Agency Theory’s “Truth Regime”: Reading Danish Pension Funds’ Decisions Regarding Shell from the Perspective of Agency Theory

Abstract

With the progression of both the climate crisis and financial capitalism, institutional investors play an increasingly central role in fossil fuel companies’ business decisions. Against this backdrop, this article investigates the underlying rationales of Danish pension funds’ climate-related investment decisions analyzed from the perspective of one of the dominant finance theories today on the governance relationship between investors and corporations: agency theory. Hitherto, investors’ climate-related investment decisions have not yet been studied from the perspective of how investors’ actions align with the assumptions of agency theory. Thus, this study explores the degree to which select Danish pension funds’ climate-related investment decisions regarding Royal Dutch Shell can be verified according to agency theory. First, deploying Foucault’s notion of a “truth regime”, the article analyzes how a certain action can be defined as true, read from the perspective of investment assumptions derived from agency theory, a truth regime of agency theory. Second, the paper explores the degree to which this truth regime can be identified in the climate-related investment decisions of the three Danish pension funds, PFA, PKA, and AkademikerPension, regarding Shell’s general assembly, 2021. The investigation concludes that the assumptions of the agency theory truth regime constitute a part of the central reasonings in financial capitalism and that, insofar as investors significantly align with the prescriptions of agency theory, it substantially reduces their possibilities to take Paris-aligned investment decisions.

1. Introduction and State of the Art: Agency Theory and the Climate Crisis

This article argues that to the extent that investors substantially align with the prescriptions of agency theory, it considerably reduces their possibilities to take Paris-aligned investment decisions. It has been well documented that fossil firms disseminate misinformation [1,2], exercise fossil lobbyism [3,4], and continue to develop business plans for new fossil projects [5], all of which intensify the climate crisis. At the same time, investors’ (re)actions towards these firms play a pivotal role in determining the course of the climate crisis. Over the last decades, various studies have pointed out the increasing economic and political power of financial capitalism [6,7]. More specifically, recent studies have shed light on the adverse effects in corporate decision-making [8,9] and nation-states [10,11] of the spread of agency theory. Agency theory is one of the dominant finance theories today on the governance relationship between investors and corporations—aiming to maximize shareholder profit by aligning the actions of “agents” (corporate managers) to the interest of “principals” (investors). Common to these critical studies is a focus on how agency theory excludes reflections on consequences and responsibilities of corporate actions, leaving agency theory’s implications for the investor-side underexposed. Concurrently, with the steady growth of both the climate crisis and financial capitalism, several studies have analyzed the logics, criteria, means, and consequences related to investors’ environmental, social, and governance (ESG) policies [12,13,14,15,16]. However, to the best of the author’s knowledge, investors’ climate-related investment decisions have not yet been studied from the perspective of how investors’ actions align with the assumptions of agency theory. Thus, it is expected that an investigation of the assumptions of agency theory can shed fresh light on central reasonings that inform critical climate-related investment decisions. Zooming in on the role of institutional investors in financial capitalism and the climate crisis, this article explores the question:

-

To what degree can select Danish pension funds’ climate-related investment decisions regarding Royal Dutch Shell be verified according to agency theory?

Methodology and Procedure of the Article: Identifying an Investment Truth Regime

Underlying this question are certain methodological qualifications. In identifying to what degree Danish pension funds’ decisions can be “verified” according to agency theory, this study employs Michel Foucault’s [17,18] notion of a truth regime. Foucault introduces the concept of a truth regime to describe how a new (economic) rationality emerged in the middle of the eighteenth century, “which consequently allows one to judge […] practices as good or bad, not in terms of a law or moral principle, but in terms of propositions subject to the division between true and false” [18] (p. 18). Instead of analyzing an overarching regime in a broad historical setting, like Foucault, this study will deploy the concept in the more specific field of agency theory and Danish pension funds. This article will first analyze how a certain action can be defined as true read from the perspective of investment assumptions derived from agency theory, a truth regime of agency theory. Next, it analyzes to what degree actions of Danish pension funds can be considered true according to these assumptions. This approach also implies that the hypothesis—that select Danish pension funds’ climate-related investment decisions regarding Shell can be verified according to agency theory—can be falsified insofar as the pension funds have not acted in accordance with the key assumptions of agency theory. To analyze agency theory’s compatibility with climate-related investment decisions, the paper compares this regime with what this study terms a Paris-aligned truth regime premised on a set of assumptions about what Paris-aligned investment decisions must address. While my approach is inspired by Michel Callon’s [19] and Donald MacKenzie’s [20] analyses of how economic theories qua their descriptions (or “performances”) shape the very economic field they describe, this article proposes to apply the truth regime as an alternative bridging concept that can elucidate the way in which (economic) theoretical assumptions resonate with (economic) practices. If there is a strong resonance between agency theory and the analyzed investment decisions—and given agency theory is a prevailing theory in corporate finance—it will point out theoretical undercurrents of the (financial) world. Thus, illuminating the resonance of agency theory could help outline a still underexposed field of knowledge within the investment world—rendered in a Foucauldian [21,22] framework these theoretical undercurrents could be considered parts of the conditions of possibility of what can be said and done in the investment world. Therefore, the remainder of this article will show how the truth regime approach can shed light on the degree to which the assumptions of agency theory can be identified in particular investors’ actions and what the assumptions of agency theory imply for climate-related investment decisions.

