No Small Change: Pension Funds and Corporate Engagement, By Tessa Hebb, Ithaca: Cornell University Press, 2008, 152 pp., ISBN 978-0-8014-4696-2.

Pension funds impact financial markets and institutions around the world. Pension funds investment decisions have direct consequences for companies and their employees and ultimately can be linked to macro-economic phenomena. Because pension funds have to pay benefits over many decades and insure the subsistence of millions people who have taken retirement, the stewards of these should be concerned about the long term value of the stocks they hold in their portfolios. Environmental risks (climate change), social risks (exposure to conflicts zones, reputation ruining risks), and bad governance may impede future returns. To address such concerns, modern pension funds managers often engage third party corporations to improve the standards of their contributor firms.

Such corporate engagement is a new and developing strategy in pension funds management. In the book “No Small Change” which draws on work undertaken as part of a PhD thesis, Tessa Hebb provides insight in to recent trends in the corporate engagement of pension funds. The work includes consideration of the outcomes of the new strategy and its policy implications. She examines the ability of pension funds to use their ownership position to change corporate practices to ensure the long-term profitability of the enterprise. She traces the evolution of California Public Employees Retirement System (CalPERS) corporate engagement strategy from 1980 until 2007 and presents and tests hypotheses using data developed for CalPERS emerging market screening during 2002-2003.

The book is organized in six chapters. In the first, the author starts with general remarks on pension fund functioning, and follows with a brief classification of pension funds – drawing attention to the distinction between Defined Benefit (DB) or Defined Contribution (DC). Hebb draws attention to the fact that DB public plans have, since 1980, become less prominent than DC private plans. The author discusses the evolution of pension funds trustees’ mentalities since the end of the 1980s until the 2000s and highlights an important change in the investment behaviour of pension funds managers. In the 1980s, most pension funds were functioning like other investment options: they operated according to a short-term vision of the future and measured success using standard industry benchmarks. But by the end of 1990s and early 2000s, the need to conduct business in the framework of global standards became increasingly important. Hebb speaks of the “drivers of corporate engagement” that boosted the change: growing size of pension funds assets, growing amounts of assets held in passive indexes that restrict pension funds’ exit from companies with poor standards, increased emphasis on environmental social and governance standards, shared value outperformance, and increasing amount of international equity held by pension funds especially on emerging markets with high exposure to risks. Facing the increased management excesses and owner absence from decision-making process and declining stock values, pension fund managers perceived a need to move from growth towards value investing. This shift required that they put greater emphasis on the long-term. Abandoning their old “lonely wolves” tactics, pension fund managers began to act in coalition. The author presents the corporate engagement typology as consisting of seven steps. These include: the initial developing of policy statement and identifying areas and concern in global governance, adoption of formal codes of conduct like OCDE Code of corporate governance, direct engagement with proxy voting guidelines, and enhanced emphasis on relationship investing (using extra financial information to select investments and fund managers).

Chapter 2 describes the origins of pension fund corporate engagement and discusses socially responsible investing (SRI) which entails greater concern for the moral and ethical dimension of investment. In the third chapter Hebb explores how pension funds set corporate standards for firms. She notes a net power shift between owners of firms and the managers running them, especially since 2004. She discusses the “inefficiency of secrecy” which was shown during the failure of Enron and indicates how transparency and disclosure may be considered as key considerations for successful firm functioning. On the other hand, the most profitable companies in the developed world are often the most opaque. Pension funds managers are inclined to ignore the operations of such firms (like CalPERS with Enron or other financially successful companies). Chapter 4 discusses why pension fund managers may care about environmental, social and corporate standards. The author concludes that that maintenance of a corporate reputation is crucial for maintaining long-term share value. Chapter 5 speaks about the influence of global standards on corporate governance. She discusses how global standards emerge. Amongst the main actors in this chain we find institutional investors, rating agencies and national governments. The author contests the theory of path-dependence in global standard making. She tries to provide evidence for her alternative conceptualization which suggests that the regulation regimes of countries are still playing the main role in external capital investment decisions. She proposes that the convergence to some global standard occurs through the pressure of institutional investors like pension funds and rating agencies especially in emerging markets eager to attract foreign investment. She tests the validity of the hypothesis that institutional investors’ demands result in country level agency in global standard setting. Chapter 6 presents the books conclusions and policy suggestions. Here, Hebb confirms the idea that pension funds could have a profound impact on the global standard-setting process using their investment leverage. They have the capacity to create new forms of corporate governance and thus provide shareholders improved oversight over management.

This book is aimed at a wide range of potential readers. Its straightforward language style permits easy understanding of the nature of corporate engagement and why pension funds need it. The work may assist to facilitate broader appreciation of the interactions of multiple actors in the global standard setting process. It is possible that the book’s arguments are overly optimistic and/or set unrealistic expectations regarding the capacity of pension funds to change social order. However, Hebb frequently acknowledges that pension funds managers are mostly driven by narrowly-defined financial objectives and not necessarily by concern for social justice or wellbeing. The fact is that pension funds trustees and managers “have come to believe that in the long run ESG consideration lower the risks associated with uncertain future” and that companies with good EGS standards maintain and gain value over time. She draws two general conclusions. First, corporate engagement offers a long-term view of value that “both promotes higher environmental, social, and governance standards and adds share value, thus providing long-term benefits to future pension beneficiaries”. Second, corporate engagement could push pension funds to “usurp the rightful responsibilities of corporate managers who could forget their primary responsibility of ensuring the retirement benefits of their members”. In light of these conclusions, it would be interesting to know how those extra-financial standards are fixed, who controls the process and how is the process in the interest of less developed countries?