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Folksam kapitalförvaltningRapport 2003:1

Ethical Aspects in Active OwnershipMarkus Åhman, Marcus Carlsson Reich, Anna-Sofia KumlinIVL

corporate governance,investment, human rights,influence, global compact,environment, screening,investors, sustainable,ownership, ethical

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Abstract ............................................................. 4

Sammanfattning ................................................. 5

Acknowledgements ........................................... 6

Preface .............................................................. 6

Introduction ........................................................ 7

Active Ownership – an Overview ......................... 8

International Overview ...................................... 12

Status in Sweden – five cases ........................... 16

Consequences of Active Ownership ................. 25

Discussion ....................................................... 27

Conclusions ..................................................... 29

Further Research .............................................. 30

References ....................................................... 31

Appendix A

Questions at interviews (Swedish only) .............. 33

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The overall objective of the study isto shed light on the subject of activeownership and the consequences ofan increased ethical focus in thework of institutional investors.

The following questions are treatedwithin the study;

• What do ethical aspects ofownership mean?

• To what extent, and in what way,are ethical aspects taken into ac-count by institutional investors?

• What are the consequences ofactive ownership with ethicalaspects taken into account?

• What effects would an increasedethical focus in the work with ac-tive ownership in Sweden have?

• What are the hindrances andpossibilities for an increased ethi-cal focus in active ownership inSweden?

Generally, there are few indicationsthat active ownership will become apowerful tool for driving the com-panies’ ethical agenda. In order forthis to change, the view of activeownership as solely a strategic toolmust change and the activities of theinvestors must become more opera-tive and proactive in their nature.Further, the Swedish institutionsparticipating in this study, apartfrom Folksam, do not agree that in-stitutional owners should be moreactive than they are today.

In Europe, active ownership is gene-rally carried out through dialogue-based intervention. In the US, ethi-cal aspects, or rather active owner-ship as a whole, is often a matter ofconfrontational propositions fromowners on annual general meetings.The differences in how active ow-nership unfolds seem to stem largelyfrom legislative differences and cul-tural differences, as active owner-ship is relatively homogenous withinthe studied countries.

Abstract

Ethical aspects are often seen asoperational rather than strategic,and are therefore disqualified fromlegitimate ownership influence.Shareholder value is of paramountimportance, and ethical aspects areof concern only when this directlycould affect shareholder value. Acti-ve ownership in Sweden concerningethical aspects seems to be focussedon incidents rather than policy issu-es, and reactive in its nature ratherthan proactive.

The limited number of existing stu-dies done on active ownership or onethical screening of portfolios showlittle or no effect, positive or negati-ve, on financial performance.

Legislation is not considered an ob-stacle to a more active ownership inSweden, with the possible exceptionof the insider information that thedialogue-based intervention someti-mes can lead to.

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I studien beskrivs och analyserasaktivt ägarskap, med tyngdpunkt påetiska aspekter av begreppet.

Bland andra behandlas följandefrågor i studien:

• Vad innebär etiska aspekter avägarskap?

• I vilken utsträckning, och på vil-ket sätt, beaktas etiska frågeställ-ningar av institutionella investe-rare?

• Vilka är konsekvenserna av ettaktivt ägarskap där etiska aspek-ter tas med?

• Vilka effekter skulle ett ökatetiskt fokus i arbetet med ägar-styrning i Sverige innebära?

• Vilka hinder och möjligheterfinns för att i högre grad ta medetiska frågor i ägarstyrningen iSverige?

Det finns få tecken som tyder på attaktivt ägarskap inom den närmasteframtiden kommer att bli en starkdrivkraft för de svenska företagensetik. För att det ska kunna ske mås-te synen på aktivt ägarskap som en-bart ett strategiskt verktyg föränd-ras. Investerarna måste också blimer proaktiva i sina aktiviteter, ochengagera sig även i frågor av meroperativ karaktär än vad som är fal-let idag.

Synen på vad som är ”etik” i ägar-styrning varierar. Vissa aktörer in-kluderar traditionella corporate go-vernance-frågor, som bonussystemoch styrelsesammansättning, med-an andra gör en åtskillnad mellandessa och miljö- och sociala frågor.

De svenska institutioner som deltogi studien, med ett undantag, tyckteinte att det finns skäl för svenskainstitutioner i allmänhet att varamer aktiva som ägare än vad de äridag.

Sammanfattning

I Europa bygger ägarstyrningen iallmänhet på en dialog mellan ägareoch företag. I USA är den aktivapåverkan från företagens ägare merkonfrontativ, och etiska frågor lederofta till konflikter på företagens bo-lagsstämmor. Skillnaderna i hurägarstyrningen tar sig uttryck mel-lan olika länder tycks grunda sig iskillnader i lagstiftning och före-tagskultur. Inom de enskilda länder-na är olikheterna relativt små.

Etiska frågor ses av ägare ofta somoperativa snarare än strategiska ochär därför inte en fråga som tas upp ideras ägarstyrning. Avkastning påinvesterat kapital är det viktigasteintresset, och etiska frågor beaktasbara då de kan förväntas på verkadetta. Ägarstyrningen i etiska frågortycks i Sverige mer fokuserad påhantering av incidenter än på poli-cyfrågor, och har reaktiv snarare änproaktiv karaktär.

Det begränsade antalet studier somgjorts av effekter av ägarstyrningeller etisk screening visar på liteneller ingen påverkan på avkastning-en, vare sig positiv eller negativ.

Lagstiftning betraktas inte som etthinder för ägarstyrning i Sverige.Möjligen kan dialoger mellan ägareoch företag i vissa fall leda till insi-dersituationer.

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We would like to thank the intervie-wed persons who have generouslygiven of their time and experienceto the project team. We are alsograteful to Folksam and the SwedishEnvironmental Protection Agencywho jointly financed the project andprovided valuable input to ourwork.

Acknowledgements

In a customer survey carried out byFolksam, as many as 87 percent ofrespondents said that it was impor-tant for them that we should allowenvironmental considerations andhuman rights to weigh heavily whendeciding whether to invest in sharesin big multinational companies.

In 2001, as the first asset manager inSweden, Folksam introduced humanrights and the environment as in-vestment criteria for all our capitalinvestments. Our policy was basedon the UN’s Universal Declarationof Human Rights and the ILO Con-vention on Fundamental Principlesand Rights at Work.

Folksam’s aim, by means of our in-vestments, is to influence compa-nies to work systematically towardsbetter fundamental practices ofemployment law affecting theiremployees. The starting point forthis work is the rules mentionedabove, the UN Convention on theRights of the Child, and the guide-lines published by the OECD. Wealso assess a company’s suppliersand sub-contractors based on thesenew criteria. The same applies in thearea of the environment.

In 1995, Folksam was a signatory tothe UNEP Statement of Environ-mental Commitment by the Insu-rance Industry. Folksam also opera-tes a wide-ranging internal environ-mental programme. Several busi-ness divisions within the FolksamGroup are environmentally certifiedto ISO 14001.

Preface

The importance of stakeholderissues for institutional investors hascome increasingly into focus in re-cent years. Folksam has decided toconcentrate on active share owner-ship for three principal reasons:Firstly, our customers demand thattheir common interests in stakeholderissues be safeguarded so as to bene-fit their long-term returns; secondly,we are anxious to encourage asound, long-term development ofthe venture capital market; and,thirdly, we want to influence thecompanies we invest in to respectthe environment and human rights.

Folksam has also become a memberof the United Nations’ “GlobalCompact” initiative, and is backingthe Swedish Government’s “Swe-dish Partnership for Global Re-sponsibility”. The reason for this isthat it is Folksam’s vision to helpbring about a long-term sustainablesociety, in which the individual feelssecure. This accords well with thefocus of Global Compact and is alsoin line with Folksam’s environmen-tal policies over the years.

Knowledge relating to corporatepractices and governance based ona traditional Corporate Governanceperspective is relatively extensiveand well-recorded. The field of ethi-cal corporate governance and of ac-tive ethical share ownership aimingto exert influence on companies isnot so well documented, however.Folksam believes it is important toincrease the knowledge of ethicalshare ownership through research.

Stockholm, 30 October 2003

Håkan Johansson

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A popular opinion, often expressedin the business press during the lastdecade or so, is that there is a lackof powerful, old-style, capitalistswith a strong and long term interestand involvement in the companiesthey own. Huge but anonymous in-stitutions, like pension funds or in-surance companies, will never beable to take the same responsibilityas owners, it is argued. However, pa-rallel to this rather pessimistic deba-te, there is an increasing awarenessamong individual shareholders, aswell as institutional investors, of theimportance of good corporate go-vernance. During the last 35 yearsthe role of the institutional owner,and the power of the institutions,has been discussed, albeit withshifting intensity and focus.

What role the financial marketshave in influencing the actions andstrategies of companies has beendiscussed widely in Sweden for fif-teen years or more. Environmentaland ethical funds of different kindshave slowly but surely grown in po-pularity on the market for financialproducts. During the last few yearslarge institutions like the AP-fundsand several life insurance compa-nies have started basic screening oftheir entire portfolios as well. Thishas had repercussions in circles faroutside the so-called SRI communi-ty. However, active ownership andhow it is related to ethical issues hasso far not received the same atten-tion in Sweden as it has in othercountries. Nor has the issue of acti-ve ownership been penetrated asthoroughly as, for example, the scre-ening practices of fund managershave been. In this report, we try todescribe the background and basicconcepts of active ownership, whatrationale lies behind active owner-ship, and we give an insight to whatview a few of the major Swedish in-stitutions have on the subject. Final-ly, we discuss the possibilities for,and hindrances to, active ownershipin Sweden.

Introduction

Objective of the StudyThe overall objective of the study isto shed light on the subject of activeownership and the consequences ofan increased ethical focus in thework of institutional investors. It isour hope that the study shall consti-tute an input to the discussion onhow the role of an institutional in-vestor may be developed further.

The following questions are treatedwithin this study;• What do ethical aspects of ow-

nership mean?• To what extent, and in what way,

are ethical aspects taken into ac-count by institutional investors?

• What are the consequences ofactive ownership with ethicalaspects taken into account?

• What effects would an increasedethical focus in the work with ac-tive ownership in Sweden have?

• What are the hindrances andpossibilities for an increased ethi-cal focus in active ownership inSweden?

DelimitationThe contents of this report shall beseen as examples of how active ow-nership may work, what issues are infocus and how the subject can bedeveloped in the future. The studyconcerns ethical aspects of activeownership, and ethics and its impli-cations have been in focus in asmuch as has been possible. Howe-ver, the literature in the field is by nomeans complete or exhaustive.Therefore, parallels have beendrawn to adjacent areas.

We regard active ownership asone of three fields of activity thatform the core of the wider termSocially Responsible Investments(SRI) or Ethical Investments (EI).The other two fields, which are notdiscussed in detail in this report, areScreening and Community Invest-ment (figure 1). Screening refers tothe evaluation of companies or sha-

res for portfolio selection purposes.The theory of screening, differentscreening methodologies and theirconsequences have been thoroughlycovered in several studies (CarlssonReich et. al, 2001, Gottsman &Kessler 2000, Williams, 1999,MacKenzie 1998, Pava & Krausz,1996)

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What is Active Ownership?We define active ownership as: “ac-

tivities performed by a shareholder of

a company with the purpose of affec-

ting the decision making bodies of, or

decisions taken by, the company,

using its power as a shareholder, wit-

hout selling the shares”.

Unlike conventional screenedethical investments, active owner-ship, in the sense we mean in thisstudy, implies that the manager usesthe ownership stakes to engage com-panies in dialogue and shareholderactivism, rather than excluding suchcompanies from its investments(McLaren, 2002). This contrasts tothe use of ethical screens for portfo-lio selection, where an investor seeksto improve the performance of herinvestments, or influence the beha-viour of companies for other rea-sons, through the inclusion or exclu-sion of shares in the portfolio. If acompany acts in a way that violatesthe screening criteria, the shares aresold. This is sometimes referred toas “voting with your feet”. Althoughwe recognise that this may very wellbe an action which an active ownercould take at some point, in this re-port we focus on what an owner cando while still holding shares in acompany.