The article is organized into two main parts. The first part analyzes the role of the investor in agency theory and identifies four assumptions regarding investment passivity, performance indicators, responsibility, and consideration of the consequences of investment decisions according to which a given investment decision can be said to be true or false: a truth regime of agency theory. This part is informed by reading core texts on agency theory (particularly Jensen and Meckling 1976 [23] and Fama 1980 [24]). The investigation then contrasts this regime with the Paris-aligned truth regime, in order to analyze below to what degree these two are compatible or clash in the climate-related investment decisions of Danish pension funds. This analysis is informed by selected recent studies by academics and think tanks (e.g., [5,25,26,27,28,29]). The second part explores the degree to which the two truth regimes can be identified in the climate-related investment decisions of the three Danish pension funds: PFA, PKA, and AkademikerPension. The case in point is Royal Dutch Shell and, in particular, Shell’s general assembly in 2021. The empirical material used is the pension funds’ statements in newspapers, on their webpages, and in the minutes from the general assemblies of the three pension funds 2019–2021 supported by data from Danish NGO reports (WWF, AnsvarligFremtid, ActionAid). Then, the discussion considers the extent and limitations of the scope of the two truth regimes in the three pension funds’ investment decisions. The study concludes, inter alia, that the assumptions of the agency theory regime constitute a part of the central reasonings in financial capitalism and that, insofar as investors significantly align with the prescriptions of agency theory, it substantially reduces their possibilities to take Paris-aligned investment decisions. Moreover, the article concludes that the three pension funds’ different reasoning on investments indicate that there is significant room for pursuing profit maximization in different ways, that these ways vary substantially in how much they align with the two truth regimes, and that member-based democracy in pension funds seems to increase the funds’ level of Paris-aligned investment decisions.

2. Analysis, Part I: Two Truth Regimes—Of Agency Theory and of Paris Alignment

2.1. If Agency Theory Became the Answer, What Then Was the Question?

In general terms, agency theory refers to a branch of theory centered around the University of Chicago, which was developed from the mid-sixties to the mid-eighties. Still today, its assumptions are considered “the dominant perspective on which governance research relies” [30] (p. 2, cf. [31]). Likewise, one of the leading textbooks within corporate finance presents agency theory to new investors and finance scholars to-be as one of “the seven most important ideas in finance” [32] (p. 909). Agency theory arose in response to the problem: how can the conflict between the interests of owners and managers—referred to as “principals” and “agents”—be aligned in order to maximize shareholder profit, which, in turn, would allegedly maximize societal prosperity? Hence, agency theoreticians analyzed the governance relationship between investors and firms from the perspective of striving to make managers maximize profit for shareholders. Key persons and texts in agency theory’s early development were Berle and Means (2009 [1932]) [33], Coase (1937; 1960) [34,35], Williamson (1964) [36], Manne (1965) [37], Spence and Zeckhauser (1971) [38], Alchian and Demsetz (1972; 1973) [39,40], Demsetz (1967; 1983) [41,42], Ross (1973) [43], and Holmström (1979) [44] (cf. [30,31,45,46]). The theory reached its most defining articulation in Jensen and Meckling (1976) [23]. In its later development, it was notably refined in Fama (1980) [24], Fama and Jensen (1983a; 1983b) [47,48], Jensen and Ruback (1983) [49], and Mizruchi (1983) [50]. To identify the constitutive assumptions of the agency theory regime, the analysis will briefly highlight some main developments in agency theory, before defining which “truth” assumptions it requires of the investor.

When Adam Smith published The Wealth of Nations in 1776, most companies were owned by the director and stock companies were still rare. Still, Smith was critical of their governance structure:

“The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company” [51] (p. 741).

In 1932, Columbia law scholar Adolf Berle Jr. and Harvard economist Gardiner Means observed how American capitalism was changing its shape: whereas stock companies had only played a minor role in Adam Smith’s days, now, as corporations were increasingly growing in scale, investors, financing the firms, increasingly came to own shares of the corporations. Expanding on Smith’s cautions, Berle and Means described how this development gave rise to a conflict of interest between the owners and managers of the firm [33] (p. 302–313). Forty-four years later, in 1976, Michael C. Jensen, a financial economist with a PhD from Chicago from 1968, together with his University of Rochester colleague William Meckling, published their article “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”. This article became seminal since it combined Eugene Fama’s thesis that the market prices reflect the information of all the market participants (known as the efficient market hypothesis) with Berle and Means’ identification of the organizational agency costs derived from the separation of ownership and control. Moreover, the article proposed concrete ways to address these hurdles [23] (p. 31 and p. 68). Jensen and Meckling asserted the following general definition of the problem of agency theory:

“We define an agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision-making authority to the agent. If both parties to the relationship are utility maximizers, there is good reason to believe that the agent will not always act in the best interests of the principal. […] We define agency costs as the sum of:

• the monitoring expenditures by the principal,
• the bonding expenditures by the agent,
• the residual loss” [23] (pp. 5–6).

