In a well-publicized decision to sell shares in Walt Disney Co., the Texas Board of Education has raised important questions about operations and investment policies of public funds.
The contemporary conception of an ideal investment management system is that the board or investment committee establishes policy that is implemented by professional managers. A typical written investment policy allocates assets between equities and fixed-income securities, and further allocates within those classes to categories such as international, small cap, large cap, indexed and venture capital. The policy also might contain minimum credit ratings and maximum maturities, categories to be avoided, as well as social criteria. Social criteria usually is expressed in the negative such as prohibitions against owning tobacco stocks.
The Austin, Texas-based board voted to divest 460,000 Disney shares (valued at some $43 million) from the Texas Permanent School Fund to protest objectionable content of films produced by the Disney subsidiary Miramax Films. Apparently, a majority of the board felt that the Texas school system should not be associated with films having adult content. This is legitimate social criteria, expressed in the negative by selling shares of one company and by publicizing the sale.
QUESTIONS RAISED BY DIVESTING
The action also calls attention to the long-term administration of the fund, and raises these concerns:
* How were shares acquired -- by votes of the board, or by discretionary action of investment advisers? Was the acquisition of Disney shares in accord with the board's written investment policy? Did the board change its policy at the time it decided to sell Disney? Does the investment policy of the board contain admonitions against owning securities of companies deemed socially irresponsible? Should the board publish its written investment policy so that beneficiaries and observers can comment on its content?
* Should the board release a list of all of its holdings and its investment policy, thereby permitting observers to measure the depth of its commitment to social responsibility? Should it release the names of securities purchased with the proceeds from the sale of Disney?
* Does the board vote on every investment decision? The contemporary investment management model would state that boards should not vote on every investment decision, a time-consuming and potentially costly administrative requirement.
* Does selling a security have enduring social value? Does this decision affect policies of Disney? Will observers and Disney management long remember this protest, or will its affect be transitory? Would the Texas board be in a better position to eliminate or to reduce objectionable content of films if it continued as a shareholder? If it were a shareholder, could it continuously and effectively protest at annual meetings and in letters to other shareholders?
HOW RELEVANT AND COSTLY?
My view is that the decision to sell is socially irrelevant and indicative of a board without policy or direction.
I hypothesize that a member of the board became incensed after viewing one or two Miramax films and formally introduced a motion to sell Disney shares. Of course, any member of an investment committee may offer a motion, but some motions are more powerful (but less important) than others. Powerful motions have an emotional or political content. They force other members of the committee to deal with narrow, non-monetary investment themes, such as adult content of films.
Many investment committee members would prefer to avoid voting on specific investment decisions, but the introduction of a motion requires action. Some members want to vote against a motion to sell on general administrative principles. They do not want to set a precedent that the board must review specific investment choices.
However, a motion to sell Disney shares had political content and was unusually visible, probably forcing some members to vote in favor despite philosophical opposition to board involvement.
If the Texas board's vote to sell becomes irrelevant and its message short-lived, then the board has incurred unnecessary costs. The costs are commissions and downward pressure on Disney stock, plus commissions and upward pressure on stocks to be acquired with proceeds. Furthermore, the board might be placing a heavy burden on the process of delegation. Its professional money managers might be left in "policy doubt," especially in the absence of a written policy that clearly expresses social objections to specific types of investments. A money manager operating in "policy doubt" does not know how to avoid a board's social hot buttons, and it might experience fear of dismissal for acquiring objectionable securities under an unknown policy.
Since the Texas board has chosen to publicize its actions with respect to Disney, I believe that it should publicize its investment policy and long-range objectives including social goals. On the other hand, if the board comes to believe that its vote on Disney was not a significant social protest, it should consider creating by-laws that restrict introduction of motions that place investment committee members in an awkward position.