Pension clout: Bye-bye boycotts, hello jawboning

The state’s two big public pension systems, CalPERS and CalSTRS, are adopting new policies on using their massive investment clout to push for changes in an industry or foreign government.

Boycotts of corporate stocks to end racial apartheid in South Africa and reform the tobacco industry cost the two pension funds billions of dollars, with no hard evidence of any results.

Instead of barring investments, the new policies emphasize a legal obligation not to sacrifice investment performance and call for “engagement” with the corporations to persuade them to change.

A new policy on “divestment,” as the selling of holdings and bans on new purchases is often called, was adopted this week by the California Public Employees Retirement System.

Here is a summary sentence from the new CalPERS policy, carefully worded in legalese:

“This Policy, therefore, generally prohibits Divesting in response to Divestment Initiatives, but permits CalPERS to use constructive engagement, where consistent with fiduciary duties, to help Divestment Initiatives achieve their goals.”

The word “generally” means there are exceptions that allow divestment under the new policy. The California State Teachers Retirement System is drafting a similar policy that may be adopted next month.

“When pressured to divest, CalSTRS firmly believes that active and direct engagement is the best way to resolve issues,” says a draft. “Face-to-face meetings with shareowners and senior management, or the board of directors, are essential to bringing about change in a corporation.”

The CalSTRS draft says “no further action (presumably divestment) will be taken until all efforts at engagement have been fully exhausted,” including shareholder resolutions and media campaigns.

One of the issues raised by divestment is who controls the pension investment portfolios — the pension boards with their legal obligation to protect pension funds or lawmakers seeking leverage on domestic and foreign affairs?

A 1987 state law requiring divestment of firms doing business with South Africa cost CalSTRS $600 million to $750 million as holdings were sold and replaced and investment opportunities lost, according to a report by the Pension Consulting Alliance.

The report said South African divestment cost CalPERS an estimated $529 million in financial losses. Wilshire estimated that with the loss of earnings from the $529 million in later years, the CalPERS divestment cost totaled $1.86 billion by 2006.

In 2000, after tobacco divestment failed in the Legislature, the two pension systems voluntarily shifted to investment benchmarks that do not include tobacco stocks. The move was said to control risk as lawsuits and regulation threatened the tobacco industry.

The tobacco-free portfolio has cost CalSTRS an estimated $1 billion in lost investment opportunity, said the Pension Consulting Alliance report. At CalPERS, the tobacco-free shift has cost $790 million in market impact and $650 million in lost opportunity.

When legislation was signed in 2006 to divest holdings in firms doing business in Sudan, where mass genocide is alleged in the Darfur region, the two big pension funds had already been working on their own Sudan divestment plans.

But a bill on divestment in Iran, believed to be trying to develop nuclear weapons, triggered vigorous opposition from CalPERS and CalSTRS before it was signed in 2007.

A Senate committee analysis said CalPERS estimated that it would have to sell about $2 billion in holdings in 50 companies, creating sales and reinvestment costs of about $17 million.

Last December, the first annual CalPERS report on compliance with the Iran divestment bill, AB 221 by Assemblyman Joel Anderson, R-El Cajon, said CalPERS has holdings in 37 firms that may have business operations in Iran.

Neither the value of the holdings in the 37 firms nor the amount of shares were listed. CalPERS reported that it “notified these companies and is determining whether they meet” the specifications of the divestment bill.

CalSTRS had a more alarmist view of the Iran divestment bill.

A Senate floor analysis said CalSTRS thought it might have to sell “investments in over 140 companies, including companies like General Electric and Coca-Cola, totaling more than $10 billion in stocks alone.”

A Senate committee analysis said CalSTRS thought “this bill could result in investment losses for that pension system of more than $500 million, and more than $1 billion in future opportunity costs.”

The first CalSTRS annual report last December listed holdings in 18 companies “that have possible ties to Iran.” The report did not give the value of the holdings or the amount of shares.

But unlike the cryptic CalPERS report, which did not elaborate on how the firms were being “notified,” CalSTRS is seeking the face-to-face meetings said to be “essential” to corporate change in its draft divestment policy.

All the companies have been sent a letter requesting that their senior executives meet with CalSTRS to discuss their operations in Iran.

“CalSTRS staff has continued to engage with the companies on the Iran list including having senior management of one company visit us at our headquarters in Sacramento, and sending staff to New York, Italy, Tokyo and Switzerland to meet with five others,” said the CalSTRS report.

After a temporary four-year break expired, the pension systems resumed two annual reports last December on their holdings in firms accused of religion-based discrimination in Northern Ireland and of having used slave labor during World War II.

At a CalPERS investment committee meeting this week, board member Priya Mathur questioned the need for the reports. She said CalPERS is complying with the governor’s order for cost-cutting furlough days, giving staff less time to do its work.

Mathur also said the lawmakers who requested the reports are no longer in the Legislature. The reports are required under legislation in 1999 by former Sens. John Burton, D-San Francisco, and Tom Hayden, D-Santa Monica.

“They are required by statute in perpetuity?” Mathur asked, before suggesting CalPERS lobbyists seek a change. “Right now it doesn’t seem to make much sense to produce these reports. At some point, it simply will really not make sense.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ 20 Feb 09

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