Further, they argued that if “a wholly-owned firm is managed by the owner, he will make operating decisions that maximize his utility” [23] (p. 10). However, the owner of the firm often needs more money than she has at her disposal individually, and therefore she will need external finance, causing agency costs.

Contrary to most of the intellectual history of the theory of the firm Jensen and Meckling drew on—e.g., Milton Friedman (2002) [52], Fama (1970) [53], Smith (2012) [51], Coase (1937) [34], and Alchian and Demsetz (1972) [39]—agency costs were now at the center of the definition of the firm. This revision, in turn, called for ways to minimize these costs. At large, agency theory advances three approaches to monitoring managers: First, the establishment of a board of directors independent of management who can monitor managers. Second, the use of payments of equities in the firm, which align managers’ interests with the interests of owners. And third, the market for corporate control, in which poorly managed firms will be bought and replaced by new management [30] (p. 3). These strategies are developed and discussed in the development of agency theory, including (to some extent) in Jensen and Meckling’s aforementioned article. Of particular interest is the way in which financial theories were enacted in the governance of the firm. Referring to the efficient market hypothesis of Fama, Jensen and Meckling wrote: “A large body of evidence exists which indicates that security prices incorporate in an unbiased manner all publicly available information and much of what might be called ‘private information’” [23] (p. 68). If true, this claim posed the question of the value of security analysts, given that they would not be able to beat the market. However, as argued by Jensen elsewhere [54], investment analysts must fulfill a useful function simply given the fact that there was a demand for them. According to Jensen and Meckling, their analysis indicated “that to the extent that security analysis activities reduce the agency costs associated with the separation of ownership and control, they are indeed socially productive” [23] (p. 68). It follows from the definition of agency costs in firms and from the efficient market hypothesis that the role of investment analysts was to monitor managers by buying or selling shares according to their management. If the management performed poorly, it might be worthwhile to buy the majority of the shares, kick out the managers and restructure the firm, or it might be a good idea to sell off before the firm goes broke. Moreover, as proposed by Donald MacKenzie [20] (p. 261), since management was increasingly paid in stocks and options (to align their interests with the investors), the stock and option markets gained increased legitimacy. In this way, agency theory, both via stock payments and via investment analysts’ monitoring, increased the strength of financial markets as well as financial theories.

This strength, however, was not to be wasted on “social responsibility”, the two Chicago scholars emphasized. They argued that Friedman’s [55] normative views on the role of the firm could be justified by Alchian and Demsetz’s [39] positive description of the firm as a set of complex processes:

“Viewing the firm as the nexus of a set of contracting relationships among individuals [as Alchian and Demsetz had proposed] also serves to make it clear that the personalization of the firm implied by asking questions such as ‘what should be the objective function of the firm?’ or ‘does the firm have a social responsibility?’ is seriously misleading. The firm is not an individual. It is a legal fiction which serves as a focus for a complex process in which the conflicting objectives of individuals (some of whom may ‘represent’ other organizations) are brought into equilibrium within a framework of contractual relations. In this sense the ‘behavior’ of the firm is like the behavior of a market, that is, the outcome of a complex equilibrium process. We seldom fall into the trap of characterizing the wheat or stock market as an individual, but we often make this error by thinking about organizations as if they were persons with motivations and intentions” [23] (pp. 9–10).

The firm, then, is a nexus of conflicting objectives and processes “brought into equilibrium within a framework of contractual relations”. This proposition draws on marginalism’s assumption that supply and demand always strive towards equilibrium, and that we cannot measure the difference between different actors’ qualitative utility. Hence, equilibrium analyses recommend business decisions that maximize quantitative utility, i.e., maximize the absolute profit output, regardless of qualitative consequences. Since firms have many different stakeholders, and since the firm is but a nexus of contracts, Jensen and Meckling concluded that the firm could not be assigned any other social responsibility than to maximize its quantitative profit. In other words, as “a legal fiction”, the firm enjoys the same rights as a person—in the US, this legal fiction entails the right to “free speech”, which allows it to donate unlimited, undisclosed contributions to politicians (cf. [9] (pp. 155–156)). However, insofar as the firm is not an actual—“behaving”—individual, it cannot have any ethical responsibilities.

Jensen and Meckling’s propositions were notably advanced by Fama [24] who reasoned that the disciplining of management neither falls on shareholders nor directors, but is a function of the market. And, according to Fama, the role of the investor as a residual claimant and risk-bearer is further reduced when considering the consequences for ownership structures of the growing risk management via diversification of investors’ investment portfolios (as advanced by Harry Markowitz [56]): “efficient allocation of risk bearing seems to imply a large degree of separation of security ownership from control of a firm” [24] (p. 291). Therefore, the role of investors is merely to assess the value of the (management of) the firm, not to try to reduce agency costs by conducting active ownership. Again, the sole objective of investors is to maximize their own profit. Hence, Fama assumed that the market, both for management and stocks, “operates in the interests of the firm’s security holders”, which in turn “probably” ensures “good survival properties” [24] (p. 294). However, Fama’s argument neither discussed the scope or type of investor interests nor did it consider the degree to which investors’ interest is essentially aligned with the firm’s survival, not to mention the well-being of its other multiple stakeholders.

