Do Australian Institutional Investors Aim to Influence the Human Resource Practices of Investee Companies?

Abstract

There has been considerable speculation regarding the effects of the growing prevalence of institutional investors in the equity markets on investee company behaviour. It has been posited that the growth of institutional investors may lead to the pursuit of what is generally referred to in the human resource literature as 'high commitment' employment practices in investee companies. This may be because institutional investors are using 'voice' mechanisms to pressure investee companies to adopt 'high commitment' human resource practices. These labour management practices typically involve managerial attempts to motivate and manage workers through a series of workplace practices that incorporate the interests of employees rather than through strict command and control structures. These might include investment in staff training and development, employment security, flexible workplace practices and self-directed work teams, investment in occupational health and safety, incentive pay, and 'partnerships' and consultation with employees and/or their representatives. The purpose of this study is to discover whether it is the intention of institutional investors to encourage investee companies to adopt 'high commitment' employment practices through case studies of twelve prominent institutional investors with funds invested in the Australian equities market and the Australian Council of Superannuation Investors (an industry body representing 39 superannuation funds). In the event that the institutional investor did seek to influence investee companies, we asked (i) why they seek to influence the companies, and (ii) what mechanisms they use to exert this influence. In the event that they did not seek to influence investee companies in this way, we asked (iii) why they did not and what barriers exist to taking into account companies' employment practices. We also sought to discover (iv) whether institutional investors take into account the employment practices of companies when making investment decisions, and if so, (v) what kinds of practices they take into account. In addition, we enquired into (vi) whether there are any differences between institutional investors, based on type, in relation to whether or not they have an intention to influence investee company employment practices, or the ability to do so. We are particularly interested in the difference between industry superannuation funds and other types of institutional investors. This difference is significant, first, because under the relevant legislation, industry superannuation funds are required to have equal representation of employers and members on their boards. In the case of industry superannuation funds, which are operated by parties to industrial awards, these representatives are usually employer associations and unions. Second, industry superannuation funds often manage their funds via external fund managers, whereas other institutional investors generally manage their funds internally. It is possible that these two characteristics of industry superannuation funds might result in different attitudes and responses concerning the human resource practices of investee companies compared with other types of institutional investors.