Figure 1. The concept of Socially

Responsible Investments/Ethical

Investments.

However, it is important to note thatin the literature, sometimes little orno distinction is made between scree-ning and active ownership. Rather,screening is considered a tool for an

Active Ownership – an Overview

active owner. Several fund managersthat we have spoken to during thework with this study also hold thisview (see Status in Sweden chapter).

In the literature, and indeed inthis report, the terms shareholder

advocacy and shareholder activism

are sometimes used to describe phe-nomenons that are closely related oridentical to active ownership. If adistinction between the terms couldbe made at all, it is that shareholder

activism often refers to activitieswhere the shareholders are in con-flict with the management of thecompany, whereas active ownershipis a more neutral term.

What is ethics?It is common to divide ethics intothree dimensions: Financial, Envi-ronmental and Social Responsibili-ty. In this sense, the term has greatsimilarities to the concepts of Sus-tainability and Corporate Social Re-sponsibility. This study focuses onthe social and environmental di-mensions of ethics.

However, it is our view that noabsolute set of ‘good values’ is pos-sible, or even desirable, to construct.We recognise the fact that over thelast two and a half thousand years,there has been an ongoing debatewhether ethical knowledge is at allpossible. Some people have the con-viction that the term ”ethical” hasno real meaning. Particularly whenclassical ethical issues, like moral,what is right and wrong, what is trueetc., are discussed, this opinion iscommon. The argument is based onthe judgement that each person hasher own set of values, opinions andfeelings, and that ethics thus is just amatter of individual opinion. If youembrace this concept of ethics, so-metimes labelled ”emotivism”, ethi-cal knowledge is impossible andethical inquiry is pointless (Macken-zie, 1998).

Even so, considering the intensediscussions on the subject of busi-

ness ethics that has taken place inmany countries during the last fewyears, with the scandals surroun-ding Enron and Worldcom as primeinternational examples, there is nodoubt that ethical issues are a realand true concern for shareholdersof today. Without further defini-tion, we will in this report use theword ethical in a very broad sense,roughly based on concepts such asthe UN declarations on human andlabour rights and sustainability.

BackgroundMonks (2001), outlines the develop-ment of the power of corporationsand the role of their owners, fromthe 16th century until today. He ar-gues that from the dawn of what isoften called the first modern corpo-ration, the East India Company inEngland, until the late twentiethcentury, the owners of ever-growingglobal corporations have lost theirsense of involvement in the busines-ses they own. Although the ownersof the East India Company, throughthe corporate form, had limited lia-bility, they were involved. Shouldthe ships that sailed to India havefailed to accomplish their statedmission, the owners would have ta-ken decisive action. This active ow-nership, Monks argues, has slowlybut surely decreased over the fourcenturies that followed the birth ofthe East India Company. Since thebeginning of the 20th century, thetrend with more passive owners hasaccelerated. An important factor inthis development is the emergenceof the great institutional ownersthat now hold significant shares ofthe entire publicly traded companiesof the world.

The history of active ownershipand shareholder activism as definedin this study, dates back to the early1970s’ when the phenomenon firstoccurred in the US. There exist verylittle literature on the situation inEurope during the 1970s and 1980s’.

Ethical Investments(SRI)

Screening ActiveOwnership

Community

Investment

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In the US, public interest resolu-tions originated in the social acti-vism of the 1960s’ and drew theirpolitical and ideological strengthfrom the drive for increased publiccontrols over the corporation thatdominated the political agendaduring much of the seventies. Theirexistence and legitimacy were thusclosely linked to the relative declineof public support for business thatbegan in the midsixties and conti-nued for more than a decade. (Vo-gel, 1983). As is the case today, themost visible kind of activism wasthat of shareholder resolutions tothe annual general meeting. Duringthe mid seventies the US Securitiesand Exchange Commission (SEC)reformed some of the rules concer-ning active ownership, making itmore difficult for boards of direc-tors to ignore shareholder resolu-tions.

During the first years, the mostcommon issue to be raised was thatof corporate involvement in SouthAfrica. Then followed activism onenergy issues, particularly nuclearpower, marketing of infant formulasin developing countries and in theearly eighties environmental con-cerns began springing up as well.The ideological centre of gravity ofshareholder activism was placedfirmly to the left of centre, althoughthe political spectrum began tobroaden as early as 1975. Conserva-tive groups then began pressuringboards on issues like the medias’alleged liberal bias and trade withcommunist countries. In a cam-paign that received a fair amount ofattention in 1979, conservative indi-viduals attempted to stop large cor-porations like Dow Chemicals andDuPont from giving contributionsto universities that employed ‘a vo-wed Communist, Marxist, Leninistor Maoist’, or that prohibited mem-bers of the academic communityfrom working with the Central Intel-ligence Agency (Vogel, 1983). One of

these resolutions received as muchas 15.7 percent of the shares voted,following a management decision totake no position on it.

After a downturn during the 1980s,largely due to changes in the politi-cal and economic systems, the inte-rest for shareholder activism soaredin 1992 when SEC began requiringdata relating a corporation’s returnsand stock price performance to exe-cutive compensation (AIMR, 2003).

Why Focus on InstitutionalInvestors?There is no doubt that Swedish capi-tal markets have a crucial role toplay in enabling enterprise, innova-tion and growth. The so-called ethi-cal funds, which have received muchattention in the public debate, repre-sent less than 6 percent of the totalfund assets under management inSweden (Skillius, 2002). Althoughthey can play an important role assymbols and forerunners in the SRIfield, they will not be a significantfinancial power in the foreseeablefuture. Institutional investors howe-ver, which hold a very large part ofthe total assets under managementin Sweden, are clearly key partici-pants in the capital markets, and po-tentially very powerful ones as well.On a global scale, institutional in-vestors are equally important. Pen-sion funds have rapidly become oneof the most important groups ofowners in the world. In 1999, retire-ment funds held, on average, morethan 15 percent of the shares in 25 ofthe worlds largest corporations(Monks, 2001).

However, concerns that this stra-tegic asset is not being used to itsfull potential are increasingly beingraised. More often than not, institu-tional investors are described as be-ing passive in their role as owners,“voting with their feet” rather thantrying to actively convince the com-panies they own to change theirstrategies or behaviour. During the

last few years, scandals like Enronand WorldCom, have put transpa-rency, ethics and corporate gover-nance issues on the front pages ofthe business papers of the world. InSweden, lucrative retirement plansand incentive programs for top ma-nagement of companies like Skan-dia and ABB, approved by theboards of directors, have left manyshareholders wondering if the largeinstitutions are not taking their re-sponsibilities as owners.

Much has been written about theAnnual General Meeting of a com-pany, and in particular the non-at-tendance, or at least inaction, of in-stitutional shareholders. This, it isargued, is a consequence of the factthat most institutional investors’prime responsibility is to achievehigh short term investment return totheir clients. In the case of pensionfunds or life insurances, the timehorizon may be longer than for ex-ample someone investing in stan-dard stock funds. However, conside-ring the volatility of share prices,the returns sought by the fundmanager’s clients, most mangers donot regard holdings to be ‘perma-nent’ or even ‘very long term’. In-stead, a relatively high proportionof the portfolio may have a quickturnover, a fact that does not en-courage the owner to be actively in-volved in the company’s businessstrategy.

Despite all this, the official policyof most of the large Swedish institu-tional investors is to be an activeowner. Thus the question arises; whyis that, and how will it be carried outin practice?

What are the Purposes ofActive Ownership?The motives behind shareholder ac-tivism during the 1970s’ and 1980s’are in the literature described as be-ing, for the most part, ideological orpolitical. During the 1990s’, howe-ver, there was a shift towards a more

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traditional financial approachtowards active ownership and cor-porate governance. More and morefrequently, active ownership was putforward as a way to increase the fi-nancial return for shareholders. Thistrend is analogue to the develop-ment of SRI and Corporate SocialResponsibility in general. There aretwo radically different categories ofobjectives for SRI: Saving the Worldand Profit Maximising (CarlssonReich et al, 2001).

With a Saving the World objecti-ve, the aim is to, directly or indirect-ly, change the way companies do bu-siness, with the overall goal tochange our world to become a betterplace.

The Profit Maximising objectivereflects the belief that the share of acompany with a high ethical perfor-mance will do better on the sharemarket than the shares of a compa-ny with a lower ethical performance.Someone with the Profit Maximi-sing objective may or may not havea desire to save the world, but in thiswork we do not consider it to be thedriving force behind the behaviourof the investor.

The public debate on SRI in Swe-den, particularly regarding screen-ing and portfolio selection, hasmostly been held in the context of“saving the world”. This debate hasbeen strongly oriented towards theprivate investor segment, and thederegulation process in the Swedishpension system has especially en-couraged financial institutions toheavily market their “ethical funds”.Institutional investments and activeownership were, until only a fewyears ago, very seldom discussed atthe same time as screening of funds,nor by the same people who talkedabout these funds. Instead, the moretraditional business community hasdriven the debate on active owner-ship, introducing ethical aspects forsolely financial reasons. Often usedexamples of such issues are staff in-

centive programs and board inde-pendence. Parallel to this, there hasbeen a growing awareness in theSwedish SRI community andamong Swedish NGOs, that the po-wer of the institutional owners hasbeen largely untapped so far. Theincreasing success of proxy votingcampaigns in the US, and especiallythe activities in this field by largepension funds like CalPERS, areused as examples of how sharehol-der activism can be executed.Furthermore, since the developmentof SRI as a whole, in the US, hasbeen a few years ahead of Europe, itdoes not seem unlikely that a similarincrease in shareholder activismthat has taken place in the USwould occur in Sweden as well.

How does Active OwnershipWork?Active ownership can mean manydifferent things. Depending onwhom one asks, the opinions regar-ding how active ownership couldand should be performed may vary.In this study, we differentiate be-tween voting and intervention. Vo-ting is executed at a company’s an-nual general meeting, whereas inter-vention can be performed at anytime. Owners are often representedby fund managers, and in this chap-ter we use these terms interchangea-bly.

Public companies have extensiveobligations to provide informationto share information with its share-holders, the owners of the company.The corporation must also provideinformation on all issues that mayhave an effect on its shareholder va-lue to all stakeholders, including thefinancial markets, as well. One ofthe most central duties of a compa-ny is the annual general meeting(AGM). In fact, all public compa-nies must, by law, hold an annualgeneral meeting to which they inviteall those who own shares in thecompany. At the AGM, companies

usually ask shareholders to vote onseveral standard items that are al-ways included in the agenda. Suchan issue, which nearly always ap-pear, is the ratification of thecompany’s auditor. Another veryimportant item is the election of thecompany’s board of directors.

Other, less routine matters thatmay require the shareholders’ votesare mergers and acquisitions andindividual or shareholder group ac-tions that qualify for the agenda ofthe AGM. This last category ofitems are the most interesting in thecontext of this study, since ethicalissues connected to the company’sactivities often fall into that catego-ry. Matters that are brought beforethe AGM for voting are called reso-lutions. However, the vast majorityof resolutions put to the sharehol-ders do not typically relate directlyto a company’s current or futureperformance (notwithstanding theall-encompassing nature of resolu-tions to ‘approve the Report andAccounts’). Instead, most items onthe agenda of an AGM concern thegovernance of the company. Elec-tions of non-executive directors areimportant, and the terms of share-option schemes have significant po-tential influence on managementbehaviour (UK Actuarial Profession,2002). However, neither specificallyaddresses issues of strategy or ope-rational management. Therefore, inorder to be able to use voting atAGM’s as a tool to influence corpo-rate strategies and behaviour in ope-rational issues, the likes of whichethical matters often are, a sharehol-der will often need to actively fightfor the inclusion of such items in theagenda of the AGM.

Another problem related to activeownership and shareholder value,especially when ethical aspects areconcerned, is related to public rela-tions. Some investors may be wor-ried that if they put pressure on acompany in public regarding a rou-

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tine or strategy that they believe isdetrimental for the company’s per-formance, it may create a publicconfrontation that itself may haveserious adverse consequences forthe business.