2.2. Key Assumptions of Agency Theory’s Truth Regime

Having outlined the main ideas of agency theory regarding investors, the analysis will now pursue the following questions: How does agency theory define, and prescribe certain actions and calculations for, investors? And to what degree can the central assumptions of this truth regime be deduced from these definitions?

From the preceding analysis, the investigation can now establish some key premises underpinning how the investor-subject is conceived within the theoretical framework of agency theory. First, while the firm might be nothing more than a nexus of individual contracts, it still needs its investors. Second, investors are expected to diversify their ownership, reducing their stakes and interest in conducting active ownership in each individual firm. Third, agency theory assumes that the market exerts pressure on both individual managers in terms of their career prospects and on the broader management’s leadership of the firm. Fourth, overperformance or underperformance is expected to be reflected in the firm’s stock market price. Hence, fifth, the active role of the investor is to hire security analysts who can calculate prospects for takeovers and degrees of business risks and profits. This implies in turn, sixth, that the investor’s role is not to conduct active ownership. Finally, seventh, agency theory posits that investors’ sole goal is the maximization of investment profit—and particularly short-term profit, because investors will prefer to sell off shares and buy others expected to yield better immediate returns, rather than to give up short-term profit for investment projects with a long time-horizon. These seven elements together are complemented by the assertions that society would reap the greatest benefit only if each individual firm focused exclusively on increasing its own profit, and that the essential measure of company performance is the stock price. The central parallel consequence of this premise is that firms should strive for, and hence incentivize their managers toward observing, not individual investors’ wishes or ethical concerns, but the combined, efficient signal of the market price.

Four assumptions of the truth regime of agency theory can be deducted from the above premises: First, the truth regime nurtures passivity. The autonomous decision-power of both investors and managers is restricted since business and investment decisions are to adhere strictly to fluctuations in the market price. Thus, the possibility of investors taking active ownership is severely limited; this preclusion is further supported by the doctrine of portfolio diversification. Second, this market-based reasoning also implies that ethical responsibility for the consequences of corporate actions is displaced from managers and investors to abstract market laws. Given that investors’ sole responsibility is to signal to the managers which firms they perceive have the best stock return prospects, investors and corporate decision-makers will be relieved of any responsibility for “externalities”. Third, insofar as the actors’ functions and incentives are conceived within the market framework, and since no common qualitative responsibility can be agreed upon by all economic stakeholders, economic return is defined as the exclusive goal, which is ultimately reflected in shareholder value. Hence, shareholder value becomes the final performance indicator for managers and investors alike. Fourth and finally, the truth regime delimits which consequences of investment decisions should be considered. The texts analyzed here do not explicitly address environmental consequences, but they clearly advise against corporate decision-making based on any other responsibilities beyond those defined by law.

The above analysis has identified the assumptions that constitute agency theory’s truth regime. The investigation will now outline what will be described as the Paris-aligned truth regime.

2.3. A Marginalized Paris-Aligned Truth Regime?

In order to analyze the climate-related investment consequences of agency theory, this article focuses particularly on how the agency theory regime precludes investment decisions aligned with the goals of the Paris agreement. Hence, the study will now qualify the key assumptions of a Paris-aligned truth regime, in order to pursue the hypothesis that the Paris-aligned truth regime is marginalized by that of agency theory.

With different reasonings and in different contexts, both active ownership and divestment can be regarded as effective ways to bring about change. This article argues that a combination of both active ownership and divestment is the most efficient approach for pursuing climate-related investment decisions; this combination is what this study terms the Paris-aligned truth regime. This combination is based on the following assumptions: Recently, several studies have documented that divestment decisions can both be politically influential and economically efficient [25,26,27,57]. Furthermore, this investigation assumes as a minimum, first, following Cedric Dawkins [27], that active ownership is best suited for companies in which only one element of the business structure needs to be changed (e.g., management changes or the substitution of diesel engines with batteries), whereas active ownership is likely to be less effective compared to divestment when the core business model needs to be changed (e.g., a coal-mining company shifting to specializing in wind-turbine production or another non-fossil production). Second, active ownership will have the greatest effect if the investor defines clear criteria for alignment with the goals of the Paris Agreement and sets deadlines for progress, which will be met with divestment if the firm does not meet these criteria within the deadline (again in accordance with Dawkins [27]). Third, as long as over half of the fossil firms’ capital expenditure goes to fossil projects (and for most fossil firms, it was still in 2021 significantly over 90% [5]), it is in these firms’ capital interest to delay climate action, something which they achieved with great success through lobbyism and dissemination of misinformation [58,59]. Here, divestment not only targets fossil firms’ financial interests but also delegitimizes their political influence [14] (p. 10; cf. [25]). Notably, these reflections do not only concern the divestment of shares. By contrast, fourth, the divestment of bonds does not significantly affect the potential for conducting active ownership, and bond divestment will cause fossil firms to pay higher interest on their bonds, thereby increasing the financial cost of instigating new fossil projects, as argued by Ulf Erlandsson and Emma Sjöström [60].

