Sovereign wealth fund, Oslo-based Norges Bank Investment Management (NBIM), has recently come out with a Note outlining its expectations when it comes to the board and corporate governance.
The discussion paper makes clear what corporate governance means to one of the world's largest shareholders:
"NBIM's goal is aligned with a commonly accepted definition of corporate governance, namely the way that suppliers of finance assure themselves a return on their investment".
What we see here is that corporate governance is little more than an instrument of investment strategy. Corporate governance is a continuation of investing by other means. It is what is done to ensure a return on a decision to buy shares.
NBIM then goes on to affirm this conclusion by describing its "universal" role for the board:
- The board must act as a representative of the owners of equity capital
- The board is responsible for establishing a corporate governance system that alleviates agency costs
- The board must ensure adequate and honest information to the market and the shareholders
To NBIM's credit, they acknowledge that the board has two roles that might be considered traditional "directing" - appointing the chief executive and approving and overseeing strategy. But even then, the fund qualifies that role by saying that the board shall approve overarching strategic decisions without being distracted from its monitoring role.
I read this last line with disbelief. Could they really be saying that directors must not be distracted from their role as investment managers* by their role as directors of a corporation?
Is this really what a director must do?
The note is the latest in an industry marketing campaign that stretches back 30 years. By convincing the world that directors work for shareholders, share holding/trading has become the apex business model of capitalism. Investing is a business model like selling software or making cars. And for much of the 20th Century it was an unspectacular business model. That is until the proselytism of the new trinity - ownership, agency and agency cost. It's been a brilliant pivot for the investment industry. Make no mistake, the most successful takeover of the 1980's was the boardroom.
The challenge for NBIM, its 7000 "investments" and the rest of us is that corporations that trade things other than shares rely on directorship to ensure their success. Somebody has to motivate management, somebody has to approve acquisitions and capital requirements, somebody has to do all the other things that a board must do to assure the strength, resilience and endurance of the corporation in which they own shares. These things require commercial directors focused on the corporation's business model - not proxy investment managers working to justify the investors decision to buy shares.
Instututional shareholders forget that non share trading corporations don't expect someone elses board to manage the sucess of their business (you may need to read that a couple of times). Corporations that manufacture things or sell services expect their own board to do that job. And they can ill afford to share, let alone surrender, that scarce resource to an wealthy investor.
The other challenge is for the non profit sector. They have been swept up in the success of the shareholders campaign to takeover the boardroom. All too often directors in the non profit sector behave like institutional investment managers despite having no owners investments to manage. It's a disaster.
As is the case with marketing campaigns, the reality can be more of an empty promise:
- NBIM acknowledges that its fund is dependent on companies' sustained profitability but then expects the team ultimately responsible for that profitability - the board - to work for them as their investment manager. If sustained business success is the goal perhaps the NBIM might consider other ways to assure their return that would free the board to get back to the work of directing.
- NBIM acknowledges that there is a lack of evidence to support the value of corporate governance codes but appears to adhere to the fundamental tenets of such codes. Moreover, NBIM argues that investors should depart from best practice if well thought out and persuasively justified. But then relies on the trinity of ownership, agency and agency cost to support their expectations. None of which are universally recognized as well thought out or persuasively justified.
But perhaps the emptiest promise is corporate governance itself. Have institutional investors been too successful in their campaign to assure themselves of their investment? By robbing corporations of their directors and installing their managers in their stead, are investors losing far more than they could ever gain from protecting against agency costs.
If governing is investing by other means who is doing the work of directing?
More importantly, if directors are mere investment managers who will stand up to challenge NBIM's expectations and reject them if unrealistiic or unjustified? Who will speak on behalf of the corporation to say no - there is a better way?