Pension funds and social investment
O'Cleireacain, Carol
American workers have more than two trillion dollars in their pension funds. They own about onequarter of all the corporate shares on the New York exchange and account for almost half of daily...
...Pension fund trustees have discovered that there is a shortage of financial intermediaries willing to find and package deals that would make pension fund capital available to borrowers and also be profitable business...
...There are those who argue that markets are perfect and "capital gaps" do not exist...
...Corporate treasurers raided their funds for help in fighting takeovers or achieving leveraged buyouts...
...As long as pension funds represent the major form of savings for a growing generation of Americans, the use to which those savings are put will be an important issue...
...But, in addition, the past decade's booming capital markets (and the wonders of compound interest) generated spectacular growth...
...they have huge dollars to invest and reinvest annually...
...Organized workers recognized that their money was part of the corporate restructuring game, which often cost them jobs and always cost them wages, and insisted that their unions focus on ways that their pension funds could help them survive...
...The markets that brought phenomenal pension fund growth also brought the rise of corporate raiders and hostile takeovers, and their defenses — greenmail, golden parachutes, poison pills, to name a few...
...The funds are too large, their need for diversified investments too real, their share ownership too major, their ability to fill gaps in selected parts of the capital markets too visible to ignore...
...The trustees of the larger public funds recognized earlier than private trustees that proxy voting is a necessary component of fiduciary responsibility, but that recognition has not brought with it a unanimity of position on various proxy votes...
...The staff of the pension fund trustees had to bring in SBA experts to city banks to teach them the details, rules, and how to do the paperwork...
...Further, the disastrous macroeconomic policy of the first Reagan term raised both interest rates and the value of the dollar...
...ETI programs are directed primarily to filling gaps in private capital markets, largely the housing market, small-business loans, and venture capital...
...Growth in the labor force and growth in earnings alone would have guaranteed a growing pool of pension fund savings...
...Hence the special fondness of public pension funds for supporting proxies calling for confidential voting (secret ballots), one share, one vote, and not counting abstentions when determining the majority...
...The dramatic shift of federal government spending toward the military crippled any local government response to these events...
...On average, pension funds returned 12 to 15 percent per year in the 1980s...
...It is not hard to understand why...
...New York (state and city) funds constitute about 10 percent of ETI nationally...
...On these issues, there has been far less unanimity among institutional investors...
...There is not yet a "right" or a "wrong" way to vote on corporate restructuring...
...One was toward shareholder rights and corporate governance...
...The three largest public pension systems—in California, New York State, and New York City—voted on different sides when Carl Icahn bid for Texaco and Harold Simmons attempted to replace the board of Lockheed...
...A recent survey financed by the Ford Foundation documents more than $7 billion in ETI by public employee pension funds around the country...
...They own about onequarter of all the corporate shares on the New York exchange and account for almost half of daily trading activity...
...In the 1980s public pension funds emerged into the forefront of the shareholder rights movement...
...As the "1990 Report of the Joint Economic Committee of the U.S...
...The other was the strategic placement of pension fund capital in sectors of the economy that appeared to suffer from a capital shortage...
...This is just one case of a clear market imperfection, which was eliminated by the supplier of capital—the pension fund—training the financial intermediary (the bank) to play its necessary role in the market so that the borrowers (small businesses) could be served...
...There is a firm belief that if corporate pension funds were able to have the secrecy of the voting booth, rather than the public roll call, the corporate democracy movement would win many more votes...
...They were shocked to find that the banks in the financial capital of the world did not use SBA loan proWINTER • 1991 • 13 Comments and Opinions grams...
...For example, the New York City Police fund set out to invest in small businesses in New York City...
...As the budget deficit has constrained the national government's ability to meet investment needs, the creative use of public pension assets to meet these needs has become a potent political issue...
...Those who work with housing, small-business, or venture capital lending know that standard rules of thumb as to return and risk have closed out access to capital for certain borrowers...
...They could not count on management to represent their interests...
