Public plans at odds over a ‘messy’ issue

Executives at some public pension funds want to probe whether their money managers are unwittingly buying stocks of companies that aid terrorist nations.

Others, however, contend the job of identifying rogue companies is best left to the feds. Some hope to look to a newly formed office of global security risk at the Securities and Exchange Commission for guidance.

In one camp are those who believe monitoring investments is simply a new element of risk management and part of funds' fiduciary responsibility. Those on the other side believe that pension funds engaging in foreign policy might muck up the process.

The issue is messy. Last month, it led to a spat among members of the Council of Institutional Investors. Complicating matters further are questions raised about the only service that monitors corporations doing business in six terrorist countries.

Public officials' wariness began after the Sept. 11, 2001, terrorist attacks. A recent "60 Minutes" report — "Doing Business with the Enemy" — added more fuel to the fire.

That Jan. 25 segment, according to a transcript, prominently featured William Thompson, the New York City comptroller who oversees the $82 billion New York City Retirement Systems.

"The revenue that is generated from the work that these companies are doing, we believe, helps to underwrite and support terrorism," Mr. Thompson said, according to the transcript. He later said the system might put pressure on companies doing business in terrorist states, ultimately forcing those countries to change their practices.

Last year, the New York City Police and Fire Department Pension Funds, which are part of New York City system, sponsored shareholder resolutions at General Electric Co., Halliburton Co. and ConocoPhillips, asking those companies to review their operations in terrorist-linked countries through offshore entities. New York City officials did not respond to requests for interviews.

Elsewhere, the Arizona Legislature is close to approving a bill backed by state Treasurer David Petersen requiring government agencies that run state money — including the $21 billion Arizona State Retirement System, Phoenix — to report annually on their holdings. Officials of the state system have reportedly resisted doing so.

On the other side are public pension fund officials who think the job of deciding which companies are supporting terrorist activities is beyond their ken. Those funds include the $164 billion California Public Employees' Retirement System, Sacramento; the $6 billion Missouri State Employees' Retirement System, Jefferson City; and the $16 billion Iowa Public Employees' Retirement System, Des Moines.

"IPERS and other public pension funds need the assistance of the U.S. government to accurately determine which companies are harming the security interests of the United States and its citizens," Iowa system officials wrote in a statement on the pension fund's website.

Explained MOSERS' rationale for an anti-terrorism investment policy, adopted April 1: "Quite simply, factual information that MOSERS needs to prudently divest from these companies is not available."

Officials at other state pension systems, including those of Connecticut and Colorado, are still weighing the issue.

"I think it's a fertile issue for public funds, particularly ones that are run by elected officials, because no one wants to get caught in headlines showing that funds are unwittingly abetting terrorism," said Stephen Davis, president of Davis Global Advisors, Newton, Mass., a corporate-governance consultant.

A few pension officials are lobbing their own grenades.

Last month, Gary Findlay, MOSERS' executive director and then-chairman of the Council of Institutional Investors, placed an unsigned editorial in a CII newsletter favoring a policy of seeking federal guidance.

The editorial, which branded the "60 Minutes" broadcast as sensationalism, warned that U.S. agencies have developed multi-layered policies and that pension funds could undermine U.S. anti-terrorist initiatives by trying to go it alone.

In fact, the government's position on doing business in different countries varies. "For example, it is legal for U.S. companies to do business in North Korea and Syria" because they further U.S. policy goals, while it is illegal for U.S. companies to do business in four other nations, the editorial said.

Nor is it possible for U.S. investors to get information on companies doing business in U.S.-sanctioned states, it added. Compiling such data could be costly, it warned.

Instead, the editorial said a fund could adopt "a policy that calls upon the State Department to provide guidance, not just on which countries are deemed to support international terrorism, but which companies have connections to terrorism." (The italics are in the original.)

That editorial "outraged" Mr. Thompson and NYCERS trustees, Mr. Thompson wrote in a March 8 letter to Council members.

"We are offended by its malicious implications that our efforts are more about sensationalism than facts, and the ridiculous assertion that our efforts may needlessly hurt U.S. companies and their employees," he wrote.