Intervention, as opposed to vo-ting, can be performed by an inves-tor at any time, not just in connec-tion with the AGM. Interventioncan be almost anything that can bedescribed as an attempt to get infor-mation from, or exert influence on,the company by one of its owner(s).Often, large owners have regularmeetings with the company’s boardof directors. At such meetings, ow-ners can engage in dialogue with thecompany over matters more closelyconnected to its operations andstrategies. Many institutional inves-tors state that intervention is a moreeffective and constructive way to actas an active owner. However, thereare important limitations to whatcan be discussed at closed meetingsbetween owners and a company.One of the most important is theinsider dealing rules. These rulesstate that companies cannot shareprice-sensitive information with anyone stakeholder before the entiremarket has access to the same infor-mation. Since meaningful interven-tion is very likely to involve, or evencreate, information of such type, theinsider rules may well put a cons-traint on intervention as a tool forowners.

Moreover, companies may verywell be reluctant to reveal commer-cially sensitive information to afund manager since he or she mayhave relations to the company’scompetitors. Further, it is of littleinterest for a fund manager to im-prove the performance of one com-pany in the portfolio, if it is achie-ved at the expense of another com-pany in the portfolio.

In general, financial institutionsand fund managers have a greaterinfluence over corporate behaviour

and management in times of corpo-rate crisis and need. In such times,institutions may use their power tonegotiate changes in managementand management succession. How-ever, voting and intervention maydiffer somewhat in this respect.Since intervention in ethical issues isoften aimed at avoiding crisis, forexample emanating from bad strate-gies or reputational loss, it can takeplace in more ‘ordinary’ times thanother forms of engagement. As aconsequence, dialogue in ethicalissues relies on high levels of trustbetween fund managers and corpo-rate managers – rather than thethreat of replacement (McLaren2002).

Those who oppose intervention,or the whole concept of active ow-nership, argue that an owner, who inthis context is often represented by afund manager, has his expertise inportfolio selection, risk manage-ment and the relative valuations ofdifferent shares. That field of know-ledge may not be particularly wellsuited for dealing with more hands-on business strategies and manage-ment of operational issues that de-mands business specific competence.

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Shareholder activism has long beenon the agenda in the US, and also inthe UK. Therefore, a description ofthe situation in these countries isimportant in order to see whetherthere are any structural differencesbetween these countries and theSwedish case.

The USIn the US, the interest for sharehol-der activism soared in 1992 when theUS Securities and Exchange Com-mission (SEC) began requiring datarelating a corporation’s returns andstock price performance to executi-ve compensation. (AIMR, 2003)

Ever since the start of sharehol-der activism, an important, if notthe most important, objective formany shareholders has been tostrengthen the independence of theboard of directors and make it moreaccountable to shareholders. This is,and has been, an important issue forSEC as well. Board independencedefinitely receives more attention inthe US than in Sweden. This is notparticularly surprising, consideringthat the board of directors in UScompanies often than has thecompany’s CEO as its chairman. Itis also common for other senior ma-nagement, current or former, to bemembers of the board. This is veryseldom the case in Sweden, andwhen it occurs it immediately drawscriticism.

At least at first glance, sharehol-der activism in the US seems muchmore radical than it is in Sweden.Open conflicts between manage-ment of the company and sharehol-ders are more common. An impor-tant characteristic of shareholderactivism in the US is the kind of is-sues raised and voted on at the an-nual general meeting. Although acompany can refuse to include anissue on the agenda of the AGM if itconcerns ‘ordinary business activiti-es, SEC, who is the regulating bodyof the AGM, has ever since the mid-

International Overview

1970s’ frequently ruled against com-panies’ efforts to exclude resolutionsmade by shareholders.

Each year, publicly held corpora-tion must issue a proxy statement,calling upon their shareholders tovote on a variety of matters rangingfrom the approval of the Board ofDirectors, to executive compensa-tion. In addition to the right to voteon these matters, shareholders alsohave the right to place their ownproposals, or resolutions as they arealso called, on the ballot, to be vo-ted on by all shareholders at thecompany’s annual general meeting.Every shareholder holding at least$ 2000 worth of stock for at least ayear, has the right to file a resolu-tion. If the company does not getthe approval from the SEC to exclu-de it, it must then be included in theagenda of the AGM as an item onthe proxy ballot.

Typically between 200 and 300social and environmental resolu-tions are filed every year (Social-funds, 2003). Some never make it toa vote, either because they are with-drawn by the shareholder or suc-cessfully challenged at the SEC bythe company. Withdrawals usuallytake place as a result of progress indialogue with the company, if theshareholder no longer feels it is ne-cessary for the AGM to vote on theresolution. Thus, a withdrawal canbe a success for the shareholder, if itrepresents a positive settlement ofan issue or at least an understandingbetween the company managementand the shareholders.

Environmental or social resolu-tions rarely receive more than a fewpercent of the votes. Still, the proxyvoting systems is considered to be apowerful tool to put pressure onmanagement. The resolution mustreceive 3 percent of the votes thefirst year in order to be allowed tobe resubmitted the following year, 6percent the second year and 10 per-cent every year after that. Resolu-

tions that receive enough support tocome back year after year are a mes-sage to management that the issuewill not go away easily.

It is common for shareholder ac-tivists to organise themselves underdifferent umbrella organisations.Some of these, e g the ShareholderAction Network and the InterfaithCenter on Corporate Responsibility(ICCR), are permanent organisa-tions specialising in proxy votingcampaigns and other shareholderservices. Other groups are organisedaround specific issues or compa-nies. There are several public dat-abases of shareholder resolutionsaccessible on the Internet, providinginformation to investors as well asfacilitating the communication withthe company on the issue of the re-solution. One of the most extensivedatabases is provided SRIWorldGroup in collaboration withthe IRRC (Domini, 2003).

The regulations for the AGM,and the rules regarding what issuesare beyond the scope of shareholdercontrol, stipulates that the AGMshould not discuss or decide in issu-es related to day-to-day activities ofthe company. However, in the USthe issues included in the proxy sta-tement (the official document sta-ting what will be voted on at theAGM) have a much more operativecharacter than what is usually thecase in Sweden. Over the last 30years, issues like in what markets acompany should be active, policieson overseas manufacturing, resour-ce use, environmental risk manage-ment and product safety have fre-quently occurred in the proxy state-ments of US firms. The shareholderinitiatives cover many of the sametopics social investors look for inscreening their portfolios.

Shareholder Activism –Examples from the USThe shareholder activism in the USoften consists of shareholder pro-

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posals at the AGM’s. Often, it is dif-ficult to directly assess whether theshareholder proposals are a drivingforce when companies change theirpolicies or actions, as the companiesrarely give credit to shareholder pro-posals, and as the proposals rarelyor never obtain enough mandate tocarry through changes directly. Ty-pically, a shareholder proposal mayreach as much as 10 or even 15 per-cent of the votes, which is enough tokeep the question on the agenda.When changes take place the com-pany usually states business reasonsrather than a long-running share-holder proposal as the driving force(Mathiasen, IRRC).

The example most frequentlyused as a success story for sharehol-der activism is the case of SouthAfrica during the five years beforeMandela was released from prisonin 1990, during which the demandfor a boycott of South Africa wasrising. During this period, theamount of shareholder proposals,and the support for them, rose sharp-ly. In the 1985 proxy season, share-holders proposed 38 resolutions onthe South Africa issue. Eighteen ofthose were withdrawn when compa-nies complied. The number ofSouth Africa-related proposals thatcame to votes in 1986 increased to61—more than half of the social po-licy resolutions considered by share-holders. In 1987, altogether, 156South Africa resolutions were filedfor the spring proxy season, morethan the number of social policy re-solutions on all issues that had cometo votes the previous year. Of those,proponents withdrew 45 that askedfor disinvestment as companiesagreed to leave South Africa. Sixty-three other proposals on withdrawalcame to votes, picking up an averageof 12.2 percent support. Althoughthere are other reasons, the share-holder activism on this issue couldwell be a contributing factor for US

companies to leave South Africa(Mathiasen, IRRC).

The situation with shareholderresolutions on tobacco issues hasbeen different; institutional inves-tors that were comfortable asking acompany to get out of South Africahave been much less willing to askcompanies to take action that wouldclearly hurt their core business, andvotes have been on the low side. Suc-cess stories include in 1991, for ex-ample, church shareholders tackledthe question of tobacco ads on bill-boards and were able to withdraw aresolution to 3M when the companysaid it would stop all such adverti-sing. In 1992, church shareholderswithdrew a resolution asking PhilipMorris to place warning labels oncigarette packages in countries thatdid not require them. The companyagreed to follow suit, fulfilling therequest of a second-year resolutionthat had got 6.7 percent support theyear before. The sponsors hailed theaction as a major victory, but thecompany, in a policy statement, saidmerely that it had decided to takethe action because “ the relativelysmall number of packages involvedhas become an issue out of propor-tion to its importance.” (Mathiasen,IRRC)

In 1989, longtime shareholder ac-tivists such as the Interfaith Centeron Corporate Responsibility andthe controllers of the New York Cityand the California public employ-ees’ retirement systems (CalPERS)joined forces with environmentalgroups and socially responsible in-vestment advisers to form CERES,the Coalition for EnvironmentallyResponsible Economies. The CE-RES principles emphasise the needfor standardised annual reports tostakeholders on corporations’ treat-ment of the environment. CERESrepresentatives entered into a dialo-gue with scores of companies short-ly after the announcement of theprinciples, and filed their first share-

holder proposals in 1990. While onlyfive of nearly two dozen resolutionsproposed that year came to votes,support levels averaged 12.5 percent,the highest of any first-year share-holder initiative in the 20-year histo-ry of proxy voting on social issues.(Mathiasen, IRRC)

As a more recent example, a coa-lition of institutional investors hasfiled a global warming shareholderresolution at the five largest carbondioxide emitters in the US electricpower industry, called the “filthyfive”. The Connecticut RetirementPlans and Trust Funds (CRPTF) ledthe initiative, with co-ordinatingsupport from the Coalition for Envi-ronmentally Responsible Econo-mies (CERES) and the InterfaithCenter on Corporate Responsibility(ICCR). The resolution asks thecompanies to report on the businessrisk of their greenhouse gas emis-sions and on the potential economicbenefit of curtailing those emis-sions. The motif for the action is,according to the State of Connecti-cut Treasurer, that “investors needthe full picture to assess companies’long-term investment value: air pol-lutant emissions are some of themost measurable, relevant, and sig-nificant indicators of risk for thisparticular industry, and it’s our re-sponsibility to ask what the compa-nies’ plans are to address that risk”.(Baue, Socialfunds a)

Another example is ExxonMobil,which this year receives 23 sharehol-der resolutions on issues rangingfrom climate change to corporategovernance. It is the refusal of thecompany to address climate changeand renewable energy whatsoeverthat makes investors wonderwhether the lack of climate changeand alternative energy strategies isin the best long-term interest ofExxonMobil, as they thereby ignorea major risk. (Baue, Socialfunds b)

Water supply is a growing con-cern, and is going to be one of the

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most important environmental andsocial issues of the 21st century. The-refore, investors in PepsiCo, a com-pany that uses large amounts of wa-ter, have filed a resolution asking thecompany to disclose its “current po-licies and procedures for mitigatingthe impact of operations on localcommunities in areas of water scar-city”. (Baue, Socialfunds c)

The UKThe prospects for shareholder acti-vism in the UK are favourable, com-pared to the US. Legislation givesmuch more room for co-operativeintervention rather than forcing in-stitutional investors to use confron-tational voting. Further, ownershipis more concentrated in the UK –among the twenty largest institutio-nal investors, no more than ten usu-ally own over fifty percent of thestock of most traded companies.(Monks, 2001)

One reason for this climate (al-though the history of the differencesprobably is much longer) could bethe Myners’ Review of InstitutionalInvestment in the UK, which wascommissioned by the Chancellor ofthe Exchequer in the 2000 Budget,to investigate whether there werefactors distorting institutional in-vestment in the UK, resulting in in-efficiency and inflexibility in capitalmarkets. The review found that, al-though institutional investors areengaging with companies in whichthey invest, there was currently alack of active intervention in suchcompanies even when there were areasonable expectation that thiswould enhance the value of invest-ments. Specifically, the report foundthat fund managers argued that the-re was no need for them to engage insuch intervention, either because itwas no part of their role or becausethere was no need for them to adoptsuch a strategy. The review gained alot of attention and has had an im-

portant role in the development ofshareholder activism in the UK.

