Disengagement and investment short-termism: a contextual study of UK pension funds

This paper is submitted to the conference track on Context, behaviour and evolution: new perspectives on public and non-profit governance. This study is most relevant to this track because it extends agency theory through an... [ view full abstract ]

This paper is submitted to the conference track on Context, behaviour and evolution: new perspectives on public and non-profit governance. This study is most relevant to this track because it extends agency theory through an assessment of contextual factors that influence pension fund investment strategy and ownership behaviour vis-à-vis investee corporations. Very few studies in corporate governance have examined pension funds as a distinct type of institutional investor in public equity. This paper provides novel qualitative insights into pension fund governance, highlighting the significance of learning more about context while exploring governance and organisational behaviour of pension funds. While the nature of the interaction between pension funds and corporations is subject to much theoretical and normative prescription, the empirical picture is still ambiguous. It is consequently crucial to examine how contextual factors shape pension fund behaviour vis-à-vis investee corporations.

The analysis is based on thirty-five in-depth, semi-structured interviews with pension fund trustees, executives, investment officers and financial intermediaries; documentary analysis; and observations of four fund investment meetings. We develop a framework of related contextual drivers that shape pension fund investment and ownership behaviour, detailing how two primary drivers act as the core influences, alongside four secondary drivers associated with the broad socio-economic context. Over the course of the last sixty years, a range of secondary drivers have exacerbated these tendencies, resulting in a strategic outcome based on liability-driven investment, which in turn results in short-term investment behaviour and disengagement vis-à-vis portfolio companies. Our findings challenge the perspective that institutional investors behave as principals.

Finally, our study also has significant implications for both policy makers and practitioners (specifically, pension fund trustees and the fund executives who are responsible for investment decisions and complying with the best practice codes). Within policy debates, shareowner stewardship is put forward as one of the solutions to the governance problems identified as a contributor to financial market failure. Our study indicates that imposing additional corporate governance expectations and responsibilities onto pension funds is currently unrealistic, further complicating a system which is already too complex. We suggest that in debating the desirability of increased pension fund involvement in corporate governance as significant holders of shares, policymakers ought to give much more weight to the contextual factors that drive pension fund investment strategies.