Institutional Investor Corporate Engagement Theory: An Empirical Review of the Calpers Focus List Program

Abstract

The institutional investor corporate engagement theory holds that investors may use their position of ownership to monitor and engage corporations within which they are invested in order to better align managers’ interests with their interests. The financialization of pension funds has generated a group of institutional investors interested in long-term fundamental corporate value. The maintenance of long-term value often requires good corporate governance as the two are positively correlated. Institutional investors, notably pension funds, are increasingly resorting to corporate engagement initiatives to ensure that good corporate governance practices and structures are implemented within corporations in which they are invested. The California Public Employees Retirement System (CalPERS) has been a market leader in corporate engagement. The success of the CalPERS program has not yet been investigated with respect to its stated objectives. By conducting an industry-matched control group based investigation over a 15 year study period (1992-2006) it has been determined that the CalPERS corporate governance engagement program is a success. Corporations which were once financially under-performing report industry-specific average 1, 3, and 5-year shareowner returns post-engagement (p<0.05). These same corporations also demonstrate industry-specific averages of corporate governance compliance scores and corporate governance risk assessments (p<0.05). Such results empirically support the institutional investor corporate engagement theory and elucidate the practical mechanisms of the theory. Successful engagement campaigns require tangible grievances, a reliable information source, a semi-strong form efficient market, and a competitive market for corporate control.

Keywords: Institutional Investor, Engagement, Corporate Governance, CalPERS