Firms’ Reaction to Changes in the Governance Preferences of Active Institutional Owners

Abstract

In November 2012, Norway’s sovereign wealth fund (NBIM) unexpectedly announced that it would foster better corporate governance practices in its portfolio firms by articulating specific governance expectations. We use this sudden change in governance preferences as a natural experiment to understand shareholder influence among active ownership investors. We first document how the fund re-balanced its portfolio to achieve this governance objective believed to be aligned with investment objectives. We then show how firms for which the fund is an important investor and also firms that are very important to the fund reacted by aligning their corporate governance following NBIM expectations. Marginal investment changes and governance changes become more correlated in the new equilibrium. We also examine the heterogenous response of firms to institutional pressures. This paper advances existing research on active owners’ influence on firms, and particularly on firm governance practices.

Keywords: Corporate Governance; Institutional Ownership; Sovereign Wealth Funds

JEL Classification: F30, G32, G34