Xstrata’s minority shareholders by the time the
$76 billion deal finally closed in May 2013. In February
2012, when the deal was first announced, QH held slightly more
than 3 percent of Xstrata stock, but it began buying more
shares in daily transactions through mid-June, eventually
accruing a 10.98 percent stake. As the firm’s
position grew, QH executives made it clear that the offer on
the table from Baar, Switzerland–based Glencore, which
would have given Xstrata shareholders 2.8 shares of the merged
entity for every share of Xstrata they owned, was too low.
Meanwhile, NBIM, the arm of the Norwegian central bank that
manages the $719 billion Government Pension Fund Global
(GPFG), began building its own position in Xstrata. By
late-summer 2012, QH and NBIM held enough common shares between
them to block the merger unless Glencore offered better terms.
QH argued that Xstrata shareholders should receive 3.25 shares
in the new company for each of their Xstrata shares. Although
that ambitious goal was never met, after a remarkable chain of
events , Xstrata shareholders ultimately received 3.05 Glencore
shares for each Xstrata share.
As fearless an activist investor as QH can be, only
Norway’s NBIM consistently puts corporate
governance issues at the center of its investment process.
In allocating funds on behalf of GPFG, NBIM has developed an
extensive program that engages target companies on governance
and environmental and social concerns. In November 2012, for
example, it filed shareholder proposals for proxy access (which
gives shareholders the right to nominate candidates for board
elections on company ballot sheets) with six publicly traded
U.S. companies. They include San Francisco–based
brokerage firm Charles Schwab Corp.; Chicago-based global
derivatives trading giant CME Group; Irving,
Texas–based natural-gas and oil exploration company
Pioneer Natural Resources Co.; Framingham,
Massachusetts–based multinational office retailer
Staples; and banking and communications group Western Union
Co., of Englewood, Colorado.
The right to nominate candidates to the board of a public
company is a fundamental principle of good corporate
governance. Although supported by U.S. law, the process is
burdensome and costly to the nominating shareholders, who must
submit alternative agendas at annual meetings and distribute
documentation among investors at their own cost. Proxy access
simplifies things by letting shareholders put their nominees
straight on the company’s agenda. The impetus for
such action has only grown since the global financial crisis,
which revealed that many boards of financial services firms had
failed miserably in their oversight of management.
"Norway’s approach benefits GPFG and the market
as a whole," says Cristina Ungureanu, a consultant at
Milan-based corporate governance advisory firm Crisci &
Partners and a member of the European Corporate Governance
Institute.
Depending on their organizational structures, some sovereign
wealth funds are better positioned than others to take hold of
corporate governance issues. Singapore’s GIC and
Temasek Holdings often invest directly in public and private
companies, sometimes buying them outright. As a result,
they’ve become savvy, well-staffed and highly
motivated activist shareholders. In September 2011, for
example, $157 billion Temasek installed Goh Yong Siang,
its head of strategic relations, as a director of Fort Worth,
Texas–based oil field service company FTS
International after the sovereign wealth fund led a consortium
of investors in taking a combined 70 percent ownership stake in
FTS International’s owner, Frac Tech Holdings. And
in May 2012, Temasek challenged London-based global bank
Standard Chartered by calling for the appointment of more
independent directors while abstaining from a vote for the
reelection of the company’s nonexecutive
directors.
GIC, which also was an investor in Xstrata, has gone beyond
mere shareholder activism and now boldly questions regulators
in the countries where it invests. In April 2012 the fund
challenged British water regulator Ofwat, which had proposed
radical changes to the way it managed licensing for all water
companies. With more than £5 billion
($7.6 billion) invested in U.K. infrastructure, GIC had a
particular stake in the outcome because it owns 33 percent of
Kelda Group, the parent company of Yorkshire Water, one of the
companies whose profits might have been hurt had Ofwat gained
greater freedom to review licensing arrangements and set new
price controls.
Although sovereign wealth funds are becoming more outspoken
shareholders, not all of them are as brash as GIC and Temasek.
Many, including QIA, still seek to strike a balance between
guiding their strategic investments and making headlines. QIA,
for example, has board seats at British supermarket chain J
Sainsbury and German automaker Volkswagen, but it
doesn’t tend to take the lead on corporate
challenges. Although it fought a fierce corporate battle over
better terms in Glencore’s takeover of Xstrata, it
has since abstained from voting on the retention of
Xstrata’s management.
Sovereign wealth funds are well aware of the reputational
risks that may stem from more-direct engagement with their
portfolio companies (not to mention regulators), but
they’ve woken up to the importance of good
governance. Companies following governance best practices make
for profitable investments, and companies that ignore
investors’ concerns — or are regarded as
self-serving in their compensation policies — have
been put on notice by the Glencore-Xstrata deal.
"The whole world is now more aware of the fact that lack of
corporate governance is one of the key reasons for not
investing in a company," says Monique Melis, global head of
consulting at London-based regulatory and due diligence
consulting firm Kinetic Partners.
Despite QH’s headline-grabbing role in
Glencore-Xstrata, few sovereign wealth funds appear eager to
engage in the aggressive shareholder activism practiced by some
hedge funds and large pension funds. Part of their hesitation
is political, but staffing challenges may also play a role,
Ungureanu explains. "Some of them still lack expertise and
human capital to tackle corporate governance issues," she says.
"Their activism will probably never reach the levels of other
traditional activist investors."
But sovereign wealth funds are among the prominent financial
institutions that have the most to gain by advancing good
governance practices — and keeping a watchful eye on
the companies in which they invest. As true providers of
long-term capital, they have the freedom to buy and hold
portfolio companies for years, if not decades, and to realize
the incremental gains of greater transparency and
accountability.