Norway's gigantic $650 billion sovereign wealth fund has just published an important note on what it expects in terms of corporate governance from the companies it invests with.
The sheer size of the fund, the world's largest sovereign wealth fund, makes its "expectations" influential. Its equity portfolio is worth $380 billion. The fund is a minority shareholder in more than 7,000 companies world wide. It says it is among the 10 largest shareholders in 2,400 companies and among the five largest in 800 companies. So when Oslo-based Norges Bank Investment Management—the groups that manages the fund—speaks, you can be sure people are listening.
NBIM is interested in protecting minority shareholder rights and board accountability, of course. But what makes the note so interesting is that it questions the popular idea of formalizing good governance into regulatory or legislative codes. Or even of attempting to apply a voluntary code of good governance across all companies.
"Such a perspective has led the firm to question the basis for the near-universal consensus in support of features appearing in corporate governance codes, given that NBIM finds gaps in academic evidence for many of them," writes Gavin Grant, the fund's head of active ownership, in an introduction to the NBIM note for the Harvard Law School Forum on Corporate Governance and Financial Regulation.
In other words, NBIM recognizes that codes cannot substitute for judgment, in part because different companies face a diversity of challenges that can justify a wide variety of governance structures.
From the note (emphasis mine):
The original 1992 UK code of good governance (by informal tradition referred to as the "Cadbury Code"), on which many subsequent national and international codes have been based, was not intended to lay down the law on how companies should be governed. It was, explicitly by design, a statement of recommended good governance practices. It was then for boards to implement in ways which made sense to them and to their shareholders. Corporate governance would then be correctly positioned as a contract between a company and its investors.
In the intervening twenty years, these well-founded best-practice recommendations have been somewhat corrupted – first into principles and then into hard and fast rules. This has largely occurred for reasons of expediency and convenience. It is also an outcome of international portfolio diversification and a tradition of global standards and benchmarks in other important areas of investment: accounting, financial reporting, financial ratio analysis etc. A separate corporate-governance lexicon has been created which is now technical and perhaps largely impenetrable to the generalist investor.
It almost goes without saying that this corruption from best practices to principles to hard and fast rules describes exactly the direction of corporate governance in the United States for the last decade or so. From Sarbanes-Oxley to say-on-pay, we've increasingly mandated and federalized corporate governance rules. Indeed, many self-styled corporate governance experts appear to regard "progress" in this area as synonymous with homogenization.
Norway's dissent from this movement is a welcome development.
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