The following section will analyze to what degree select Danish pension funds’ investment decisions towards Shell are aligned with the assumptions of the Paris-aligned truth regime and/or with the assumptions of the agency theory regime.

3. Analysis, Part II: Danish Pension Funds and Shell’s General Assembly 2021

3.1. The Context of Danish Pension Funds

Tracing the truth regimes in the context of Danish pension funds requires, at least, a preliminary historical contextualization of these institutional actors. The national Danish pension scheme was gradually introduced during the 20th century, but as it only covered limited needs, various occupational groups gradually established their own pension funds. These occupational pension funds owe much of their current structure to negotiations that occurred in the 1980s. These negotiations resulted in a compromise between demands for an increased degree of “economic democracy” and wishes from, respectively, the trade unions and the employers to gain decision-making power in the pension funds. The result was that, unlike the national and commercial funds, the member-based Danish pension funds have a relatively unique degree of membership-based democracy compared to pension funds in other countries. Trade unions and companies still have a prominent degree of formal and informal power in these pension funds; yet, to varying degrees, members often have the right to vote at general assemblies and for certain board positions. Whereas all Danish citizens receive state pension (da. “Folkepension”), and all workers additionally have a national pension, called ATP, pensioners’ main pension payments normally come from the occupational pension schemes (the Danish occupational schemes are all “defined contribution” schemes). Depending on one’s workplace, these pension schemes are either member-based or commercial—the employees’ employment contract determines which particular pension fund the employee has. This implies that the individual employee cannot decide to change their pension fund (although they can choose to set aside additional money, beyond that granted in their employment contract, in a different fund of their own choice) (cf. [61,62]).

Particularly, the analysis will look at three Danish pension funds: PFA, PKA, and AkademikerPension. PFA is the largest Danish commercial pension fund (DKK ~725,000 million as of 2021). PFA is a joint-stock company and its pension savers do not have access to put forward resolutions at the general assembly nor vote for board elections. With about a million pension savers, PFA’s pension savers come from diverse private and public sectors. PKA is one of the largest Danish member-based pension funds (DKK ~400,000 million as of 2022). PKA has indirect member democracy where members can elect delegates who can participate in, vote, and put forward resolutions at the general assembly. PKA’s members are typically social workers or employed in the health sector. AkademikerPension (formerly known as “MP Pension”) is a medium-sized (DKK ~150,000 million as of 2022) member-based Danish pension fund. The members of AkademikerPension can participate in, put forward resolutions, and vote directly at its general assembly, and they can run as and vote for board members. AkademikerPension’s members are typically academics from the humanities and natural sciences. The study will proceed by analyzing their respective actions toward Shell, focusing on Shell’s general assembly 2021, comparing them to the agency theory and the Paris-aligned truth regimes.

3.2. The Two Truth Regimes Visit Shell’s General Assembly, 2021

On May 18, 2021, a resolution was put forward by Royal Dutch Shell plc at its general assembly for approving the transition plan that Shell had proposed. The plan aimed at reducing Shell’s emissions to “net”-zero by 2050, but the company still projected that at least 75% of its capital expenditures would continue to be invested in oil and gas, which put into question the plan’s influence on Shell’s absolute reductions [63,64]. On the very same day, this proposal was paralleled with the release of the long-awaited report from the influential International Energy Agency (IEA) on how to reach the Paris Agreement’s target of keeping the global temperature increase below 1.5 degrees [29]. The IEA concluded that investors should halt funding for new oil, gas, and coal supply projects, a finding that was clearly at odds with Shell’s projected continued capital expenditure on fossil projects. Then, nine days later, a Dutch court ruled that Shell’s proposed plan was insufficient. In the preceding years, Shell had continually announced certain improved climate-related ambitions: in 2017 Shell declared it would reduce the carbon intensity of its energy products, in 2019 it connected the executive pay to its net carbon footprint target, in 2019 it declared that it began reviewing the alignment between its climate-related positions and its membership of key (lobbyism) industry associations, and in 2020 it announced its plan to become net-zero by 2050 [65]. Still, as of the general assembly in 2021, it seemed far-fetched that Shell (taking into account Shell’s locked-in physical infrastructure, the expertise of its personnel, its production chains, etc.) would transition its projected future 75% capital expenditure on fossil projects to 0% on new fossil projects (as required in IEA’s scenario)—by 2020, Shell spent approximately 90% of its capital expenditure on fossil projects and between 3 and 5% on renewable projects [66]. This large-scale challenge of transitioning Shell’s new investments entirely away from fossil fuel projects was furthermore reflected in Shell’s sustained involvement in several industry associations that conducted lobbyism that counteracted the goals of the Paris-agreement [67]. Nevertheless, the general assembly had approved Shell’s plan with an 88.74% majority. PFA was among the majority who voted for the resolution, PKA voted against it, and AkademikerPension had already sold off its shares in Shell back in 2019. Which considerations and logics underpinned these divergent decisions and to what degree did they resonate with the two truth regimes?

