July 01, 2003
Pension Funds and Mutual Funds Influence Their Holdings Differently
by William Baue
Academic studies discern between how pension funds and mutual funds wield influence as
institutional shareowners, but the studies lack methods sophisticated enough to evaluate the
effects of SRI.
Are all institutional investors alike in terms of their influence on how companies are managed?
No, according to three articles on the subject published in the last few years in the Academy of Management Journal (AMJ).
AMJ is a peer-reviewed academic periodical on corporate management published every other month by
The latest study, published in the April-May 2003 issue of AMJ,
focuses on the internationalization, or corporate expansion into the global marketplace, of 197 S&P
1500 firms, based on data collected in 1996. The researchers found that pension and mutual funds
favored internationalization for significantly different reasons: whereas mutual funds support
internationalization for short-term profits, pension funds favor it for long-term stability,
especially in high-tech industries.
"Institutional investors are, emphatically, not all
alike," said University of Oklahoma Professor Robert E. Hoskisson, a co-author of the study. "Our
research reveals clearly that public pension funds approach investing with a longer time horizon
than that of professional investment funds, such as mutual funds and investment banks."
"In general, public pension funds are much more likely than mutual funds or investment banks to
support the heavy lifting that drives long-term progress not just for an individual company but for
the greater society," added Professor Laszlo Tihanyi, a University of Oklahoma colleague who
co-authored the study. There were two other co-authors, University of Oklahoma Professor Richard
A. Johnson and Arizona State University Professor Michael A.Hitt.
The paper considered
internationalization as a desirable development in general, as it correlates positively with firm
performance and risk-adjusted returns. The study also mentioned several negative consequences of
Interestingly, the study did not list any social or environmental
impacts amongst the negative implications. Professors Tihanyi and Hoskisson told SocialFunds.com
that it is very difficult to isolate and measure social and environmental considerations in
academic studies, so they did not include these variables in their parameters.
study, published in the August-September 2002 issue of AMJ, found that pension funds favor internal
innovation through R&D, while mutual funds prefer external innovation through business
acquisitions. Based on the survey of 234 companies between 1985 and 1991, the study also found
that both pension and mutual funds prefer firms that have independent board members who own company
stock. It also found, though, that pension funds tend to give more support than mutual funds to
"inside" board members who own company stock.
Where do SRI mutual funds fit into this
equation? Certainly not lumped directly with mainstream mutual funds, Prof. Hoskisson admitted to
SocialFunds.com, as SRI fund managers tend to have a much longer horizon than most mutual funds.
In this sense, SRI funds align closer to pension funds. However, neither of these papers discerned
SRI funds from the overall universe of mutual funds studied, though both Prof. Hoskisson and Prof.
Tihanyi told SocialFunds.com that such a distinction sounded like a promising research question.
The trick with such research is tracking social issues, according to co-author Prof.
Richard Johnson. He also co-wrote a 1999 AMJ article that used the same approach to study the
influence of these two types of institutional investors on corporate social performance (CSP).
Prof. Johnson separated five dimensions of CSP tracked by KLD Research & Analytics into
two groups. He combined "product quality" and "environment" into a single "product quality" group,
and "community," "women and minorities," and "employee relations" into a "people" group.
The study, which examined 1993 data on 252 companies, found a relationship existed between
pension funds and CSP, but no found such relationship existed for mutual funds. It also found that
the product quality dimension of CSP was linked to companies where top management owned equity in
the company. No such link was found for the people dimension.
Prof. Johnson told
SocialFunds.com that objective standards such as ISO 14000 certification make it possible for
academic researchers to isolate environmental and product quality dimensions. However, Prof.
Johnson knows of no such objective standards for isolating social dimensions, a deficiency that
hampers academic research on socially responsible investing.