This situation has led to a share-holder activism that differs substan-tially from the US case. The mostimportant actors are managers ofpension funds who, with a substan-tial long-term index tracking hol-ding, have a good base for long-terminvolvement.

HermesHermes is one of the largest fundmanagers in Britain. As at 31 De-cember 2002 Hermes had approxi-mately £37 billion under manage-ment and managed assets of four ofthe seven largest UK pension funds.Hermes’ official view on corporategovernance is that “responsible pen-sion fund investment requires inves-tors to behave like owners ratherthan gamblers”. This, according toHermes, is particularly importantwhen funds are managed on a passi-ve or index-tracking basis, as is thecase with the majority of funds ma-naged by Hermes.

Hermes has over 40 people wor-king with stewardship and corpora-te governance: a mixture of ana-lysts/managers, fund managers, en-gagement specialists and investorliaison people. Hermes submits vo-tes on behalf of its clients at some1200 annual and extraordinary mee-tings a year. However, Hermes diffe-rentiates its programmes from thoseof the “raider activist” by adoptinga relational approach on behalf ofall shareholders and is particularlycritical of activist programmes in-volving greenmail or micro-mana-gement of companies. Hermes’ pro-grammes have generally been con-ducted in private and have nottherefore been widely published.

In addition to its stated in-housecommitment to corporate gover-nance, Hermes participates in anumber of fora dedicated to the to-pic. These have proven to be a sour-ce of potential allies when action is

needed in relation to an individualcompany. In one of these fora, theCorporate Governance Forum(CGF), best practices on social,ethical and environmental mattersand executive pay have recentlybeen developed. Hermes also hasinternational contact with e.g.CalPERS, where they generally votein accordance with CalPERS gover-nance policy in the US, and CalPERSvotes in accordance with the Hermespolicy in the UK. Hermes also hasclose co-operation with pensionfunds in Scandinavia.

One of Hermes’ investment prin-ciples is that a company should beable to demonstrate its competitiveadvantage, both at corporate and atbusiness unit level, and that it in sodoing it should demonstrate ethicalbehaviour. They have 10 investmentprinciples, two of which are social,ethical and environmental in nature:

• Companies should manage effec-tively relationships with theiremployees, suppliers and custo-mers and with others who have alegitimate interest in thecompany’s activities. Companiesshould behave ethically and haveregard for the environment andsociety as a whole.

• Companies should support vo-luntary and statutory measuresthat minimise the externalisationof costs to the detriment of socie-ty at large.

Hermes states that it is not their roleto act as moral philosophers, stillless to micromanage companies’ re-sponses to ethical issues, any morethan they would wish to microma-nage their commercial operations.

Thus, Hermes is an active owner,and its role as a passive fund mana-ger allows a long-term involvement.They do have explicit investmentprinciples concerning social, ethicaland environmental principles. Thisstems from the fact that their ulti-

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mate beneficiaries includes the grea-ter part of the adult population whodepend on private pensions and lifeinsurances, and therefore an exter-nalisation of costs from managedcompanies would still end up beingpaid by the fund beneficiaries. The-refore, even the social, ethical andenvironmental policies stem from awill to maximise long-term share-holder value, not only through stockprices but through minimising ex-ternal effects as well. (Hermes, 2003)

MorleyMorley holdings amount to some2.7% of all UK quoted companies,as well as significant holdings incompanies operating in Europe, theUS and Asia. Morley say that theyincorporate environmental, socialand ethical issues into their invest-ment decision process in order toprotect and maximise returns fortheir clients,. As an example of theirimpact, over 40 FTSE companieshave responded to Morley’s votingpolicy with a commitment to beginenvironmental reporting.

Morley is active not only in boardelection and shareholder proposals,but have a wider engagement alsoon specific issues:

• Morley has, together with severalother institutional investors, sig-ned up to the Carbon DisclosureProject. This project aims to col-lect data on the climate changestrategies of the Fortune 500.This initiative makes possible apowerful joint action by large in-vestors to raise the climatechange issue to the boards of theFortune 500. This engagement isextended by Morley to individualmeetings with high climatechange impact companies, suchas ExxonMobil.

• Morley believes it is necessary forcompanies to understand whatsustainability means to their or-ganisation and to their sector.

Therefore, Morley has developed“Sustainability Blueprints” forkey industry sectors. The Blue-prints outline the key sustainabi-lity issues facing the sector, bothin terms of risks and opportuni-ties.

• In 2001 Morley joined forces witha number of financial institutionsto launch “Business involvementin Myanmar (Burma) – a state-ment from institutional inves-tors”. The group suggests thatcompanies operating in unstablepolitical climates can be exposedto negative press and publicitycampaigns, safety risks, and cor-ruption.

• Morley claims that its involve-ment in the Balford Beatty invol-vement in Ilisu dam in Turkeyfeatured significantly in the com-pany decision process to with-draw.

• Another joint project, the Inter-national Cocoa Initiative, whereMorley participated, contributedto a hopeful resolution to tackleenforced labour in the productionof chocolate.

(Morley, 2003)

HendersonHenderson Global Investors is a lar-ge provider of socially responsibleinvestment (SRI). Part of Australi-an financial services group, AMP,Henderson has been managingfunds with social, environmental orethical perspective since 1977. Hen-derson now has over £1.2 billion ofSRI assets under management in 17different funds for a range of indivi-dual investors, local authorities,companies and charities.

For Henderson, SRI research andengagement activities operate on aspectrum stretching from desk-ba-sed analysis through to researchmeetings with company manage-ment and active intervention incompanies with inadequate corpo-rate responsibility performance.

Henderson state that the use an acti-ve dialogue with both company ma-nagement and key stakeholders toinfluence company policies and per-formance.

Conclusive Comments onthe UKBoth Morley and Henderson useexamples of a very active engage-ment in specific issues that may bejudged as micro-management oroperational issues (although of ethi-cal character). Examples are the IlisuDam in Turkey, and labour condi-tions in chocolate manufacturing.These companies also engage in theproduction of, and signed up to, in-stitutional investor collaborationstatements on e.g. climate changeand global health, and have shownproactive engagement in ethical is-sues. However, this study has notallowed us to penetrate all informa-tion on the UK market and its play-ers, so the reader should be awarethat the picture is not complete andall aspects have not been covered.

Rest of EuropeFor the rest of Europe, there doesnot seem to be either any sharehol-der activism of note or at least noliterature describing this activism.One source claims that as largeblocks of shares are held by familiesor single institutions which have ex-ercised their ownership responsibili-ties and been treated by boards in away which was more in their parti-cular interests than of all the share-holders, there has been no “open”shareholder activism. So far, relatio-nal shareholder activism seems lessstraightforward in e.g. France andGermany than in the UK, where therules for e.g. board selection givesmore room for such measures.(Watson, 2002)

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About the Case StudiesFive institutional investors were in-terviewed: AMF, Folksam, Nordea,Robur and SEB. They all have theirhead offices in Stockholm. The in-stitutions differ significantly in sizeand character. AMF has recentlychanged from being a pension fundwith clients that had no choice offund manager, to becoming a fundmanager who is subject to competi-tion on the open market. Nordea,Robur and SEB are all banks with alarge number of bank offices spreadacross Sweden, whereas Folksam isan insurance company with very fewoffices outside Stockholm.

Even though the institutions re-present different types of manage-ment and have slightly differentclient categories, we do not claim tohave captured a statistically repre-sentative sample of the Swedish in-stitutions, nor was that the aim. Theinterviews should be taken for whatthey are; five important voices andexamples from the Swedish financi-al community, but not interpreted asmore than that.

No single definition of ethics orethical issues was imposed on theinterviewed persons. Instead theywere left to interpret the term asthey wished. However, all institu-tions in the study mentioned envi-ronmental an social issues as part ofthe ethical scope of their organisa-tions, as well as more traditionalbusiness ethics like accounting prac-tices, corruption and compensationprogrammes.

The interviews lasted for 1-1,5hours. All institutions received thesame questions, sent to them in ad-vance to allow for preparations andthought. However, during each in-terview discussions arose that some-times led to other questions beingraised. Different amounts of timewere devoted to each question de-pending on how the interview pro-ceeded.

Apart from the interviews, we havealso collected information from of-ficial documents provided to us bythe institutions. This material inclu-des ownership policies, marketingmaterial and web pages.

AMFFacts about the CompanyCompany: AMFMain client categories: Individualsin private sector employmentAssets under management:180 BSEKShare of holdings actively managed:100 percentInternal management or manage-ment under direct control:100 percentEstimated number of holdings:150 companiesEstimated annual turnover in port-folio: not availableDirect investments: Marginal

Date of Interview: 2003-04-03Company representative:Tor MarthinPosition: Vice Managing Director,Chief Financial Officer

General on Active OwnershipIt is AMF’s policy to be an activeowner in its Swedish holdings. Thesole formal reason for this is to in-crease shareholder value, but MrMarthin adds that “common sense”and “general decency” in realityalso act as guidelines in all ofAMF’s activities. This, according toMr Marthin, is particularly impor-tant in ethical issues. Furthermore,AMF’s ownership policy states that“AMF should act in a manner thatcreates trust with the public and bu-siness”.

Mr Marthin points out that it isimportant to distinguish betweenthe different roles that exist in therelationship owner-company, andwhat mandate each actor has. AMFbelieves that by far the most impor-tant responsibility of an owner is to

elect the board of directors and tohold them accountable for the fi-nances and accounts of the firm.The board of directors, for theirpart, should concentrate on thelong-term management of the com-pany and they also appoint theCEO. Furthermore, the board de-cides in matters not addressed in theday-to-day management of the firm,but leaves all the daily operations tothe CEO to manage. Many ethicalissues, as they are defined in thisproject, according to Mr Marthin,falls under the responsibility of theCEO. Thus they should not, undernormal circumstances, be discussedby the board, and consequently notby the owners either.

Activities of Institutional Investors.

Mr Marthin believes institutionalinvestors do a lot that never comesto the attention of the public. This isone of the reasons why media oftengives the (incorrect) description ofinstitutions as being passive andirresponsible owners. Mr Marthincarries no view on whether institut-ions in general would benefit frombeing more active than they are to-day. The most important work ofAMF in their role as an owner iscarried out in advance of the AGM.AMF has no written guidelines onhow to vote in certain types of issu-es, and Mr Marthin does not believethat such guidelines would serve anypurpose.

Company response. According toMr Marthin, companies are generallyvery attentive and eager to hear theviews of the owners. Whether thisleads to a different behaviour is moreuncertain, however.

Legislation. Mr Marthin does notbelieve that Sweden and the Swedishfinancial markets would benefitfrom a legislation more similar tothe one found in the US. He pointsout, however, that it is his impres-

Status in Sweden – five cases

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sion that much of the debate on acti-ve ownership in connection withethics originates from the US, andthat the legislation may contributeto that fact.

Practical Work with ActiveOwnershipThe policy of AMF is to engage indirect contact with the companies,rather than using the option of sel-ling the shares or use its voting po-wer.

To AMF, “Active ownership” me-ans three things:1. Influencing the decision making

bodies of a company2. Screening and analysis of hol-

dings and potential holdings3. Entrepreneurship, where the ow

ner actively engages in the activities of the company.

AMF actively pursues the first andsecond items on this list, but has nointention to become an entrepre-neur. This is also reflected in theportfolio composition. AMF hasonly marginal direct investment,and deliberately avoids becoming amajor owner in any company, sincesuch a position would force theminto longer commitments and moredirect involvement in the daily ope-rations of the company. At present,AMF does not hold more than 5-6percent of the votes in any company.

Ethical Aspects in ActiveOwnership and Consequences ofActive OwnershipIt is rare that AMF takes environ-mental or social issues into accountin their role as an owner, and AMFhas no publicly available policy onethical issues in general. There is,however, an internal document de-scribing how ethical issues should beaddressed by AMF staff, includingfund managers and analysts.

