Although they have been in existence for decades, sovereign wealth funds have found themselves in the spotlight in recent months. While much of the recent attention given to these funds has focused on the political implications of their investment, sovereign funds' impact on fellow shareholders has received scant coverage. Indeed, their growing presence has sparked discussion within the global institutional investor community on how best to define, understand, interact, and potentially influence these funds.

As such, RiskMetrics Group's new report, Sovereign Wealth Funds & Emerging Governance Issues, is intended to: (1) provide an overview of sovereign wealth funds; (2) identify key and emerging issues of interest to institutional investors; and (3) explore potential solutions to concerns related to the transparency practices of sovereign investors.

Key takeaways from the paper include the following:

* Sovereign wealth funds are firmly established. There are now roughly 40 such funds–half of which came into being since 2000–collectively managing assets in the range of $1.9 to $2.9 trillion. Macroeconomic trends, including a weak U.S. dollar, tightening of credit, growth in commodity prices, and market volatility suggest that sovereign investment, and its influence, will only grow.

* Traditional institutional shareholders are seeking to understand the investment objectives and strategies of these potential power brokers. The International Monetary Fund is now involved in consultations with more than two dozen sovereign wealth funds in an effort to develop a code of conduct for their transparency, and market regulators across the globe are considering guidelines for disclosure and related issues. Mainstream investors will wish to monitor and potentially influence these efforts.

* There are concerns that sovereign funds will primarily be "disengaged" investors in equities. Some traditional investors have suggested that they will ride the coattails of other shareholders who press underperforming management for change through governance activism; or that their proclivity for non-voting stakes could help to entrench or otherwise insulate underperforming management.

* Substantial investment from sovereign funds could lessen pressure on governments and corporations in developing economies to raise corporate governance standards in such markets.

* Sovereign wealth investors with long-term investment horizons may serve as a stabilizing force in the market, however. Most are not bound by the constraints of many traditional investors who may have to withdraw capital on short notice for income or liquidity needs. Moreover, sovereign investors have demonstrated their willingness and ability to expeditiously shore up the capital base of distressed companies.

* There is no standard disclosure model for sovereign wealth investors. But some sovereigns may be more comfortable with disclosure models other than that of Norway's fund–widely viewed as the gold standard for transparency–and traditional institutional investors may wish to promote alternatives such as Temasek's approach to transparency. Temasek, a Singapore-based fund, is an active investor disclosing key investment objectives and strategies though does not disclose its full portfolio or voting record.

* Pressure from lawmakers and regulators for sovereign investors to meet elevated standards of disclosure could have unintended consequences. Such pressure might lead to the funds avoiding direct investment in corporate issuers and allocating more of their capital to private equity and hedge funds, potentially leading to greater acquisition activity and proxy fights.

To access RiskMetrics new paper, Sovereign Wealth Funds and Emerging Governance Issues, please visit here.

Questions of shareholder value, board competency, and transparency continue to drive the high-profile proxy contest between rail company CSX and two hedge funds.

The Children's Investment Fund (TCI), a London-based equity group, and Cayman Islands-based 3G Capital Partners say they're seeking board seats because CSX has refused to engage in dialogue about the firm's business model. Together, TCI and 3G own 8.7 percent of the Jacksonville, Fla.-based company, and have an additional 12.3 percent stake through stock swaps.

The June 25 proxy contest will be the 30th challenge to go to a vote at a U.S. company this year. The fight for CSX has received the most media attention after Carl Icahn's proxy bid at Internet firm Yahoo!, which is slated for an Aug. 1 vote. TCI's decision in December to seek five seats on CSX's 12-member board has led to a war of words in the press, legal actions on both sides, and even Congressional hearings.

The dissident slate includes TCI Managing Partner and founder Chris Hohn; Gilbert Lamphere, a former director at Canadian National; Timothy O'Toole, managing director of the London Underground subway system; Gary Wilson, former board chair at Northwest Airlines; and Alexandre Behring, managing director at 3G and former CEO of Latin American rail company America Latina Logistica. TCI aims to replace the four longest-tenured directors: Elizabeth Bailey (18 years); Robert Kunisch (17 years); William Richardson (15 years); and Frank Royal (14 years). The fifth targeted director, Jacksonville-based contractor Steven Halverson, has only one year of board service; TCI contends that he lacks experience with both CSX and with railroad management.

Hohn said his fund, which is CSX's second-largest shareholder with a 4.4 percent stake, has tried unsuccessfully for over a year to engage the firm in a productive dialogue about the company's future. The proxy contest was a last resort, but "it is impossible for us to effect the change we see as possible if we don't change the board," Hohn told Risk & Governance Weekly.

