Private engagement by Nordic institutional investors on environmental, social, and governance risks in global companies

• Author: Lars G. Hassel,Natalia Semenova
• DOI: http://doi.org/10.1111/corg.12267
• Published date: 01 March 2019
• Date: 01 March 2019

ORIGINAL ARTICLE

Private engagement by Nordic institutional investors on

environmental, social, and governance risks in global companies

Natalia Semenova

1

|Lars G. Hassel

2

1

School of Business and Economics, Linnaeus

University, Växjö, Sweden

2

Department of Business and Economics

Studies, University of Gävle, Gävle, Sweden

Correspondence

Natalia Semenova, School of Business and

Economics, Linnaeus University,

Universitetsplatsen 1, SE‐35195 Växjö,

Sweden.

Email: natalia.semenova@lnu.se

Abstract

Research question/issue: The paper examines private engagements related to envi-

ronmental, social, and governance (ESG) incidents as a corporate governance mecha-

nism used by Nordic institutional investors to influence MSCI World companies. The

questions addressed are how an agent‐led collaborative engagement is carried out,

what are the characteristics of the target companies selected, and if the successful

engagements can improve ESG performance compared with pre‐engagement and

incomplete cases.

Research findings/insights: A unique data set of 355 private engagements of a pro-

fessional agent on behalf of its Nordic clients is studied on environment, human and

labor rights, and corruption risks between 2005 and 2013. An engagement process

of the agent is described with focus on sequence and duration of actions of private

engagement dialogues before filing a resolution. Successful private engagements,

when target companies adopt the proposed ESG changes, are 27.6%. The incident‐

driven private engagements target companies rated with high market values and

ESG performance. ESG performance and transparency increase for succeeded

engagements in the postengagement period and relative to incomplete engagements.

Theoretical/academic implications: The paper provides empirical support for a

social movement‐based influence of private engagements on target companies and

adds to the broad‐scale empirical literature on investor activism. In the Nordic gover-

nance setting, an agent‐coordinated private engagement is seen as a social movement

that supports targeting companies with a potential for change.

Practical/policy implications: Insights are offered to actors in the value chain in

financial markets by demonstrating that successful ESG engagements have the poten-

tial to change portfolio company ESG practices.

KEYWORDS

corporate governance, active ownership, environmental, social, and governance (ESG) risks,

institutional investors, private engagement

1|INTRODUCTION

Institutional investors have become more active in the management of

environmental, social, and governance (ESG) risks of the companies in

which they invest (Eurosif, 2013; Eurosif, 2016; Gifford, 2010;

Goldstein, 2014; Gond & Piani, 2012; Kiernan, 2007; Principles for

Responsible Investment, 2016; U.S. SIF, 2016), and investor activism

on ESG issues has evolved into an important mechanism and research

topic in corporate governance (Goranova & Ryan, 2014; Sikavica, Per-

rault, & Rehbein, 2018; Thomsen & Conyon, 2012). Prior broad‐scale

Received: 17 January 2018 Revised: 28 September 2018 Accepted: 15 November 2018

DOI: 10.1111/corg.12267

144 © 2018 John Wiley & Sons Ltd Corp Govern Int Rev. 2019;27:144–161.wileyonlinelibrary.com/journal/corg

database studies have examined investor activism on ESG issues from

different perspectives. These include filing of shareholder resolutions

(Grewal, Serafeim, & Yoon, 2016; Lee & Lounsbury, 2011; Proffitt &

Spicer, 2006; Rehbein, Logsdon, & Van Buren, 2013; Reid & Toffel,

2009; Vasi & King, 2012), exercising voting rights at annual general

meetings (AGMs; Campbell, Gillan, & Niden, 1999; Monks, Miller, &

Cook, 2004), and private engagement dialogues (Barko, Cremers, &

Renneboog, 2018; Bauer, Clark, & Viehs, 2014; Bauer, Moers, & Viehs,

2015; Dimson, Karakas, & Li, 2015; Goodman, Louche, Van

Cranenburgh, & Arenas, 2014; Hoepner, Oikonomou, Sautner, Starks,

& Zhou, 2018; Logsdon & Buren, 2009; Rehbein, Logsdon, & Van Buren,

2013). Studies in the literature claim that private engagements are a

powerful option of investor activism because of their direct impact on

where the “real action typically occurs”(Logsdon & Buren, 2009, p.

353; see also Goodman & Arenas, 2015; Goranova & Ryan,2014). A pri-

vate engagement is a mutual agreement between an active owner and a

target company to be involved in ongoing interactions on ESG risks

(Logsdon & Buren, 2009, p. 354). Most previous empirical research

has focused on private engagement from a withdrawal perspective

when a shareholder resolution on an ESG topic has been filed with a

poorly performing company in order to avoid a formal vote that can

cause negative publicity and damage the reputation of the company

(Bauer et al., 2015; Clark & Crawford, 2012; David, Bloom, & Hillman,

2007; Logsdon & Buren, 2009; Rehbein et al., 2013). The mainstream

of studies has examined the visible part of activism, such as the share-

holder resolution process, the responses of companies to shareholder

resolutions, the determinants of shareholder resolution withdrawals,

and the impact of withdrawn resolutions on target companies.

