Public Entities as Institutional Investors for Corporate Sustainability

31 Pages Posted: 7 Jun 2017 Last revised: 2 Nov 2017

See all articles by Jukka Mähönen

Jukka Mähönen

University of Oslo - Faculty of Law; University of Helsinki - Faculty of Law

Date Written: June 6, 2017


Short-termism or ‘myopia’ is seen as the first-order problem faced by modern business firms. There is however expectation gap between what investors really are looking for, and what the management think they are looking for. Many executives embrace still the conventional wisdom that the mainstream investors care little about an organization’s long-term performance. A growing number of investors are paying attention to long-term performance, as evidence mounts that sustainability-related activities are material to the financial success of a company over time. Investors care more about sustainability issues than many executives believe. There is a gap however and in many cases the investors and especially institutional investors are to blame it. The investment chain is often long and complex, with numerous intermediaries that stand between the ultimate beneficiary and the company.

What is important many of these institutional investors are either public entities or controlled by them. Federal, national, subnational and local governments and authorities act in the markets at least in four roles, as direct investors, portfolio investors, regulator-supervisors and procurers. Public entities have been investing directly both unlisted and listed companies especially in the utility and energy sectors, infrastructure as transport, and real estate. Portfolio investments are usually done through special purpose vehicles, as pension and investment funds but also investment companies. Many governmental regulatory and supervisory agencies have also active market participant role. Lastly, public entities participate the markets as contractual partner not only in public procurement but also in other contractual networks and value chains.

In this paper I focus on public entities’ role as institutional investors and how they can affect corporate behaviour. As far as institutional investors’ behaviour in their portfolio companies’ governance is concerned, they have two choices available if they are unhappy with the portfolio company: (i) they can engage with management to try to effect change (‘voice’ or direct intervention) especially in matters as strategic initiatives, the appointment of board members and managerial remuneration, or (ii) they can use trading decisions and especially leave the firm by selling shares (‘exit’ or ‘voting with their feet’). The important thing is that the mere threat of exit can also discipline the management of the portfolio company. However voice, especially when conducted behind the scenes with the board, is also important.

In the following, I will discuss these issues from public institutional investors’ point of view and test these claims especially based on Norwegian examples. A specific attention is given to ‘block-holding’, the role of how a big (over 5 or 10 per cent) stake an investor has in the productive company affects her behaviour. Generally, block-holders are a diverse class of investors, comprising of hedge funds, mutual funds, public and private pension funds, national and sovereign wealth funds, individuals, and corporations, including civil law foundations. These different investors may engage in different forms of governance, be affected by firm characteristics in different ways, and have different effects on firm outcomes.

The structure of the paper is the following. In chapter 2 I discuss different kind of institutional shareholders. In chapter 3 I give a glimpse to the important issue of financial engineering and especially securities lending is given. In chapter 4 exit and voice and discussed deeper. Chapter 5 concentrates on the two important types of public institutional investors, national and sovereign wealth funds and a specific type of pension funds, public pension reserve funds. In chapter 6, I concentrate on sustainability. Chapter 7 concludes the paper.

Suggested Citation

Mähönen, Jukka T, Public Entities as Institutional Investors for Corporate Sustainability (June 6, 2017). University of Oslo Faculty of Law Research Paper No. 2017-25, Nordic & European Company Law Working Paper No. 16-28, Available at SSRN:

Jukka T Mähönen (Contact Author)

University of Oslo - Faculty of Law ( email )

Karl Johansgt 47
N-0162, Oslo
+4722859534 (Phone)


University of Helsinki - Faculty of Law ( email )

Porthania 5th Floor
P.O. Box 4
Helsinki, FIN-0001 4

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