They are the giants of the global investment stage. Funded, by and large, with oil and gas money and embodying the financial might of their country of origin, sovereign wealth funds can sometimes seem all-powerful. It is no surprise that they spark questions around their regulation and transparency. However, there is one crucial question that has remained in the shadows: what effect might such a fund have on your job?
Smaller financial players, such as private equity houses, attract great controversy over accusations that they pursue drastic cost cuts in pursuit of a profit, leading to job losses and a longer term destruction of organisational capabilities.
The scale and scope of sovereign wealth funds mean they could have an even greater impact. They, after all, are in the business of generating returns, just like a private equity investor and in theory, there is little to stop most of them adopting an equally aggressive approach.
Sovereign wealth funds have spread their money across a huge variety of assets in financial markets, from infrastructure projects to major holdings in foreign firms and smaller investments in bonds and stock markets.
Norway’s oil fund is the world’s largest. It is currently sitting on assets with a market value of about $900 billion. Other major funds include the United Arab Emirates' Abu Dhabi Investment Authority, Saudi Arabia’s SAMA Foreign Holdings, the China Investment Corporation and the Kuwait Investment Authority (KIA).
In fact, there are as many as 71 sovereign wealth funds across the globe. They have an estimated combined value of $7 trillion and with shares in one out of every five companies worldwide, they collectively hold an enormous amount of wealth and power.
Perhaps unsurprisingly given their financial influence, the funds have caused major controversy on numerous occasions. Accusations have been rife that some investments are motivated by political rather than economic incentives, or that some funds use investments as a means to purchase technological capabilities or intellectual property for their state of origin, with little concern for the physical operations, or the staff, at the companies involved.
Norway’s oil fund is rather different. It has an explicitly ethical brief, and emphasises the importance of responsible investment in the management of its funds as well as an active ownership style which means it will lobby company bosses over strategic or ethical issues close to its heart. It means that Norway’s fund is among a handful which score a perfect ten on the standard transparency measure used in the sector. However, more than 20 funds have a score of only five or below on the same scale.
Now, these low scores alone don’t mean that an investment by one of these giant funds in the company you work for will lead to negative effects, such as job cuts and insecurity. If a fund makes a much-needed capital infusion into a struggling firm, then that will in turn benefit employees. It is also plausible that sovereign wealth fund investment has no discernible impact, as some evidence suggests minimal influence on wages and working conditions. The impact on human resource management is also likely to be diluted given that the funds are rarely sole owners of firms.
One case study of the Dubai sovereign wealth fund revealed few effects on employment and minimal but detrimental changes in workers' voice and pensions. But frankly, there is only limited literature that explores these funds' potential impact on the strategies of investee firms. We have tried to fill that gap in understanding by examining the case of investments by Norway’s oil fund in the UK.
Our focus is on investments which led to the fund owning at least 3% of a firm’s equity from 2008-2013. This gives us 80 UK-listed companies the Norwegian fund invested in. We also identified a suitable control group without sovereign wealth fund investment, but which matched the characteristics of the investee firms. We found control firms for 67 of the 80 companies.
What did we find? As one would expect given the choice of our period of study, there is a general downward trend in employment. However, this is counterbalanced by a significantly positive effect from the Norway investment on firms' HR practices, specifically in terms of retaining workers.
Keeping everything else fixed, while there were was on average a 4% decrease in employment across all the firms forming part of this study, this decrease was more than counteracted by an 8% increase in employment – and hence a net increase of 4% – in firms with a significant Norwegian stake.
It is important to note again that this finding has been subject to controls which isolate potential industry-wide effects or the effects of timing. Finally, we have also adjusted for differences in wage costs and productivity, which might explain differences in the demand for labour.
This all leaves the way clear to argue that Norway’s oil fund has an interest in ensuring employment stability and job security in line with its Norwegian ethical values.
Now, you might speculate that investments that reduce workforce downsizing create a subsequently negative effect on firm profitability. However, we do not find that investments have any effect on firm performance, whether positive or negative.
Interestingly, the fund’s average stake is around 4%, with a maximum just below 9%. The implication is that even a relatively small minority stake may impact on HR policy. Clearly, those in charge of human resources policy need to be kept informed of changes in their firm’s shareholding structure if they are to respond appropriately to developments.
Let’s not forget that in the Norway fund’s case, it regularly reviews investments and dumps its stakes if a company fails to meet its criteria, an outcome that could be a financial and reputational headache for the board.
In the case of our research, the Norway oil fund might bring with it demands for an ethical approach to staff, but each sovereign wealth fund is a different beast. It will be crucial for managers to understand the very individual nature and behavioural patterns of their new, giant, investors.
Marc Goergen is a Research Associate of the European Corporate Governance Institute. Geoffrey Wood - no potential conflicts.
Geoffrey Wood, Marijana Baric, and Noel O'Sullivan do not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. They also have no relevant affiliations.
Authors: The Conversation