This paper will focus on the hidden and direct mechanism of

investor activism, namely, private engagements by institutional inves-

tors on ESG issues prior to or independent of a shareholder resolution

(Barko et al., 2018; Bauer et al., 2014; Dimson et al., 2015; Goodman

et al., 2014; Hoepner et al., 2018; Rehbein et al., 2013). Private

engagements or dialogues with the target companies are probably

widely used, but data restricted to proprietary databases on behind‐

the‐scenes interactions that take place without public knowledge have

constrained more broad‐scale empirical research (Gifford, 2010; Gillan

& Starks, 2003; Goranova, Abouk, Nystrom, & Ehsan, 2017; Logsdon

& Buren, 2009; Rehbein et al., 2013; Yamahaki & Frynas, 2016). The

broad‐scale empirical work at hand that investigates private engage-

ment with respect to ESG issues has been presented by Dimson

et al. (2015), Bauer et al. (2014), Hoepner et al. (2018), and Barko

et al. (2018). The studies normally employ data of a particular institu-

tional investor who has extended activism from traditional governance

concerns into environmental and social issues (Barko et al., 2018;

Bauer et al., 2015; Dimson et al., 2015; Hoepner et al., 2018). Evi-

dence is provided on thematic private engagements (Barko et al.,

2018; Dimson et al., 2015; Hoepner et al., 2018) primarily targeting

domestic, blacklisted companies with an objective to enhance financial

performance by making improvements in ESG practices (Bauer et al.,

2014; Dimson et al., 2015). The studies above can be extended by

considering other objectives for private investor engagements, such

as ethical considerations, reputational concerns, and incidental

breaches of social norms; by extending the studies to targeting global

companies; by considering the governance setting of the institutional

investors; and by including different ways of conducting private

engagements, such as in‐house, collaborative, or service provider‐led

private engagements. The existing stream of broad‐scale empirical

studies also seldom moves beyond the financial literature based on

rational economic agency relationships (Barko et al., 2018; Dimson

et al., 2015; Hoepner et al., 2018).

This paper introduces the following extensions to previous large‐

scale empirical studies. The private engagements are triggered by an

ESG incident when the company has violated social norms, for exam-

ple, UN Global Compact principles. The engagement process is led by

a professional agent in collaboration with Nordic institutional inves-

tors who are guided by the Nordic governance model rooted in a

stakeholder‐oriented tradition. When global companies are targeted,

legal, political, and cultural dimensions bring in additional complexity

in the engagement relation because of differences in perceptions

and implementation of ESG responsibilities in engagements across

boarders. Social movement theory is brought in to support the

hypothesis for the selection of target companies when the emphasis

is on ESG and not primarily on financial performance.

The Nordic countries feature a stakeholder‐oriented governance

model (Poulsen, Strand, & Thomsen, 2010; Thomsen & Conyon,

2012), which can shape the collaborative engagement tactic used by

institutional investors and the agent who acts according to their pref-

erences (Dyck, Lins, Roth, & Wagner, 2019; Hart & Zingales, 2017;

Yamahaki & Frynas, 2016). Liang and Renneboog (2017) report that

Nordic companies have the highest ESG ratings in a global perspective

to make stakeholder demands on ESG performance high on the

agenda in Nordic countries.

The purpose of the paper is, first, to describe the key sequences in

an engagement process, with special emphasis on the private, behind‐

the‐scenes dialogues. The first part defines how the private collabora-

tive engagements are actually carried out by the agent and what the

ESG dimensions and key characteristics are in the engagement

process. Univariate tests are provided for pre‐engagement and

postengagement performance for successful, complete dialogues.

Second, based on social movement theory, the paper empirically

investigates the characteristics of the companies targeted for private

engagements and collaborative dialogues. The analysis is extended

to include company characteristics of successful engagements

and environmental, social, and corruption risk dimensions of the

aggregate ESG score. The empirical part seeks to answer the

question of what drives private engagements and whether successful

activism improves the target company's ESG practices in relation to

incomplete cases.

The remainder of this paper is organized as follows. Section 2 pro-

vides a social movement framework for the paper and reviews the

prior research on active ownership and private engagement to derive

at a hypothesis on what company characteristics are important for

the targets. The Nordic context for engagement is also presented.

Section 3 describes the engagement data and sample, presents the

model of the engagement process, and provides empirical evidence

on the characteristics and determinants of private engagements and

the pre‐engagement and postengagement ESG performance of

successful targets in relation to cases that were not completed.

Section 4 discusses the results, and Section 5 concludes the paper.

SEMENOVA AND HASSEL 145