Even though it is uncommon thatAMF takes action in ethical issues,

as an owner, Mr Marthin mentionsthree factors that can trigger suchactions:1. Staff reactions.2.Media, for example covering an

incident related to a company inthe portfolio.

3. Financial analysis of individualcompanies.

At present staff reactions and inci-dents reported in the media are themost important of these factors. Inthis sense the actions taken by AMFare often reactive rather than pro-active. Mr Marthin cannot recallany case where ethical aspects havebeen considered as having such asignificant impact on the financialperformance of a company in theportfolio so the analyst has recom-mended AMF to take action in theirrole as an owner.

AMF has developed routines forhow to handle incidents related totheir holdings. The most importantis to get an independent view onwhat has actually happened. Inmany cases things are not as simpleas they seem, so AMF always seeksto get information from several me-dia sources, researchers or compa-nies. The next step is to take directcontact with the company in ques-tion and hear their version of thestory. In most cases this leads to afruitful discussion on how the issuecan be resolved.

FolksamFacts about the CompanyCompany: Folksam Asset Manage-ment, a division of Folksam MutualGeneral InsuranceMain client categories: Major popu-lar movements and members ofthese.Assets under management: 105BSEK (August 2003)Share of holdings actively managed:100 percent.

Internal management or manage-ment under direct control:100 percentEstimated number of holdings:1 500Estimated annual turnover in port-folio: Not availableDirect investments: Marginal

Date of Interview: 2003-02-20Company representative: HåkanJohanssonPosition: Manager Folksam AssetManagement

General on Active OwnershipIt is Folksam’s view that practisingactive ownership is both a right anda responsibility of a shareholder.The main objective of Folksam’sactivities is always to increase thereturn on investments. However,Folksam also hopes that thecompany’s commitment will have apositive influence on society at lar-ge. And if, which is the conviction ofMr Johansson, investing in compa-nies which take a broader range ofstakeholders into consideration intheir business will provide a betterlong term return on investments,these two objectives are not contra-dictory. Further, Mr Johansson be-lieves that the importance of activeownership is increasing in the finan-cial markets, both as a tool for inves-tors and as a competitive advantage.

Activities of Institutional Investors.

Folksam has previously, as manyother institutional investors, beenrelatively passive as an owner. Issuesthat called for action where relatedto board composition, mergers andacquisitions and, in more recentyears, executive compensation. How-ever, over the last few years, thecompany has gradually changed itspolicy, and is making increasing ef-forts to pursue the role of an activeowner. It is the view of Folksam thatthere is a trend of institutions inSweden becoming more active.

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However, in general Swedish institu-tions are still too passive as owners.This is true for traditional corporategovernance matters, but even moreso for issues related to environmen-tal and social aspects of business.An important reason is the short-term investment horizon of mostinstitutions. However, even invest-ment companies which in some ca-ses have holding dating back to thefounding of the company, show asurprising lack of interest in actingin ethical issues, according to MrJohansson. Furthermore, practisingactive ownership is resource consu-ming and demands different skillsand competence than a more passi-ve owner needs.

Company Response. In general, MrJohansson has the impression com-panies welcome owners that take aninterest and express an opinion onissues important to them. Swedishcompanies are also well aware ofmany of the potential ethical pro-blems associated with their opera-tions, and welcome a discussionabout them. It remains to be seen,however, how companies react ifinstitutions attempt to significantlyincrease their influence over thecompanies in which they hold shares.

Legislation. Mr Johansson does notsee that legislation constrainsFolksam’s possibility to act as anowner. However, there can be situa-tions where an owner engaging indirect dialogue becomes an insider.This is one of the reasons why trans-parency is crucial, both from com-panies and owners. Mr Johanssonrecognises that this can create pro-blems for analysts, whose whole jobis to seek out information and acton it before the rest of the market.

Practical Work with ActiveOwnershipFolksam adopted a new ownershippolicy in January 2003. It is the in-

tention that the ownership policyshould be revised once a year, andthe company is currently developingnew routines for implementation ofthe policy.

Folksam states in its ownershippolicy to “actively influence compa-nies through investments where it isconsidered to be feasible and suc-cessful”. The OECD-guidelines oncorporate governance apply to all ofFolksam’s holdings, both Swedishand foreign. Furthermore, moredetailed guidelines are applied toSwedish holdings i.e. companiesthat are traded the Stockholm StockExchange. Folksam’s intention is topractice its role as an owner at annu-al general meetings, through directcontacts with corporate manage-ment and boards, through partici-pating in nominating committeesand through co-operation with otherowners. So far, the policy only co-vers holdings traded on the Stock-holm Stock Exchange.

Due to shortage of resources,Folksam cannot attend all annualgeneral meetings of the companiesin which they are owners, nor canFolksam be active in all those com-panies. Consequently, Folksamseeks to act in issues they considerparticularly important, and wherethe potential for success is believedto be the greatest. The experience ofFolksam is that the annual generalmeeting is not the most effective wayto influence a company. In fact,Folksam has never participated inrejecting a proposal from a sittingboard of directors. Instead, enga-ging in direct dialogue with thecompany has proven to give betterresults, regardless if the issue athand is very controversial or ifFolksam merely seeks informationfrom the management or board ofdirectors of a company. The con-frontational approach taken bymany shareholder groups, particu-larly in the US, would not be effecti-ve in Sweden. Transparency and

trust must form the foundation inthe interaction between owners andcompanies.

Folksam only occasionally co-operates in ethical issues with otherSwedish institutions. It is MrJohansson’s view that that institu-tions should express opinions on is-sues of principal and strategic cha-racter to a greater extent than whatis the case today. Today institutionsoften only act on very specific inci-dents, and in a reactive manner.

Folksam continually seeks possi-bilities to co-operate with interna-tional institutions, both throughnetworks and by one-to-one part-nerships. So far, however, this hasnot led to any co-actions in specificownership issues.

Ethical Aspects in ActiveOwnership and Consequences ofActive OwnershipThe vision of Folksam is “to offer abroad majority of people a betterand more secure life”. In accordancewith this vision and as a large stock-holder the company views it as a na-tural action to be engaged in activeownership, including having opini-ons and acting in ethical issues. Asmentioned earlier, Folksam alsocarries the conviction that compa-nies that are ethically sound and hasa broad stakeholder perspective willgive better return on investment.

According to Mr Johansson, it isessential to counteract a situationwhere ownership diverges too muchfrom the management of compa-nies. This is particularly true in ethi-cal issues. Mr Johansson considersan integration of Folksam’s activiti-es as an owner, e g at annual generalmeetings, and the day-to-day port-folio management is essential. Thisis due to the fact that many ethicalissues never reaches the annual ge-neral meeting or even the top mana-gement of the companies. It is theanalysts who study individual com-panies who are most often in con-

19

tact with the companies. Conse-quently, the single most importanttask in Folksam’s current work indeveloping its ownership practices isto make the individual portfolio ma-nagers and analysts aware of theownership policy’s full extent andmeaning, including the ethicalaspects. Furthermore, Folksam usesethical screening for all portfolioselection, and ideally this shouldform an integral part of the workwith ownership as well.

Nordea fundsFacts about the CompanyCompany: Nordea InvestmentFunds SwedenMain client categories: Retail andsome institutionalAssets under management: Approx-imately 30 billion SEK (invested inSwedish equities)Share of holdings actively managed:100 percentInternal management or manage-ment under direct control:100 percentEstimated number of holdings:Approximately 100Estimated annual turnover in port-folio: Not availableDirect investments: Insignificant

Date of interview: 2003-04-16Company representative:Thomas EhlinPosition: Senior Vice President,Corporate Governance

All facts and views in the text referto the activities of Nordea invest-ment fund companies with domicilein Sweden or Luxembourg, mana-ged by Nordea Investment Manage-ment. However, for the sake ofreadability, we also use “Nordeafunds” in the text, but the readershould be aware that this does notmean the entire Nordea group.

Nordea Investment Funds Swe-den has some 30 BSEK in manage-ment, all of which are actively ma-

naged according to the guidelinesbelow. The ownership activities arecarried out in close co-operationwith the asset managers.

The time perspective on posses-sions is long term, defined as morethan three years. The time perspec-tive does not affect the view on acti-ve ownership.

Nordea Investment Funds hasrecently started ethical screening,performed by an external consul-tant. This is done for a limited num-ber of funds, aimed primarily at theinstitutional market.

General on Active OwnershipNordea funds take an active role asan owner in order to maximise sha-reholder value. Presently, Nordeadoes not have any asset management,and does not manage any fund, withany other goal than maximising sha-reholder value.

Nordea funds’ definition of sha-reholder issues are those that aresubject to decision at the AGM (orEGM). Nordea funds’ representati-ves do not directly sit on companyboards. Nordea manages open in-vestment funds, and must thus beable to adjust its holdings on shortnotice. Therefore, it cannot form along-term physical presence in acompany.

Activities of Institutional owners.

Mr Ehlin considers institutional in-vestors in Sweden very active: thosewho criticise institutions for beingtoo passive disregard the type ofownership, i.e. no direct board in-volvement, which limits the com-mitment to the type of issues descri-bed above. Mr Ehlin considers Swe-dish institutional investors as moreactive than their counterparts in forexample UK and USA, with regardsto their role in nomination commit-tees. It is difficult to say whetherSwedish institutional investorsshould be even more active or notwhen viewed from the inside: how

much can be done is a question ofresources rather than intention.

Company Response. Swedish com-panies generally welcome active ow-nership. Nordea funds’ view is thatits opinions and actions should notcome as a surprise for the compa-nies, which is one of the reasonswhy the active ownership policy ex-ists.

Legislation. The protection for mi-nority shareholders is well develo-ped in Sweden, which gives goodopportunities for institutional inves-tors to act as active owners For ex-ample, all shareholders, regardlessof size, can raise issues for inclusionon the agenda of the AGM.

Practical work with ActiveOwnershipNordea funds have a written policyon active ownership. This documentwill soon be subject to revision, butonly in detail: those involved find ita well-functioning active document,and the policy as such will not bechanged, apart from an addition onauditing policy.

Today, Nordea funds take an acti-ve role as an owner where they havea “substantial ownership” of a com-pany. This happens for examplewhen either:

1. Nordea is one of the major owners of a company (normally

among top 10 owners)2. Nordea’s investment in the com

pany is substantial

Sometimes this leads to engagementin relatively small companies, wherethe shareholder value for the totalasset management is limited.

The priority issues for Nordea fundsare

• board election• capital structure (new issue of

shares, repurchase of shares)

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• incentive structures foremployees

• structural questions (companypurchases, mergers).

Board election is considered as themost important ownership tool.Also, Swedish legislation concer-ning incentive programs demands90 percent majority for many deci-sions, which puts minority holdersin an important position (i.e. witha holding of 10 percent you canpractically have the decisive votingpower), which gives this question animportant status for institutionalinvestors in Sweden.

Nordea funds act as an active ow-ner almost exclusively in Swedishcompanies, plus in a limited numberof non-Swedish companies.

Nordea funds do work actively atAGMs, and in the policy on owner-ship they have publicly availableguidelines (although relatively bro-ad) on how they will act on differentissues. Nordea participates on some50-70 AGMs per annum, and insome 15 board nomination commit-tees. The nomination committeesare seen as one of the most impor-tant tools of shareholder influence.

Nordea funds are also in directcontact with the company throughthe board of directors, or occasio-nally with the CEO through assetmanagers. Mr Ehlin considers thatNordea funds have little involve-ment in the operation of the compa-nies, neither directly nor indirectly,as this is not the role of the owner.

Mr Ehlin considers that Nordeafunds manage to do what they setsout to do in terms of active owner-ship, and that the company hasenough knowledge to do it. Nordeafunds often work in concord withother institutional investors, eventhough no formal working groupsexist. Most often the active owner-ship policies of the institutional in-vestors are close enough to allowco-operation: as an example, eight

institutional investors jointly deve-loped the guidelines concerninginformation to shareholders aboutincentive programs in stock marketcompanies.

Ethical aspects in ActiveOwnership and Consequences ofActive OwnershipNordea funds include environmen-tal, and thereby also ethical, aspectsin their active ownership process inorder to analyse a company’s long-term performance. This is done inorder to maximise shareholder value.In reality, Nordea funds have neverhad to act on any of these issues,positively or negatively.

