http://www.nytimes.com/2002/10/13/business/yourmoney/13CALP.html

There is an article in today's (Oct 13 2002) New York Times about how the
California Public Employees' Retirement System (Calpers) may be investing its
funds to achieve left-wing political objectives rather than maximize
risk-adjusted returns, which is its fiduciary responsibility. If the fund
underperforms, California taxpayers will be on the hook.

There is less talk about investing Social Security funds in the stock market
than there was two years ago, for obvious reasons. I think the article
highlights the advantage of individual accounts in which people can choose a
stock or bond mutual fund, rather than a government-run stock fund that some
have suggested as an alternative. Proponents of Social Security directly
investing in the stock market claim that it can be insulated from poltical
pressure, but that is unlikely in the long run.

It does raise some interesting questions - some that also come up with
individual investors who want to invest through socially-responsible
mutual funds. I have clients in Calpers and they seem generally happy
with their investment management; I haven't discussed these specific
topics with them though.

My first thought is, somebody needs to be out there fighting against
what I guess you would label right-wing political objectives that
ultimately affect beneficiaries. Eg: allowing an free-market system of
corporate governance where Bernie Ebbers, CEO of WorldCom, can borrow
$700 million from WorldCom's bond underwriter, Citigroup, which then
leads a huge series of debt issues, and provides glowing ratings on the
stock. And if not someone like Calpers - who's going to do it? Fidelity?
Indexers like Vanguard or Barclay's?

The fact is, unless you've got enough proxy votes, you can't achieve
much - it's a fairly closed system. And without some reforms, in the end
investment returns are hurt. This is very specific to Calpers,
WorldCom's bankruptcy cost beneficiaries several billion dollars; ditto
Enron. So it's perfectly OK for them to be riding the boards of
companies even if their objectives might be labeled "left wing" (IMO
when the term "left wing" is thrown around, invariably it's about things
that are really pretty moderate...as an example from the piece,
abolishing private property rights is safely labeled a left-wing
approach to urban sprawl, but most "New Urbanists" talk more about
having nice sidewalks & hiding garages).

Also it's not surprising that labor has a big representation on the
board, just as it's not surprising that labor has a small representation
on corporate boards. Calpers serves a pool of employees, after all -
it's essentially an employee collective. So they'll have high labor
representation on the board, and in their representative capacity, will
probably skew towards the labor perspective (mirroring the views of
their constituents).

In the middle you have decisions like that of investing in "emerging"
areas of our state. There are social policy agendas underlying the
decisions, and if that's the sole motivation then it's a breach of duty.
Arguably there are some valid reasons for it, though. The 1.5 million
pension beneficiaries live all over the state, and improving the state
improves their living conditions. Also, expected returns may be
satisfactory, or even above-average, on these investments. Anyone who
bought real estate in the early 1990s in, say, the SOMA District of San
Francisco knows that buying real estate in "abandoned urban areas" can
yield incredible investment returns - social-policy considerations
aside. That decision may in fact be more defensible than buying any IPO,
or any large-cap growth fund, as a long-term investment.

Also defensible - though they involve social-policy questions - are
policies to stick with democratic countries (they have more secure
markets, less volatility) and avoiding investments in companies that use
child labor to lower costs. Maybe I've spent too much time in the land
of fruits and nuts, but I find it hard to believe that avoiding child
labor (with the expense of potentially lower investment returns) is a
"left-wing political agenda." What about, say, slave labor? That really
lowers costs and improves returns. When studying board duties in law
school, we spent time on these topics - the law of fiduciaries does
leave room for something other than profit maximization!

But then you get to things that look more like good old-fashioned pork;
these don't involve left- or right-wing political agendas, they're just
a breach of duty, plain & simple. Campaign contributions in exchange for
investment advisory engagements, or gifts made to trustees, as examples.
And of course, that stuff is completely inappropriate, if it's
happening. There are no doubt strict rules against this sort of thing,
it's a matter of finding out about them & going against the individuals
doing it.

Agreed...the latter items mentioned in that NY Times article happen to
benefit Democrats, because they're in office now, but it's a bipartisan
problem. I have absolutely no faith in the SSA to invest Social Security
dollars wisely, and believe it needs to be the most stable, predictable
part of a retirement plan. Buy your stocks elsewhere, and pick them
yourself, uninfluenced by some dopey campaign contribution!

-Tad