Until recently, PFA has rejected calls for divestment issued by climate organizations (c.f. [68]), and in 2019 PFA was still arguing that ExxonMobil was progressing on the climate agenda [69]. On the one hand, PFA argued that “We are not saving the planet by withdrawing from oil investments” [70], asserting that selling its fossil shares to less responsible investors would only decrease PFA’s possibilities to conduct active ownership geared at changing the fossil firms’ business models without taking steps to mitigate the climate crisis (a common argument among Danish pension funds, e.g., [71]). As a consequence, in 2020, PFA argued that it would concentrate its active ownership on a few fossil companies in order to gain greater influence on these firms—and divest from other fossil companies that do not have Paris-aligned business plans [70]. On the other hand, PFA also declared that “We are not a philanthropic company and we are not a company that only has CO2 transition on the brain” [72]. PFA has neither been among the first Danish pension funds to divest from fossil companies without Paris-aligned business plans nor has it, as of 2021, assumed what has been termed a “lead investor” role in the comprehensive investor alliance (comprising about 600 investors representing a total of more than $50 trillion) for active ownership Climate Action 100+ (cf. [73]). At the beginning of 2022, PFA, according to the Danish NGO ActionAid (da. Mellemfolkeligt Samvirke), still invested DKK 3,182 million in firms that initiated new fossil projects (amounting to roughly 0.43% of PFA’s total investment portfolio) [74].

The above facts correspond with PFA’s own statement of having other things on its mind than CO2 transition. However, they fit less well with PFA’s ambition to sell off most fossil companies in order to strengthen its active engagement with a few companies. Thus, upon closer inspection, PFA arguably merely conducts limited active ownership. In the Danish divestment campaign AnsvarligFremtid’s 2018 survey on Danish pension funds’ climate-related investment actions, PFA (along with LPK) was characterized as the “rear guard” of climate-related active ownership among Danish pension funds [75]. This observed hesitancy was still apparent as late as 2021; here, PFA conducted its active ownership by voting to approve Shell’s transition plan, which was insufficient both according to a Dutch court ruling and when measured against the recommendations of the—normally notorious conservative (cf. [76,77])—IEA in its net-zero report. And according to a survey by AnsvarligFremtid on selected banks’ and fossil fuel companies’ general assemblies, PFA’s voting practice was only Paris-aligned 50% of the time at the fossil fuel companies’ general assemblies (let it be noticed that PFA only invested in two of the selected fossil fuel companies), and only 20% of the time at the selected banks’ general assemblies [78]. Moreover, it is remarkable that the Danish pension funds typically vote in accordance with the recommendations of company boards rather than in compliance with recommendations regarding the firms’ Paris alignment [79] (p. 27). It seems plausible that approving the boards’ recommendation would increase the value of the firms’ shares in the short term, while the pension funds’ statements about active ownership provide them with a green image.

In comparison with PFA, two Danish member-based pension funds have taken more substantial climate-related investment actions. PKA has been a leading member of the Institutional Investors Group on Climate Change (IIGCC) since its foundation—and IIGCC, in turn, co-initiated Climate Action 100+. At its general assembly in 2019, PKA declared that it would divest from fossil fuel companies that are not on track to become Paris-aligned by ultimo 2022 [80]. In 2021, in continuation of PKA’s declared progressive climate ambitions, PKA voted against Shell’s resolution, which indicates that PKA requires fossil firms to move towards de facto Paris-compatible business models. According to AnsvarligFremtid’s above-mentioned survey, in 2022, PKA’s votes were Paris-aligned 75% of the time at the selected fossil fuel companies’ general assemblies, and 60% at the bank’s general assemblies [78]. At PKA’s 2022 general assembly, however, PKA postponed its divestment decision to 2023, arguing that it would be more efficient to make the decision when the first phase of Climate Action 100+ ended since that would align the investor pressure (of all the members of Climate Action 100+) on the fossil firms. While this reasoning might potentially be correct, the postponement decision also puts PKA’s willingness to go through with a divestment decision into question. As of the beginning of 2022, PKA had, according to ActionAid, DKK 829 million invested in firms that initiate new fossil projects (roughly 0.20% of PKA’s total investment portfolio) [74].