As for the actual effect of activeownership on shareholder value it isvery difficult to prove any connec-tion. It is rather a conviction that itmust have a positive impact. Thereare examples of individual transac-tions that have led to a better share-holder value, but a quantitativeanalysis of the entire area has notbeen done.

Nordea funds do not have anyspecific ethical or environmentalissue they consider more importantthan any other issue.

RoburFacts about the CompanyCompany: RoburMain client categories: Retail(majority) and institutional.Assets under management: Approx-imately 230 billion SEK.Share of holdings actively managed:100 percent.Internal management or manage-ment under direct control:100 percent.Estimated number of holdings:Close to 150 companies in Sweden +a very large number of companiesoutside of Sweden.Estimated annual turnover in port-folio: Not available.Direct investments: 0 percent.

Date of Interview: 2003-02-18Company representatives:Marianne NilssonPosition: Deputy Head of Equities

General on Active OwnershipIt is Robur’s policy to be an activeowner, with the principal objectiveto increase shareholder value andreturn on investments. Furthermore,Robur is convinced that, as one ofthe largest institutional investors inScandinvia, they have the duty andresponsibility to act as an active ow-ner.

According to Ms Nilsson, share-holder activism has gained more at-tention among institutional inves-tors as the positive effects of goodcorporate governance on returnshave become known. The complexi-ty of corporations and the financialmarket of today also call for a coun-terpart in the form of an active ow-ner.

Activities of Institutional Investors.

An open dialogue between manage-ment and the owners is not a newphenomenon in Sweden. However,talks may have become more indepth and frequent in recent times.In many cases more is done thansaid, i.e. a lot of activities take placewithout the general public knowingabout it. As conflicts between ow-ners and management rarely are re-solved in the public arena, the Swe-dish climate for ownership issuesmay be perceived as less spectacularcompared to that in other countries,particularly the US. Owners wouldrather come to a mutual understan-ding or an acceptable compromisewith a company’s board than con-front them in public.

Company Response. In Robur’s ex-perience, corporate managementand boards of directors more oftenthan not welcome active owners. Ingeneral, owners who choose to takeaction are well responded to and

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supported. Furthermore, it isRobur’s impression that CEOs andCFOs are often well-informed onethical issues. A financial analystmay very well be contacted directlyby the CEO or head of investor rela-tions on questions related to corpo-rate governance and active owner-ship. However, when questions rela-ted to the ethical performance ofcompanies are debated by sharehol-ders in the media, it can have acounterproductive effect on thecompany’s willingness to listen tothe views of the owners.

Practical Work with ActiveOwnershipRobur has a newly revised owner-ship policy that primarily applies tocompanies on the Swedish stockmarket. As for foreign companies, itis decided on a case to case basiswhether Robur should take on therole of an active owner. If this is thecase, it is the intention that the ow-nership policy shall apply to thosecompanies as well.

Central questions in Robur’s workwith ownership are:

• Composition of the board of di-rectors

• Corporate structure (mergers andacquisitions)

• Executive compensation• Information and transparency• Accounting

A well-composed board of directorsis a prerequisite for a well-functio-ning and managed company. There-fore, participating in nominatingcommittees is a central activity forRobur.

In general, Robur attends theAGMs of the companies of whichthey are among the 10-15 largest ow-ners. Some 80-90 AGMs are atten-ded annually.

However, preparing and attendingthe AGM is but one part of activeownership. Contacts with manage-

ment and the board of directors of acompany are regarded as equallyimportant. Consequently, contactsare taken on a regular basis. It doeshappen that these talks result ininsider situations developing,although it is not common.The communication between theowner and the company works inboth directions. In many cases theowner may act as a sounding boardfor a company in a stressful situa-tion, rather than reacting with im-mediate divestment as a response toincidents that may influence acompany’s share price negatively.The general procedure when suchincidents occur is to send a letter tothe management of the company ofconcern, in order to get an explana-tion and a confirmation of the facts.

In the discussions between Roburand the management of the compa-ny, focus lies on the problem, the re-sponsibility of the company and theneeded actions to solve the problem.Environmental analysts, heads ofdepartment and management mayall be engaged in the process, depen-ding on the complexity and size ofthe issue. Divestment is seen as alast way out, if discussions are pro-ven to be fruitless.

Ms Nilsson stresses that Roburshould not be seen as a kind of “Su-perboard” with the ultimate re-sponsibility for a company. That re-sponsibility always lies with theboard of directors and the manage-ment of the company. Thus the im-portance of composing an ade-quate selection of board members.

Robur does a majority of its com-munications through the bank offi-ces of Föreningssparbanken. Onlylittle communication is conductedthrough the media, and Robur doesnever intentionally expose specificcompanies in which they hold sha-res in the media. In this regard Ro-bur differs from institutions likeFolksam and Banco. These have fewlocal offices and are therefore more

dependent on the media to get theirmessage across, according to MsNilsson.

Robur welcomes co-operationbetween institutions, although Ro-bur itself is not part of any networkof lasting character with this objec-tive. Instead, they co-operate withother institutions if they share thesame views, and if working togetherincreases the chances of success, ona case by case basis.

Ethical Aspects in ActiveOwnership and Consequences ofActive OwnershipMs Nilsson is convinced that as alarge institutional investor, Roburhas the opportunity to influence theway companies act and do business.The process of incorporating speci-fic environmental and social issueson the agenda of active ownershipand corporate governance has onlybegun. It is important to have a ho-listic view on ownership, however.Fund managers or analysts besthandle some issues, whereas otherquestions should be discussed at thelevel of the board of directors or atthe AGM. The ownership structureis also of importance, it obviouslymakes a difference whether the hol-dings of a company make up 1 per-cent or 10 percent of the total votes.

The trend within the field is clear.Robur allocates more resources andattention to ownership and corpora-te governance issues now than everbefore. Recently, the organisationalstructure of Robur was changedwith the intention of reinforcing theimplementation of the ownershippolicy and making it easier to putspecific environmental and ethicalissues on the agenda. All mattersrelated to ownership are now hand-led by one holding company.

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SEBFacts about the CompanyCompany: SEB FonderMain client categories: Institutions,life insurance companies and pri-vate investorsAssets under management: SEK 487billion (December 2002)Share of holdings actively managed:100 percentInternal management or manage-ment under direct control: 98 per-centEstimated number of holdings: SEBmanages 198 funds and 399 institu-tional mandates. Of these, some 50percent are stock funds, each withapproximately 50 shares (December2002)Estimated annual turnover in port-folio: Not availableDirect investments: Marginal

Date of Interview: 2003-04-16Company representative: CeciliaLagerPosition: President SEB Fonder

General on Active OwnershipSEB uses active ownership for Swe-dish companies exclusively. Theyhave advisors for Japan, Asia, andLatin America, and for the rest in-house management. They managesome 125 BSEK within funds, and500 BSEK in asset management.

SEB has a policy to be an activeowner, with the purpose of increa-sing value for the shareholders. Themost important mean of influenceis the nomination and influence ofboard members and board compo-sition. Indirectly, this gives the pos-sibility to influence the boards elec-tion of CEO, and thus the CEOschoice of top management. It is alsoimportant to influence the work ofthe board and the transparency inthe board work. SEB is representedat some 70 annual general meetingsevery year.

SEB definitely has a major influ-ence on the companies they decide

to be active owners in. The effortput in by SEB also depends on theestimated potential for success. Thisis of course dependant on how largeshare of the company they own, andthe size of the investment.

Activities of Institutional owners. MsLager does not see that the institu-tional owners in Sweden are passive.Especially during the last threeyears, a notable increase in institu-tional shareholder activism has ta-ken place – a historical comparisonwould show many differences to thesituation today. The institutionalowners are not active in the sameway as, say, a large private owner,for structural reasons. An institutio-nal owner aims at maximising sha-reholder value and must be able tochange companies in the portfolioon short notice. Therefore, a “deep”engagement with direct institutionalrepresentation in boards etc. is notpossible.

Today, institutional owners arebeginning to diversify their fundsand asset management from otherinstitutional owners with respect toshareholder activism policies. MsLager sees one potential danger inthis trend, as it may lead to “jumpy”working conditions for the boardsof the companies as the institutionalowners change their portfolios com-position. Therefore, it is importantthat institutional owners do not di-rectly control the business activitiesin the companies.

That negotiations and contactshappen behind closed doors is notnecessarily a negative thing – thisimproves the chances for a friction-less solution. It is however impor-tant that facts are accounted for af-terwards: that the owner has contac-ted the board on a certain issue andwhat the outcome was.

Company Response. The companiesare generally positive to institutio-nal shareholder activism. However,

the activism must be long-termoriented, even though institutionalowners do change the compositionof their portfolios. The institutionalowners must also to a large degreerepresent the “collective” institutio-nal ownership in Sweden, eventhough no such formal group exists.Otherwise, no continuity could beachieved in the institutional share-holder activism.

Legislation. Fund companies mayown up to 5 percent of companiesaccording to Swedish law. This lawis however practically bypassedthrough institutional investorsowning several fund companies:SEB owns three separate fund com-panies mainly for this reason. MsLager perceives she has insufficientknowledge of the legislative frame-work in other countries to be able tosay whether or not these would bebeneficial to the Swedish situation.

Practical work with ActiveOwnershipThe main tool for shareholder acti-vism is the AGM: SEB yearly visitsome 70 AGMs. SEB tries to solveissues and conflicts well before theAGM in order to increase the im-pact – it is not a matter of confron-tational politics.

The second main tool for acti-vism is the participation in nomina-tion committees for the companyboard, through which SEB may in-fluence the composition of theboard and also nominate individu-als they believe would be suitable. Inthe board nomination committees,it is always a matter of unanimouslysupporting the entire board and nota matter of supporting individualcandidates.

The SEB policy for shareholderactivism in asset management givesthe guidelines for how SEB acts. Asthis policy is relatively general, therewill often be room for interpretationdepending on the specific case.

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SEB does not normally involve inactive ownership of foreign compa-nies, as their relative shares of com-pany holding are usually small. Inthese instances SEB votes with itsfeet, i.e. sell when important issuesare discovered.

SEB uses a reference group of 6 per-sons to gain adequate knowledge ofthe companies they are active within.These persons all have extensivebackground as CEOs and boardmembers in large companies in di-verse sectors, so that they may notonly provide knowledge but also im-prove communications betweenSEB and the companies.

Ms Lager believes Swedish com-panies are sensitive to shareholderdemands. When asked whether thesame confrontational policy thatlarge institutional owners in the USseem to adopt would be viable inSweden, Ms Lager says that thatcould happen, but it is long journeybefore we get there. If an operatio-nal issue would occur to which SEBwould not consent, they would selltheir stock if it was a small holding,or talk to the board if it was a largeholding. If this dialogue would notentail any acceptable action fromthe board, a formal letter would bewritten and distributed to media,and in the worst case lead to a con-frontational voting on the AGM.This has never happened, at least forethical issues, as far as Ms Lagercould recall.

Ethical aspects in ActiveOwnership and Consequences ofActive OwnershipSEB includes ethical and environ-mental aspects in their shareholderactivism process in order to maxi-mise shareholder value. They dem-and an integrated environmentaland ethical report from their com-panies, but otherwise depend on ex-ternal analysts.

The written policy that exists onethical issues is SEB’s ownershippolicy. There is no specific ethical orenvironmental issue that is more im-portant than any other for SEB intheir shareholder activism.

According to Ms Lager, capitaldoes not save the world. Active ow-nership has not affected the legisla-tion on ethical issues in Sweden, butactive ownership does contribute tothe abiding of the legislation. Share-holder activism aims to maximiseshareholder value, and thereforemaximises ethical performance aswell as long as ethical performanceaffects shareholder value. There areinstitutional owners whose policy isthat the equivalence Swedish legisla-tion should be followed independentof where the company is active. Thisis not a policy adhered to by SEB.

