With 40-some odd years of involvement with public employee retirement institutional investing behind me (with some years seeming more odd than others), I continue to be puzzled by divesting initiatives.
For starters, the underlying premises seem to me to be materially flawed. For example:
Premise: Public employee retirement assets are public money and should serve some public purpose beyond providing retirement income security.
Reality: Public employee retirement assets are held in trust and overseen by trustees for a reason. It is to assure that trustees exercise their responsibilities with undivided loyalty to and for the exclusive financial benefit of plan participants, without exception. As Benjamin N. Cardozo wrote in 1928 when he was chief judge of the Court of Appeals of New York in ruling in the Meinhard vs. Salmon case, “Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion' of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.”
Premise: The threat of selling a company's stock (or actually selling it) will result in behavior modification on the part of corporate management.
Reality: Corporate management does not care who owns their stock. In fact, they might prefer that it not be owned by meddlesome public retirement plans. In any case, isolated sales will not materially affect the stock price. If a coordinated effort were made to get all institutional investors to dump their stock in a relatively short period, momentum would probably lower the stock price temporarily, with the last one out taking the biggest hit. Even if that sell-off happened, it does not take long for the marketplace to distinguish between a momentum-driven price decline and a decline based on economic weaknesses in the company. This decline in price might, however, provide the company with the opportunity to engage in a stock buyback program while the price is temporarily depressed.
Divesting causes have varied over the years, but all seem predicated on the same thinking. A recent target was manufacturers of small arms and ammunition. The double-edged sword there is the implicit suggestion that the U.S. military establishment and law enforcement agencies should be purchasing their arms and ammunition from foreign suppliers. The current cause celebre is fossil fuel.
Let's begin by stipulating that the use of fossil fuels is having a negative impact on our global environment and, further, that there is a finite supply of fossil fuels that will eventually be exhausted, or at least not be economically viable at some point. Will selling our stock in companies that are the suppliers of fossil fuel change either one of those realities? I think not — but does that mean I think the champions of change should simply throw up their hands and call it hopeless? Absolutely not. Instead where should those efforts be concentrated? In my view, their efforts should be divided between long-term and short-term initiatives.
For the long term, we need the support of extensive academic research on alternative and renewable energy to dramatically lower, or almost eliminate, our dependence on fossil fuels. These efforts should include the participation of large energy companies that have recognized that their years are numbered unless they ultimately become suppliers of alternatives to fossil fuels.
In the short term, there are a number of changes that could be promoted at the federal policy level that could actually make a difference.
I don't think the pension funds should be involved in either these short- or long-term activities. Pension funds should be focused on providing retirement income security in a cost-efficient manner with undivided loyalty to plan participants. The short- and long-term initiatives are where divestment proponents should be spending their time and energy — things that can actually make a difference rather than trying to force pension funds to change who holds financial securities, which makes no difference. Activists going to pension funds in attempts to persuade them to sell securities to other investors does not make nearly as much sense as going to policymakers, including Congress, the administration and regulators, who can make impactful changes, such as:
- allowing/encouraging exportation of natural gas to make it economically attractive to non-U.S. companies to replace their coal-fired facilities;
- promoting tax policies that encourage individuals to insulate buildings and purchase more efficient appliances and encourage companies to be early innovators in the development of energy-efficient products and production techniques; and
- addressing the ever-expanding global population growth that is increasing the demand for energy of all varieties.
In 2007, a divesting initiative was underway at Harvard University. The issue then was different than is the case now, but the concepts were not. Daniel Robinson, a Harvard Crimson editorial editor, offered the following succinct assessment of the situation in the conclusion of an opinion piece published Dec. 17, 2007, pointing out that the matter did not need more noise, such as is produced by divesting, but rather it needed meaningful action:
“Lack of awareness is no longer a problem; a lack of progress is. Advocating for policies that do nothing but engender more advocacy is an empty form of activism.”
More recently, while not directly tied to divesting, the salient concepts were addressed in an April 6 Pensions & Investments editorial. The following key points from that editorial merit repeating and probably should be posted in the boardrooms of all public employee retirement systems:
- The sole duty of pension plan fiduciaries is to act in the interest of participants, strengthening their retirement security.
- Fiduciaries need to analyze any investment-related decision in a risk-and-return framework.
- Fiduciaries must focus on their responsibilities to participants, not their ideals for better-directed corporate advertising or a cleaner world. Those are worthy pursuits. But they are not the mission of the pension fund. These external objectives can become a distraction.
- The work of fiduciaries to secure retirement income through their oversight of the investment of assets is an underappreciated objective and often unmet challenge. Fulfilling the security of pension benefits serves an important purpose to the society and economy. Fulfilling that mission leaves the society and economy with resources that might otherwise have gone to support retirees for use for other priorities.
- Fiduciaries should never lose sight of their high calling on behalf of participants.
Gary Findlay is executive director of the Missouri State Employees' Retirement System, Jefferson City.
