Norway’s NBIM Flexes Its Activist Muscle

August 23, 2013 by Loch Adamson

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Source: Norges Bank Investment Management

NORWAY'S SOVEREIGN WEALTH FUND, the world’s largest, is starting to throw its weight around. In August the $731 billion Government Pension Fund Global (GFPG), managed by Norges Bank Investment Management (NBIM), an arm of the Norwegian central bank, revealed in its latest quarterly report that it has created a corporate governance advisory board. This board will counsel NBIM on active ownership and offer guidance on nomination practices at its listed portfolio companies.

The timing of the announcement, one month before Norway’s general election, has thrust the fund’s investment strategy and corporate governance into the spotlight. Since its inception in 1990, GFPG has been a relatively passive, risk-averse investor compared with other large sovereign wealth funds, such as Abu Dhabi Investment Authority ($400 billion) and China Investment Corp. ($569 billion). This cautious approach has contributed to GFPG’s annualized returns of just 3.1 percent over the past five years.

With an election looming, the fund’s meager returns have drawn fire from Norwegian politicians, finance analysts and other critics, who question its investment policy. For example, Sony Kapoor, director of international financial think tank Re-Define and a senior visiting fellow and strategy adviser at the London School of Economics and Political Science, has challenged NBIM’s exposure to the oil and gas industry, which leaves it vulnerable to price fluctuations. Norway’s conservative party leader and election front-runner, Erna Solberg, has also entered the fray. In August, Solberg proposed restructuring the fund and dividing some of its assets among separate teams to encourage them to achieve higher long-term returns.

NBIM chief executive Yngve Slyngstad hasn’t commented on Solberg’s proposal. But in a recent statement published on Norway’s Ministry of Finance website, Slyngstad defended the fund’s oil and gas assets by noting that because they account for just 6 percent of its total portfolio, selling them wouldn’t significantly change its overall reliance on the industry. He also said that NBIM would keep investing in oil and gas.

The fund aims to improve returns by forging closer ties with the companies in its vast portfolio. In an address to the Norwegian Parliament in April, Slyngstad highlighted NBIM’s engagement with nearly all of the 7,400 companies whose stock it owns. In 2012, NBIM voted "at more than 10,000 shareholder meetings," Slyngstad said, according to an official transcript. "We also engage in dialogue with a large number of companies and had 2,300 meetings with 1,300 companies last year," he added.

The CEO’s remarks highlighted a substantial increase in NBIM’s shareholder activism since 2003, when it participated in just 150 of its listed portfolio companies’ annual general meetings. Since then NBIM has introduced its own corporate governance principles and established an internal group responsible for shareholder voting and director nominations. This group has created a database of environmental, social responsibility and corporate governance developments at some 4,000 companies. To streamline its investment processes and improve communications with portfolio companies, NBIM recently transferred analysts from its ownership policy group to its equity management department.

In 2012 NBIM successfully lobbied four U.S. financial services firms — Charles Schwab Corp., CME Group, Wells Fargo & Co. and Western Union Co. — to give shareholders board nomination rights. In April 2013 it joined a board nomination committee for the first time when it voted on the appointment of directors at Swedish carmaker Volvo.

Such engagement lets NBIM tackle ethical issues without resorting to divestment and exclusion, but it isn’t afraid to invoke the latter. As of August 2013 the fund excluded 55 companies from its portfolio, mostly tobacco companies like British American Tobacco and nuclear weapons producers like U.S.-based Lockheed Martin Corp.

Exclusion is highly visible. But it has its disadvantages, according to Norway’s state secretary of the Ministry of Finance, Hilde Singsaas, who spoke at a May conference at the University of Cambridge’s Judge Business School. "When we exclude a company, we also lose the ability to exert influence through the exercise of ownership rights," Singsaas said. "Therefore exclusion should always be a measure of last resort." Singsaas sees active ownership as an alternative to exclusion that allows NBIM to directly influence specific companies’ policies. As an engaged shareholder, the fund can also apply pressure through mechanisms such as watch lists.

The new, three-member corporate governance advisory board, which consists of John Kay, a journalist with the Financial Times; Peter Montagnon, investment affairs director for the Association of British Insurers; and Anthony Watson, a director of London-based telecommunications company Vodafone Group, highlights NBIM’s growing clout as a corporate activist. As the Norwegian sovereign wealth fund formalizes its decadelong shift from predominantly passive investor to engaged asset owner, it’s gaining confidence in its ability to help shape portfolio companies’ governance decisions — and rebut criticism of its ethical-investment policies.

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