How Sovereign Wealth Funds Improve Firms’ Corporate Governance

Research in finance identifies two main channels that institutional investors deploy when they seek to influence the strategies of their portfolio companies. On one hand, they may talk directly to management or boards to address conflicting governance issues (the ‘voice’ channel). On the other hand, institutional investors can ‘vote with their feet,’ by divesting (the ‘exit’ channel). Both channels interact, as the threat of ‘exit’ can reinforce the influence of investors’ ‘voice’.