Corporate governance issues can be very complex and they cover a broad range of topics. When it comes to financing, corporations usually have two channels that institutional investors will use when trying to impact portfolio company strategies. Some might talk to boards or management to go over governance issues. Others will decide to divest and this can lead to two channels interacting due to the threat of an investor exit.
Sovereign wealth funds (SWFs) are an interesting topic because they have had a positive impact on corporate governance. For example, many sovereign wealth funds have been able to improve the governance of the various firms in their portfolios. A change in governance preferences can alter things quite a bit and it can lead to various improvements. Read on to explore the impact that sovereign wealth funds have on corporate governance.
SWFs Care About the Long-Term
The first thing to note is that SWFs care about the long-term and they shy away from strategies that are meant to provide short-term benefits. This is a lot different than a public pension fund because it doesn’t face liabilities and it winds up being substantially more flexible when it comes to asset allocation strategies. Many of these SWFs are great at saving and building wealth for future generations.
Changing Corporate Governance
Problems with corporate governance can have huge repercussions when it comes to investments. Changing corporate governance in positive ways will benefit everyone that is involved. Effective corporate governance has the potential to improve the value of companies in the long-term. Many SWFs demand that companies work on effective corporate governance strategies and they have certain expectations that companies will need to meet.
Basically, SWFs are changing corporate governance for the better and helping companies to improve their overall value. There’s also evidence to suggest that funds are more interested in investing in businesses that have higher governance index values. Firms now have the incentive to want to work on corporate governance and SWFs are playing a direct role in changing how things operate. If firms want to enjoy the benefits of SWFs and better investments, then they need to work on reshaping their corporate governance policies.