Though Hohn has said repeatedly that his dissident slate does not want to take over the company or oust management, CSX Chairman and CEO Michael Ward told Financial Week on May 21 that the proxy contest is specifically aimed at removing him. CSX maintains that it repeatedly agreed to meet with TCI representatives and offered board seats, lead director Ned Kelly said at a June 9 forum hosted by RiskMetrics Group.

Since its founding in 2003, TCI has sought to find "great companies with underperforming shares," and attempt to engage with directors to turn performance around, Hohn said at the June 9 forum. TCI has a history of prompting action at its portfolio companies, recently catalyzing board and management change at German stock exchange holding company Deutsche Börse and bringing about the sale of Dutch financial firm ABN Amro to a consortium of European banks.

CSX, the third-largest U.S. railroad, argues that it does not need a turnaround. The company's share price has risen more than 270 percent since January 2004. TCI counters that most of the stock gains stem from rising prices and productivity in the rail industry as a whole, rather than just at CSX. North America's largest railroad companies have all posted stock price growth during the same period--Union Pacific (131 percent), Norfolk Southern (185 percent), Burlington Northern Santa Fe (257 percent), and Canadian National (154 percent)--though none as pronounced as CSX's share gain.

On Monday, June 9 at 11 a.m. EDT, RiskMetrics Group will host a special Governance Forum on the proxy contest being waged at CSX Corporation. On this webcast, executives from both CSX Corporation and the dissident shareholders, The Children's Investment Fund (TCI) and 3G Capital Partners, will make their cases for their respective slates. The Jacksonville, Florida-based railroad operator's annual meeting is June 25, 2008.

Christopher Young, head of M&A Research for RiskMetrics Group, will moderate the forum, which will run two hours in order to provide both sides with ample time to speak and field questions from the audience. To register for this governance forum, please visit here.

"Poison pills" and other takeover defenses will once again dominate the agenda at Japan's corporate meetings this year.

The vast majority of Japanese companies hold their shareholder meetings over a two-week period in late June. This year, the largest number of annual meetings will take place on June 27--when companies such as beauty products firm Kao, electronic manufacturer TDK, and Mitsubishi UFJ Financial Group will hold meetings--although many will be held on June 18-20, and June 24-26. A few meetings, such as those at electronics firm Idec and construction toolmaker Trusco Nakayama, will be held as early as the week of June 9.

The most controversial issue this year will again be the introduction and renewal of various types of anti-takeover measures. In the wake of takeover attempts at Hokuetsu Paper, Bull-Dog Sauce, and Sapporo Holdings, and the belated legalization in May 2007 of stock-swap acquisitions by foreign firms (called "triangular mergers"), many Japanese firms are in a state of near-panic over the possibility of being acquired.

Their fears may be overblown, however. Triangular mergers are used overwhelmingly for friendly acquisitions, not hostile takeovers; and the difficulties of successfully managing a company after a hostile acquisition will help to ensure that the number of such cases will be limited. Also, some of the firms implementing pills are not especially vulnerable, because founding families, business partners, or other insiders own more than a third of outstanding shares. This is enough to veto any special resolution, such as an article amendment or a merger, severely limiting what a hostile bidder could hope to accomplish.

Nevertheless, several hundred companies will introduce or renew pills this year. One in seven Japanese companies likely will have a pill in place by the end of June. Since 2006, the vast majority of poison pills have been so-called "advance warning-type" plans. With these pills, the board announces a set of disclosure requirements it expects any bidder to comply with, plus a waiting period between receipt of information and the bid, before any offers are made. Advance warning defenses do not require shareholder approval, but in most cases, companies are choosing to put them to a shareholder vote, believing that doing so will put the company in a stronger position in the event of a lawsuit. As long as the bidder complies with the rules, the company "in principle" will take no action to block the bid, but will allow shareholders to decide.

Exceptions are usually allowed when the bid is judged to be clearly detrimental to shareholder interests. These include cases involving "greenmail" (when the bidder buys enough shares to threaten a takeover and forces the company to buy the shares back at a premium to avoid a buyout), a possible stripping of company assets by the bidder, or coercive two-tier offers. Usually, judgments on shareholder harm are made by a "special committee" or "independent committee," which may or may not include members of the board, but the committee's decision is usually subject to being overruled by the board. At some companies, the decisions are made by the board with no committee input at all.

Many of the poison pills introduced in the past few years will be up for renewal in 2008. Shareholders at Shin-Etsu Chemical and Sharp, for example, will vote on takeover defense renewals this year. Some companies, while not putting a poison pill on the ballot, will seek to pave the way for the eventual introduction of a pill through measures such as increasing authorized capital. Investors also will be asked to approve other article amendments designed to ward off hostile takeovers, such as the elimination of vacant board seats that could be filled by shareholder nominees, and the tightening of procedures for removing a director from office.