In 2019, AkademikerPension sold off its shares in all non-Paris-aligned fossil companies, including Shell. This decision was preceded by annual divestment proposals put forward by members at each general assembly from 2014 and onwards combined with the election of board members who favored a Paris-aligned investment strategy. Nevertheless, AkademikerPension did not, at the time, divest its bonds in fossil firms, arguing that it would be harder to manage its portfolio risk if it divested fossil bonds [81]. In 2022, however, AkademikerPension announced that it now estimated that fossil bonds began to pose an increased risk due to climate-related concerns among investors and that AkademikerPension had decided to divest its fossil bonds [82]. Moreover, AkademikerPension has taken a “lead investor” role in Climate Action 100+ [83]. In terms of active ownership, AnsvarligFremtid’s survey found that AkademikerPension, in 2022, had voted in line with the goals of the Paris agreement at 100% of the proposals at the selected fossil companies (with AkademikerPension only having investments in one of the selected fossil fuel companies, having sold off the rest), and at 56% of the selected banks’ general assemblies [78]. According to ActionAid, at the beginning of 2022, AkademikerPension invested DKK 99 million in firms that still initiated new fossil projects (roughly 0.06% of AkademikerPension’s total investment portfolio) [74].

The article will now discuss to what degree these analyses have answered the initial question—to what degree can select Danish pension funds’ climate-related investment decisions regarding Royal Dutch Shell be verified according to agency theory—and how the Foucauldian-inspired method has contributed to and shaped this answer.

4. Discussion: The Influence of the Two Truth Regimes

From the above analyses, the following tendencies can be detected regarding PFA’s, PKA’s, and AkademikerPension’s climate-related investment decisions and their respective alignment with the two truth regimes. Historically, all three pension funds have been reluctant to divest and to introduce divestment as an effective response if criteria and deadlines are not met, arguing that divestment would restrict their ability to manage their portfolio risk. Indicating that all three comply with the assumption that shareholder value is their ultimate indicator. Likewise, PFA stated that it will step up on active ownership, yet this ambition was disproved by the funds’ vote at Shell’s general assembly—a finding that was supported by PFA’s general voting practice in 2022, as well as by its large amount of remaining fossil investments (as a result of PFA’s hesitancy to use divestment). Similarly, although PKA’s vote was consistent with its focus on active ownership, the business plans of the fossil firms that Climate Action 100+ was trying to push remained by 2022 substantially at odds with the goals of the Paris agreement according to Climate Action 100+’s own analysis [84]. PKA’s decision to postpone its divestment deadline further questioned PKA’s actual pressure—and both PKA’s overall voting practice in 2022 and its remaining fossil investments also indicate flaws in PKA’s Paris-aligned investment policies, including its active ownership practice. By contrast, AkademikerPension was engaged in active ownership and did apply Paris-aligned criteria for divestment (reflected in AkademikerPension’s comparatively low amount of fossil investments), and, likewise, AkademikerPension’s voting practice was in most cases aligned with the goals of the Paris agreement. Yet, AkademikerPension did not comply with the Paris-aligned regime until it deemed that it did not incur too much risk to sell off first shares and then bonds. These actions indicate that different pension funds invoke different investment truths. Whereas PFA’s limited actions align with the assumptions of the agency theory regime, AkademikerPension’s decisions were primarily verifiable according to the Paris-aligned truth regime. PKA’s decisions did not live up to the principles of the Paris-aligned regime, yet its actions were not fully compatible with the agency theory regime’s premises about passivity, its delimitation of which investment consequences to consider, and its displacement of investment responsibilities. Insofar as agency theory is an influential theory regarding the governance relationship between investors and firms, its prescriptions regarding investors and their climate-related actions are of major critical interest. Complying with the agency theory regime entails investor passivity, i.e., investors obeying only market signals, rendering active ownership a superfluous expenditure and divestment criteria an unnecessary constraint. Consequentially, if all investors complied fully with the agency theory regime, they should neither pursue any divestment criteria or deadlines nor should they conduct active ownership nor consider the societal and environmental consequences of their investments. Specifically, this would mean that AkademikerPension most likely would have remained invested in Shell, that AkademikerPension and PKA would have supported the board’s resolution, that none of the Danish pension funds would have articulated climate targets (and at least not climate targets that would be more progressive than the world benchmark), and, finally, that none of the pension funds would have engaged in dialogue to nudge Shell toward Paris-alignment. Though the three selected investors exemplify three different approaches to Shell and degrees of the agency theory regime, it should be noted that echoes of this regime could be detected in the decisions of all three investors. Furthermore, the agency theory regime appears to be even more evident among the majority (88.74%) of investors who supported Shell’s insufficient plan.

Importantly for further research on how economic theory integrates with practice, including the evolving domain of “performation of economics” [19,20,85,86,87,88], it should be stressed that this investigation neither claims nor shows that the agency theory regime is deterministic or all-encompassing. Rather, this study has shown how several of its core premises resonate with investors’ concrete decisions. By analyzing agency theory as a truth regime, this study has been able to highlight the assumptions on the investor-side according to which decisions are true or false in agency theory, thus also outlining the limits of the investment decisions that can be made according to the agency regime. Given most of the investigated investment decisions complied with these assumptions, and given agency theory still remains a dominant theory in corporate finance on the relationship between firms and investors, this study indicates how the assumptions of agency theory constitute a substantial part of an overarching logic in the contemporary investment world—as proposed in the introduction, in Foucauldian terms, these assumptions can be considered parts of the conditions of possibility of what can be said and done in the investment world. The logic of the agency theory regime is far from all dominant, and its influence varies significantly among specific actors’ particular decisions. Still, to stress a key point, it is shown that this logic constitutes a sizable factor in the investment world and that it is significantly incompatible with Paris-aligned investment decisions.