Mr. Thompson also rejected the editorial's view that trustees should turn to the State Department for guidance. "We believe it is the duty of the fiduciary to obtain and assess such information and make appropriate investment decisions."

In a March 10 response to Mr. Thompson, Mr. Findlay apologized for any perceived disparagement of the New York City funds' actions. But, he added, "The implications of your letter is that trustees and administrators who are not moving in lockstep with the New York City funds may be acting irresponsibly." He cited lack of clear government guidance or information.

Meanwhile, a monitoring service jointly offered by the Investor Responsibility Research Center and the Conflict Securities Advisory Group, both in Washington, may have muddied the waters.

Global Security Risk Monitor, the sole firm currently offering such a service, includes data on about 400 publicly held companies, of which a sixth are U.S.-based corporations. The service, which ranks the relative degree of risk by four categories, costs $12,500 a year and is used by funds with more than $1 trillion in total assets, including the New York City funds.

Roger W. Robinson, a former National Security Council officer in the Reagan administration, is president and chief executive of Conflict Securities. He said the service is designed to assess the risk to companies that do business in terrorist-sanctioned states. The real risk, officials say, is from so-called "dual-use" products that can be used for both civilian and military purposes.

"I think it's been established there's a proven risk to share value and corporate reputation from doing business in these high-risk countries," he said. Stocks of companies, such as Talisman Energy Inc., which was involved in Sudan, have been hit by perceptions that they directly or indirectly aided terrorist activities or brutal civil wars, he said.

"You have arguably dozens of companies that are presently in technical violation of U.S. law under the Iran-Libya Sanctions Act of 1996," he said. While President Bush has decided to waive sanctions against these companies so far, things could change, Mr. Robinson said.

He rebuts arguments that the federal government will be able to identify risks of holding such stocks.

"In short, the government will tell you what's legal and illegal, but it's not in the risk assessment business, and it's not going to produce a list of businesses to be alert to, if they are acting in a manner that is consistent with U.S. law," Mr. Robinson said.

Maybe so, but the argument didn't persuade CalPERS officials, who dropped the product at the end of 2002. In November 2002, the pension fund's staff wrote in a memo to the investment committee that they do "not believe that his product can contribute information of value for the PERS portfolio. While it is a comprehensive database of news article references and U.S. government citations, many of the references are very old, and bear no real insights into risk related to terrorism or national security.

"Additionally, staff has concerns over the expertise of one of the sponsors of this product, which is pertinent because of the product's reliance upon his background in this area," the memo said.

Not helping Mr. Robinson's case was a Nov. 4, 2002, memo from CalPERS' Washington lobbyist, Vienna, Gregor & Associates Inc., Alexandria, Va. That memo says Mr. Robinson was "one of CalPERS' chief foreign investment critics" on the fund's investments in Chinese companies, which numerous news stories said had ties to the Chinese military or intelligence operations.

"He is believed to be one of the primary sources for many of the critical news reports and has been frequently quoted," the memo said.

The memo also said that CSAG's chief operating officer, Adam Pener, had written a report to the U.S.-China Economic and Security Review Commission — a bipartisan panel chaired by Mr. Robinson — that cited many of the same stories that were critical of CalPERS' China investments.

Mr. Robinson defended CSAG's product. "We had 10 analysts working seven days a week for seven months to compile the original research, and have updated it quarterly since then. This is all we do for a living, and we are meticulous about the accuracy and comprehensiveness of our data."

What's more, Mr. Pener denied that Mr. Robinson has criticized CalPERS' investment strategy or has been behind negative news stories.

"He's absolutely not behind the news stories," he said. Rather, Mr. Robinson has suggested that CalPERS should scrutinize their investments for their risk exposure, Mr. Pener said. He added that his report to the U.S.-China commission had made cursory references to CalPERS.

Mark Bateman, vice president at the IRRC, stood by the product and likened the reaction to what happened when IRRC offered a product evaluating companies' involvement in South Africa during the apartheid era.

"We believe that this is a controversial topic, and we developed the product in conjunction with CSAG in response to an emerging issue and to specific requests we were getting from clients about this topic," he said.