Corporate Governance

Calpers and Sovereign Wealth Funds

By J. Robert Brown

As we discuss VC Strine's dislike of institutional investors, we note the assist provided by theeditorial in the WSJ on Friday, likening Calpers to a Sovereign Wealth Fund.  It is an attempt to use a pejorative label in place of actual analysis, the hedge fund approach to criticism.  Sovereign wealth funds are government run pools of money that are not subject to regulation in the United States, including restrictions on the amount of a company that the pool can purchase.  They represent the interests of a foreign government.  Pension plans are heavily regulated entities that have mandatory diversification requirements and fiduciary responsibilities.

Beneath the pejorative label, the editorial is a mishmash of themes in search of logic.  The author on the one hand tries hard to turn Calpers into a sieve for labor unions.  The six elected members to the board?  "all six . . . have long ties to organized labor."  When Schwarzenegger tried to change things, he was "driven into retreat by strong union opposition."  The editorial does so as if this label alone somehow throws into question Calper's efforts at corporate governance reform. 

On the other, he objects to investment approaches dictated by concern over national security.  The legislature in California required Calpers to divest from companies doing business in Iran (that's right, not Darfur, where a moral imperative might exist, but Iran, where the issue is national security).  The editorial is about Calpers (remember, the comparison to a Sovereign Wealth Fund) but this action was taken by the legislature, Calpers had nothing to do with it.  Unable to blame Calpers or even the unions, the editorial rests the fault at the feet of the Republican governor, who "joined the efforts to politicize investments by signing legislation to force Calpers and Calstrs to divest about $3.4 billion in stock of companies that do business in Iran." 

Finished with the digression, the article returns to the basic theme:  "The fund touts 'good corporate governance.'  But the actual investments it trumpets typically relate to labor and environmental practices, not shareholder concerns."  It gives two examples of investments into businesses that employ workers who live in disadvantaged areas and environmentally friendly forest projects. 

First, is it really the case that these programs are not profitable?  We have talked often on this Blog about the profit to be had in socially responsible investing.  Second, is it really that valuable to find a few offending investments in a pension plan that has $259 billion under management?  Third, where is the evidence that Calpers has mismanaged assets in a manner that injures its beneficiaries? 

Much of this editorial is consistent with the views of VC Strine of institutional investors.  It is, however, a dynamic that the Delaware courts largely created.  Shareholder activism began in the late 1980s as a direct response to the widespread use of anti-takeover devices and the Delaware court's refusal to strike them down.  This deferential attitude towards management continued, most clearly in the context of executive compensation.  Having reaped what they sowed, many (including some on the Delaware Chancery Court) are now uncomfortable with the forces that they helped unleash, institutional investors who actually want to exercise some influence in the boardroom.  

Full post as published by The Race to the Bottom on March 08, 2008 (boomark / email).