Ms Lager does conceive thatSEB’s shareholder activism has aneffect on the shareholder value, eventhough it is difficult to show in figu-res. One example that could be usedis the price negotiations in take-overs, in which the activism canhave a discernible, direct effect.However, Ms Lager claims that thereare no studies whatsoever that showthat ethical and economic perfor-mance are positively correlated.There are also no studies that showthe same for active ownership andeconomic performance. Still, thebottom line is a conviction that acti-ve ownership does have a positiveeffect on shareholder value, and thatethical performance can effect eco-nomic performance.

Apart from this, ethical and envi-ronmental performance does havean impact outside ownership, e g inasset management: bad performan-ce may lead to a no-buy decision ora sell decision. Thus, many ethicalquestions are managed by asset ma-nagers rather than through share-holder activism.

Owners and media often go handin hand when it comes to pressureon boards and companies.

Summary of the CaseStudiesGeneral on Active OwnershipAll interviewed institutions have apolicy to be active owners. Theyalso all declared that the objectiveof their activities is to increase thereturn on investment. Only one ofthe interviewed institutions, Folksam,said that an parallel objective is toaffect and improve society at large,for a greater number of stakehold-ers than just their own clients.

All institutions mainly limit theiractivities as owners to the holdingstraded on the Swedish stock ex-change. They also all focus their at-tention to companies and issueswhere the likelihood of success isthought to be the greatest. This esti-mated success-rate is closely coup-led to what share of the votes is heldby the institutions.

Only one institution, Folksam,carries the view that Swedish insti-tutions are too passive. The otherfour institutions believe the criti-cism raised against institutional in-vestors to a large extent stems frommedia’s lack of knowledge aboutwhat the institutions actually do asowners.

All institutions in the study haveexperienced mainly positive respon-se from the companies where theyhave taken action in their role as ow-ners.

Practical Work with ActiveOwnershipAll interviewed institutions attend alarge number of AGMs every year.

Board election and participationin nomination committees are con-sidered to be very important by allinstitutions in the study. However,all institutional investors also men-tion that direct and more informalcontacts with the company and with

24

the board of directors can often bean equally, or even more, fruitfuland effective way to communicatetheir views.

All institutions stated that dialo-gue, transparency and trust are themost important components in theinteractions between the ownersand the company. No intervieweebelieved that a more confrontationalapproach would be beneficial. OnlyFolksam declared that they use themedia as an integrated part of theirownership strategy, although SEBrecognises that media and ownerssometimes go hand in hand in put-ting pressure on companies in cer-tain questions.

The only legislative concernseems to be that insider situationscan sometimes occur. Apart fromthat, no institution believes thatlegislation restricts their ability toact in a way that they would haveliked.

Ethical Aspects in ActiveOwnershipAll institutions except AMF expli-citly mention ethics in their owner-ship policy. However, what is inclu-ded in the term “ethics” is not veryclear, and it varies between institu-tions.

No institution had participated inrejecting a proposal from a board ofdirectors on ethical grounds. Nordid any institution give examples ofhow environmental or social issueshad been taken into the process ofactive ownership as defined in thisproject. Several institutions stressedthat such issues are often too opera-tional to be discussed at board-level.Instead, ethical aspects are mana-ged in the daily fund managementand share analysis. Several institu-tions also mentioned that they con-sider screening and portfolio selec-tion as a part of their ownership ac-tivities.

All institutions declare that theyhave routines for handling incidents

occurring in companies in whichthey have holdings.

Robur, SEB and Folksam statedthat they see a clear trend of increa-sing activism from owners. Thistrend is also true for ethical issues,with the reservations mentionedabove. These three institutions alsoexpressed the strongest convictionthat institutional investors can in-fluence the companies in ethical is-

The overall findings from the interviews are summarised in table 1Table 1. Summarised findings from the interviews

AMF Folksam Nordea Robur SEB

Active owner? Yes Yes Yes Yes Yes

Shareholder Shareholder Shareholder Shareholder Shareholder

value value, parallel value value value

Rationale for active objective

ownership responsibility

Are institutions No Yes No No No

too passive?

Positive, but Positive Positive Positive Positive

will to change

Company response not great

Restricted by legislation No No No No No

No No No No Not at pre-

US approach applicable sent, maybe

in Sweden? in the future

Ethics included in publicly

available ownership policy? No Yes Yes Yes Yes

Special focus on certain No Climate No No No

ethical issues? change

Consequence analysis of

ownership activities

performed? No No No No No

sues. Folksam and Robur went as afar as saying they have a duty to beactive in such issues.

No institution has done anyquantitative consequence analysisof their ownership activities, nordoes any institution in the studyhave knowledge of any studies sho-wing a positive correlation betweenactive ownership and return on in-vestment.

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Active owners motivate their ac-tions through a belief that what theydo has a positive impact on share-holder value, although most agreethat any firm proof of this is diffi-cult to obtain. In this section a pre-sentation is made of some scientificviews on the consequences of activeownership.

There are few, if any, studies thatunmistakably point out shareholderactivism as positive for shareholdervalue. Actually, there are very fewstudies that find any strong connec-tion, positive or negative, betweenshareholder activism and sharehol-der value. Apparently, there seemsto be a difference in results betweenmanagement studies and financialstudies, depending on the scope ofthe studies made. There is little writ-ten about ethical shareholder acti-vism and performance, but some onshareholder value and CorporateSocial Responsibility, CSR. Thesestudies usually show a weak rela-tionship between CSR performanceand financial performance. As CSRcan be seen as the logical effect ofethical shareholder activism (i.e.companies taking an ethical respons-ibility for their activities), it is inte-resting to see that there seems to berelatively week correlation betweenCSR and shareholder value as well.

Active ownership andperformanceKorac-Kakabadse et al (2001) findsthat there is no conclusive evidenceof contribution of corporate gover-nance on financial performance.Further, large scale surveys of UKand US corporations suggest thatinstitutional investors consider fi-nancial performance and growthpotential as key investment criteria,while corporate governance wasranked towards the bottom of thelist (Pic, 1997). Several large-scale,long-term empirical studies find noclear evidence of a substantive rela-tionship between board composi-

Consequences of Active Ownership

tion and financial performance(Dalton et al, 1998, and Dalton andDaily, 1999), and other studies cometo basically the same conclusion(Zahra and Pearce, 1989, and Maas-sen, 1999). Shareholder activism canbe divided into non-confrontational,long-term strategies (such as negoti-ated settlements or board election)and confrontational strategies (suchas where the owners vote against thecompany board at AGM’s). Re-search suggests that non-confronta-tional shareholder activism has apositive impact on stock return inthe short-term, but that the long-term effects are negligible, and thatthere is no evidence that confronta-tional activism has any effect on re-turns or performance (Karpoff etal, 1996, Wahal, 1996, Del Guercioand Hawkins, 1999).

In a study on the active owner-ship performed by CalPERS, theCalifornia Public Employees’ Reti-rement System, it shows that share-holder value benefits from activeownership when targeting eventswere successful (Smith, 1996). Cal-PERS exercise activism on the bot-tom ¼ performers in the portfoliowhere they have a chance of doingan impact (i.e. where CalPERS alsois a major owner). On a net, it wasestimated that the value increasefrom active ownership over the stu-died period was 19 million USD,while the costs were 3,5 millionUSD. However, the performance ofthe companies intervened in was notunambiguous: there was a signifi-cant positive stock price reaction forsuccessful targeting events and asignificant negative reaction for un-successful events.

Romano, 2001, tries to unfold thereasons behind that financial ana-lysts normally find little or negativeimpact on financial performancefrom shareholder activism. Thereare several possible reasons:

1. What firms are targeted? Targetsof shareholder activism are normally poor performers. Targetshave high institutional and lowinsider shareholding.

2. Shareholder proposals usuallyhave no significant effect oncompany performance, whileprivate negotiations over propo-sals in advance of the shareholders’ meeting usually has at leastshort-term impact, positive ornegative. Therefore, studies basedon shareholder proposals as indicators of activism naturally showlow impact.

3. Financial analysts have not beenable to identify a positive impactof activism because a lot of theactivism is misdirected: it doesfurther shareholder value.

Romano also finds that it is not pos-sible to document positive stock pri-ce effects from shareholder propo-sals on board composition. Overall,there seems to be very little evidenceof the impact of shareholder acti-vism on company performance. Onthe other hand there are objectionsthat it would be impossible to provea positive effect on stock pricesfrom shareholder activism even ifdoes occur – fundamentally, share-holder activism seems more rootedin beliefs than in undisputable facts.

CSR and performanceThere are two alternative views ofthe impact of socially responsibledecisions in companies(McWilliams, 1997):

1. Socially responsible behaviourhas a negative impact on financi-al performance, representing aredistribution of wealth from thefirms’ shareholders to its otherstakeholders.

2. Socially responsible behaviourenhances financial performanceand creates benefits for otherstakeholders.

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McWilliams has a belief that thereis a trade-off between CSR and fi-nancial return, and therefore adheresto the first view. She does howevernot find any conclusive evidence foreither view when analysing studiesthat originally come to the conclu-sion that the second view must becorrect. The studies critisised byMcWilliams are Wright et al 1995,Meznar, Nigh and Kwok 1994,Clinebell and Clinebell 1994,Davidson and Worrel 1992,Worrel, Davidson and Sharma 1991,Davidson and Worrell 1988.McWilliams’ main critique is thatthese studies use an “event window”that is too long, so that confoundingeffects have time to take place, the-reby making it difficult to derivecause and effect.McWilliams’ conclusion is that it ishard to isolate effects of any singledecision, especially if many financi-ally relevant effects happen within ashort period of time.

Diltz (1995) has examined 28stock portfolios in order to determinewhether ethical screening has an im-pact on portfolio performance. Theanalysis shows little impact, and tothe extent that any impacts could beobserved, they were both positiveand negative, depending on whatcriteria were used in the portfolioscreening.

Harrison and Freeman (1999)find that empirical research in thearea of social responsibility andcompany performance is in an earlystage. However, Johnson andGreening (1999) test an integratedmodel of the effects of institutionalinvestors and various governancedevices on corporate social perfor-mance. They find that organisationswith higher equity ownership bypension funds and organisationswith higher levels of outside directorrepresentation tend to have highercorporate social performance on anumber of dimensions. In this study,organisations that perform well on

the “people” dimension of socialperformance (relations withemployees, women and minorities,and communities) tend to havehigher financial performance aswell. This conclusion is contrary toDiltz’s finding that companies thatprovide family-oriented benefits arepenalised in their financial perfor-mance (Diltz, 1995). Molley et al(2002) in turn find that environmen-tal performance measures have nosignificant impact or even a negativeimpact on financial performance, asmeasured by returns. Kurtz (2000)concludes that, as social screeningssimply seem to have no effect on fi-nancial performance, there is nocontroversy in screening a portfolio,as it then would be both consistentwith ethical values and offer a com-petitive return on investment.

As a conclusion, it seems that therelation between ethical performanceand financial performance is weak,and in the rare cases that any corre-lation can be seen, it can be bothpositive and negative. Thus, ethicalperformance does not seem to be ofimportance for financial perfor-mance.

27

As this study has shown, active ow-nership can come in many formsand with many different purposes.Very roughly, one can distinguishbetween two types of active owner-ship: either the shareholders forcethe management to act by usingsome sort of direct or indirect threat,or the engagement takes on a formbuilt more on dialogue and mutualtrust than threat. It is clear that thefirst type of engagement is muchmore common in the US than it is inSweden.

How, and to what extent sharehol-ders are active in is to a large extentdefined by in which institutionalsetting they are operating, whatkind of shareholder they are, butalso what ambition and policy theyhave. The setting and the characterof the investor also govern whatkinds of issues are defined as ‘ethi-cal’. Some investors make no diffe-rence between traditional corporategovernance issues like board inde-pendence and executive compensa-tion, and SRI-type issues like envi-ronment or labour rights. One dan-ger of this could be that staff hiredto work with, say, environmentalissues in connection to active ow-nership, are suddenly expected tohave opinions on all matters rangingfrom mergers and acquisitions tochild labour. This, however, is a mat-ter for each institution to avoid. Wehave no strong opinion on whetherthe lack of separation betweenissues of different kinds is correct ornot, but are content to note that thisis the case.