In continuation hereof, this study contributes to the burgeoning critical literature on both agency theory and ESG investment (e.g., [8,9,10,11,12,13,14,15,16,25,27,87,89,90]), by showing that, given the scale of both the climate crisis and the investment world, it is crucial for future research on both agency theory and ESG investments to take these climate-related incompatibilities of agency theory, as well as agency theory’s assumptions’ broader resonance in the investment world, into account. Thus, whereas this study takes inspiration from the performativity approach’s focus on the flow from theory to practice, the approach of this study shows how a Foucauldian analysis of theoretical assumptions (in this case of a finance theory) can reveal severe practical challenges implied by these assumptions.

Cautions and Perspectives: The Truth Regimes and Member-Based Democracy

Moreover, some cautions to the above analysis should be stressed in order to specify the scope of the conclusion. Notably, the theoretical assumptions do not unambiguously match the observed choices of the two member-based pension funds scrutinized here. AkademikerPension’s divestment decisions prioritize Paris alignment over the possibility of complete diversification across all sectors, and PKA conducts considerable active ownership involving Paris-aligned targets and deadlines for potential divestment—although the latter was revealed as being somewhat inconsistent. In comparison, the agency theory regime resonates more strongly with the actions of the commercial Danish pension fund PFA compared to the two democratic member-based pension funds. Since around 2014, Danish pension funds have experienced pressure from pension members who increasingly call for climate action. Contrary to commercial and national Danish pension funds, in the member-based pension funds, the members have formalized ways of having their climate-related concerns taken into account via general assembly resolutions and board elections—by indirect votes in PKA via delegates, and by direct votes in AkademikerPension. Such concerns are more clearly reflected in the investment policies of member-based pension funds than in the investment policies of commercial and national pension funds (cf. the following NGO surveys: WWF 2019 [91]; WWF 2020 [92]; AnsvarligFremtid 2018 [75]; AnsvarligFremtid 2021 [79]; AnsvarligFremtid 2022 [78]; ActionAid 2022 [74]). It gives the members of member-based pension funds a greater influence on the investment strategies they can expect from the funds; furthermore, it is plausible that the higher degree of direct member influence has inclined AkademikerPension to take bolder climate-related investment decisions than PKA. As already proposed by Adam Smith, managers of other people’s affairs cannot be expected to watch over these “with the same anxious vigilance” as these people watch over them themselves [51] (p. 741). To stress another key point: the members’ formal ways of exerting influence allow for not only a quantitative definition of how the fiduciaries should conceive the members’ interest—in terms of profit maximization—but also a qualitative definition—in terms of the members’ deliberative articulation and discussion of their interests.

These examples indicate that climate concerns are not simply shaped by investment theories but rather that the choice of investment models and principles closely intersects with the question of investors’ governance structures. These aspects become clearer when they are contrasted with Danish pension funds following divergent governance structures. Whereas this investigation is inspired by Foucault’s analytical critique, the study’s findings point more practically at important benefits derived from the structures of member-based institutional investors—benefits, here, being defined in terms of Paris alignment. Steps toward such structures could possibly improve the ethical, societal, and long-term economic considerations in the fund’s investment decisions, which parallels diverse stakeholder and deliberation studies such as Ostrom (1990) [93], Matten and Crane (2005) [94], and Habermas (1983) [95].

5. Conclusions: Restrictions and Encouragements of Paris Alignment

Given that agency theory is one of the most dominant theories on the governance relationship between investors and firms, it can be expected to underpin investors’ conceptions of their role and adequate actions towards firms. Analyzing agency theory as a Foucauldian truth regime, this study has been able to outline central underlying assumptions of agency theory and the degree to which these assumptions can be identified in the three selected Danish pension funds’ climate-related investment decisions. This study has demonstrated that, insofar as investors pursue the assumptions of agency theory, it substantially restricts their possibilities to make Paris-aligned investment decisions. Paris-aligned investment decisions were defined as investment decisions that align with what this article termed the Paris-aligned truth regime; the investigation has shown that this truth regime by and large contrasts with the framework of the truth regime of agency theory. The different strategies pursued by the three Danish pension funds show that they all in different ways include assumptions from both regimes; however, the agency theory regime is the most widespread of the two regimes, indicating that the assumptions of the agency regime constitute a part of the central reasonings in financial capitalism. Still, the three pension funds’ divergent justifications also reveal a significant spectrum within which profit maximization is pursued and that these different pursuits vary substantially in their compliance with the Paris-aligned truth regime. Here, the case of the three selected pension funds indicates that member-based democratic financial institutions display a higher degree of Pairs-alignment than commercial pension funds. Based on these observations, the article suggests that this tendency can be explained, inter alia, by members’ formalized possibilities of having their climate-related concerns taken into account via general assembly resolutions and board elections. This paper, thus, proposes that such governance forms of financial institutions are further explored and advanced.