It is our view that a direct dialoguebetween institutions and companyboards seems to have more relevan-ce to company behaviour and per-formance than voting does. Thiswas indicated in the interviews, andthe same conclusion has been ex-pressed by actors in other European

Discussion

countries (e g Actuarial Profession,2001). There is a clear difference inthe way ownership is executed inSweden compared to what seems tobe the case in the US in particular.In Sweden, the institutions seem toprefer to work closely together withthe board and management of thecompanies in which they own sha-res, giving their opinions at informal‘one-to-one meetings’, rather thancriticising the boards in public, e.g.at the AGM. It is very rare that con-troversial environmental or socialissues are decided by voting atAGM’s in Sweden. This contrasts tothe US, where shareholder cam-paigns regularly result in open con-flicts at the AGM.

Further, from an ethical point ofview it is equally, or even more, im-portant that an institution has ana-lysts who can ask well informed andrelevant questions about the ethicalperformance of the companies inthe investment universe, in her orhis regular work with portfolio se-lection. Several of the interviewedinstitutions expressed that the morean issue relates to the day-to-dayoperative management and strate-gies of a company, the further awayfrom the board and AGM it gets. Asa consequence, such issues are notaddressed by the institution in theirrole as an owner, but rather in theirrole as possible investor and thentheir analysts handle them.

The companies in the US, UK, andSweden, which we have studied,may not be perfect representativesof owners in general in thesecountries. However, the tendencythat the differences in active owner-ship lie rather in what market thecompanies operate than betweencompanies in the same market is re-latively clear. US activism is moreconfrontational than is the case inEurope. Swedish activism is relati-vely low-key and reactive, while UK

activism seems more proactive. Ac-cording to the interviewed persons,none of these specific profiles wouldwork very well in any other market.Therefore it seems natural to sus-pect that market structure has animportant role in deciding how acti-ve ownership is carried out.

There is no legislative aspect thathinders Swedish shareholder to actin the same way as the British or theAmerican institutions. A structuraldifference may be that Swedish in-stitutional owners have less influen-ce on companies, as they are smallerowners than their British and U.S.counterparts. According to the Swe-dish case studies, a lot of the acti-vism in the UK and in the U.S.would be considered involvement inoperative matters or micro-manage-ment in Sweden, something which isconsidered to be outside the manda-te for active ownership.

According to the British fund ma-nager Hermes, one of the criticalfactors of long-term active owner-ship is passive fund management ofindex tracking funds. Index trackingoften means long-term commitmentto certain shares, which gives lessroom for quick exits, and conse-quently higher incentive for activeownership as a mean of improvingthe return on investment. The Swe-dish institutional owners in this stu-dy all have a very large share of acti-ve management of the shares tradedon the Swedish stock exchange. Theseare also the holdings that are subjectto the institutions’ activities as ow-ners. This may be one of the reasonswhy the Swedish institutions in thisstudy seem more reactive and passivethan, for example, the large pensionfunds on the UK and the U.S.

However, active shareholders in theU.S and in the UK do not act alone,but often network with other insti-tutional owners when creating poli-

28

cy documents and campaigns. May-be Swedish institutional ownerscould become more active in thesenetworks? At least one of the Britishpension funds explicitly states thatin order to maximise shareholdervalue, they have to work for interna-lisation of ethical effects, as theirshareholders are representative ofthe society as a whole. If this is animportant driving force, maybe thelargest potential increase in activeownership in Sweden lies with thepension funds?

We note that all institutional actorswe have interviewed, and indeed anoverwhelming majority of the onesdescribed in the literature, subscribeto the view that active ownershipmaximises shareholder value. Thismay come across as somewhat puzz-ling given that we have found noquantitative studies that prove a po-sitive correlation between return oninvestment and active ownership.

The UK institutions seem to believethat being proactive in the ethicalfield as an owner maximises share-holder value in the long run, whilethis conviction does not seem tohave reached Sweden. Here, the be-lief seems to be that ethical issuesdo not influence stock value, at leastnot enough to motivate proactivebehaviour their ownership activities.

With all this in mind, we believe thatthe recommendation expressed byMyners, 2001, is very relevant forSwedish institutions: “Managersshould have an explicit strategy, elu-cidating the circumstances in whichthey will intervene in a company;the approach they will use in doingso; and how they measure the effec-tiveness of this strategy”. Today,there is room for improvement in allthese areas.

None of the institutions we spoke tostate that they use active ownership

as a way to gain market shares di-rectly. One institution even expres-sed a fear of a situation where inves-tors compete in being the most acti-ve. Thus there still seems to be alack of direct demand for active ow-nership from the clients of the insti-tutions. Rather, the average clientseems to want maximum return oninvestment, and does not care how itis achieved.

29

In order to follow the objective ofthe study, the questions from thefirst chapter of the report will betreated below.

What do ethical aspects ofownership mean?In the US, ethical aspects, or ratheractive ownership as a whole, is oftena matter of confrontational propo-sitions from owners on annual gene-ral meetings. In Europe, active ow-nership is generally carried out th-rough dialogue-based intervention.In the UK, active owners take a pro-active, operative role in forming po-licy documents and guidance in spe-cific issues, while in the rest of Eu-rope active ownership usually limitsitself to board elections. The diffe-rences in how active ownership un-folds stem largely from legislativedifferences and cultural differences,as active ownership is relatively ho-mogenous in the studied countries.

To what extent, and in whatway, are ethical aspectstaken into account byinstitutional investors?Active ownership in Sweden concer-ning ethical aspects seems to be fo-cussed on incidents rather than poli-cy issues, and reactive in its naturerather than proactive. Shareholdervalue is of paramount importance,and ethical aspects are of concernonly when this directly could affectshareholder value. There are fewtendencies to a broadened perspec-tive. Ethical aspects are often seenas operational rather than strategic,and therefore disqualified from legi-timate ownership influence.

What are the consequencesof active ownership withethical aspects taken intoaccount?There are few, if any, quantitativestudies on ethical aspects of activeownership. The studies done on acti-

Conclusions

ve ownership or on ethical screeningof portfolios show little or no effect,positive or negative, on financialperformance. It is considered diffi-cult, if not impossible, to prove anyeffects, even though the relationshipseems to be weak. It is even moredifficult to say anything about theeffects on corporate ethical perfor-mance emanating from ethical acti-ve ownership.

What effects would anincreased ethical focus inthe work with activeownership in Sweden have?Following the above question, it isnot possible to answer what effectincreased ethical active ownershipwould have in Sweden. To be pessi-mistic, one could say it would havelittle or no effect on financial andethical performance alike.

What are the hindrancesand possibilities for anincreased ethical focus inactive ownership inSweden?The Swedish institutional ownersparticipating in this study, apartfrom Folksam, do not agree that in-stitutional owners should be moreactive than they are today. Ethicalaspects do not seem to be suited forbringing up in the same form as e.g.board composition.

The American system is not desi-rable to implement in Sweden, assuch a confrontational systemwould be a step backwards from thedialogue-based intervention usedtoday.

Legislation is not considered anobstacle to a more active ownershipin Sweden, with the possible excep-tion of the insider information thatthe dialogue-based interventionsometimes can lead to.

Generally, there are few indica-tions that active ownership will be-come a powerful tool for driving the

companies’ ethical agenda. In orderfor this to change, the view of activeownership as solely a strategic toolmust change and the activities of theinvestors must become more opera-tive and proactive in their nature. Ifethical active ownership will becomemore important in Sweden in thefuture, it will still be very hard, ifnot impossible, to discern anyquantitative facts on its effect.

30

During the process of this project anumber of questions have arisenthat remain unanswered:

• In what way could Swedish insti-tutions take part in the sharehol-der networks developing in theU.S. and the UK? Many of theviews expressed in the ownershippolicies of, for example, UK in-vestors, are shared by the Swedishinstitutions. An increased co-operation with foreign investorscould be a way to extend the acti-ve ownership to holdings outsideof Sweden.

• How could the integration of theownership activities and the dailyfund management and companyanalysis at the institutions be en-hanced and developed? Severalof the institutions in this studystates that this integration is apriority issue for them, but how itis to be achieved is still unclear.

• All the Swedish institutions inthis study declared that their ow-nership activities are limited toissues like board compositionand company structure. This dif-fers from the situation in the U.S.and in the UK. How can issues ofmore operational character beincluded in the ownership activi-ties of the Swedish institutions?

• How can the effects of activeownership be measured?

• How should the process of activeownership be organised, andwhat should it involve, in order tohave credibility for both corpora-tions and other stakeholders?

• Do the clients of the institutions,i e the individual fund savers,have the same views on what acti-ve ownership should mean? If no,how do they differ?

• Is ethics in connection with activeownership a strong sales argu-ment for the financial institu-tions?

Further Research

31

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33

Det praktiska arbetet med aktivtägarskap15. Agerar ni på bolagsstämmor,

till exempel genom röstning?16. Har ni skrivna riktlinjer för hur

ni ska rösta i olika frågor?17. Är dessa offentliga?18. Hur ofta och på vilket sätt är ni i

direkt kontakt med företagen?19. Har ni olika ägarpolicy för

svenska respektive utländskaföretag?

20. Samverkar ni ofta med andrainstitutionella ägare?

21. Sker detta offentligt?22. Med vilka andra ägare sam-

verkar ni oftast?

Etiska aspekter – miljö- och socialafrågor – i arbetet med ägarstyrning23. Tar ni med miljö- och sociala

frågor i ägarstyrningsprocessen?24. Om ja, på vilket sätt?25. Om nej, varför inte?26. Hanterar ni andra typer av etis-

ka frågor i ägarstyrningen ( tillexempel incitamentsystem,affärsetik, arbetsrätt)?

27. Bedömer ni att aktivt ägarskapkan spela en stor roll för hur fö-retagen agerar i miljö- och soci-ala frågor?

28. Finns det i ägarstyrningspolicynbeskrivet hur miljö- och socialafrågor ska hanteras?

29. Vilka skäl anser ni kan finnasatt beakta miljö- och socialafrågor i ägarstyrning?

30. Vilka konsekvenser bedömer niatt ett aktivt ägarskap i miljö-och sociala frågor får/skullekunna få för de företag i vilka niär ägare?

31. Hur bedömer ni att avkastning-en påverkas av att ni utövar ak-tivt ägarskap i miljö- och socialafrågor?

32. Har ni genomfört några specifikaanalyser av de två ovanståendefrågorna?

Questions at interviews(Swedish only)Om företagetHuvudsaklig kundgrupp:Förvaltat kapital:Huvudsaklig inriktning påplaceringarna:Andel av portföljen som förvaltasaktivt:Andel av förvaltning som skerinternt eller under direkt kontrollav företaget:Ungefärligt antal företag iportföljen:Ungefärlig årlig omsättning avinnehaven i portföljen:Andel onoterade företag iportföljen:

Allmänna frågor om aktivtägarskap1. Har ni som policy att agera

aktivt i er roll som ägare?2. Av vilka skäl?3. Vilka frågor anser ni är viktigast

för er att påverka i er roll somägare?

4. Anser ni att ni har stort inflyt-ande på hur företagen agerar ide frågor som är viktiga för er?

5. Bedömer ni att det vore önsk-värt att institutionella ägare iSverige agerar mer aktivt?

6. Varför/varför inte?7. Om ja, på vilket sätt bör ett mer

aktivt ägarskap i första hand ske?8. Anser ni att företagen välkom-

nar ett aktivt ägarskap från ersida?

9. Anser ni att ni har tillräckligkunskap om vilka konsekvenserert agerande som ägare har?

10. Om inte, vad saknas?11. Upplever ni att lagstiftning eller

andra regelverk gör att ni tvingasvara mindre aktiva i er roll somägare än vad ni skulle vilja vara?

12. Om ja, på vilket sätt?13. Finns det exempel på lagstift-

ning/rutiner/traditioner i andraländer ni anser vore önskvärt attöverföra till Sverige?

14. Av vilka skäl?

Appendix A

33. Vilken fråga inom miljö- och detsociala området är högst priori-terad för er?

34. Av vilket skäl?

Övrigt ni skulle vilja tillägga iämnet?

www.folksam.se

S 8012 03-11