...A security backed by the full faith and credit of the U.S...
...That is the area of fiduciary judgment that will not disappear...
...The pension fund investment yields a market rate of return (measured by the opportunity cost, controlling for risk, duration, and liquidity...
...Pension funds require a financial investment that is marketable, safe (either federally guaranteed or publicly insured), of appropriate size for the large amounts of cash flowing into the system, and with administration and oversight of the investment done by independent professionals outside the board of trustees...
...Having tripled in size in the 1980s, these funds are bigger now, in dollars and power, than even those of us close to them imagined ten years ago...
...It is the act of voting that is deemed to be important...
...Using the power of shareholder voting, especially in combination with other investors, pension funds have a tool for achieving fund growth...
...On top of their theoretical ownership responsibility, which pension funds had ceded to corporate management, came the very practical issue of protecting the value of their assets in takeover fights and choosing the proper values for shares...
...However, corporate democracy is different from issues of corporate financial restructuring, raiders, and takeovers...
...More than half of the large public funds (especially state funds) have ETI programs...
...The "economically targeted investing" (ETI) of pension funds to achieve a market rate of return and, in addition, a benefit (social or economic) to the public at large is the new terminology replacing "social investing...
...annual inflation averaged about 5 percent...
...Corporate fund trustees, usually corporate treasurers, have been reluctant to participate in the movement for independent directors or the implementation of democratic standards at corporate boards, lest their own boards be the next targets...
...As a result there are now large New York City banks that will make these loans to small businesses, and the police fund is committed to purchasing $50 million worth of securities backed by these loans...
...The resulting loss of manufacturing jobs and agricultural exports produced a rusted-out and boarded-up American heartland...
...Whether politicians or others want to tax pension funds to help get rid of the deficit, have them finance their own needs (bridges, roads, or buyouts), use them to keep hometown industries like Colt alive, or place environmentalists and others on corporate boards, we must not lose sight of the overriding issue:who has control over the workers' money and in whose interest do they exercise it...
...Often financial institutions find it easier to continue in the same patterns than to seek out new ones...
...Indeed, in many takeover battles, the shareholders were neither warned nor consulted...
...Leveraged buyouts by corporate management brought arguments over the appropriate value of corporate shares...
...Reasonable trustees may reasonably differ, as long as they engage in detailed and intelligent decision making...
...Congress" put it, "[T]he most damaging legacy of the 1980's is the weakening of the public sector...
...Corporate funds do...
...in effect, they are the market...
...Pension funds were forced to recognize that the traditional split in American corporations between ownership and management left them unprotected in the casino market of the 1980s...
...government is the most risk-free asset a pension fund can hold, so ETI programs try to leverage federal guarantees or federal insurance —for example, New York City's funds buy Ginnie Mae securities backed by mortgages issued in what are otherwise redlined neighborhoods...
...Junk bonds blurred the lines between equity and debt and changed the risk/return trade-off for stocks, bonds, and subordinated debt...
...Although individual ETIs may have a subsidy component, that subsidy comes from the involvement of an accompanying public program...
...one should not anticipate large pension funds moving in lockstep...
...Pension funds cannot leave the market...
...This technique has leveraged capital to build housing and provide jobs for members...
...This fear has provided strong impetus for public funds' placing confidential voting in corporate proxy fights at the top of their "Shareholder Bill of Rights...
...That appears to be an ideological rather than an experience-based position...
...Public funds, of course, do not have to worry about 12 • DISSENT Comments and Opinions whether their shareholder activism will come home to roost in their own boardrooms...
...For the pension fund to accept a rate of return that is below the market, thus subsidizing the venture, is seen as a violation of fiduciary responsibility...
...q 14 • DISSENT...
...Public officials eyed this growing pool of off-budget money that might be used to meet rising public needs...
...They have the ability to think and act long-term...
...By definition, then, if, through ETI, a pension fund invests in a venture, or a neighborhood, or an industry that has not been receiving investment, it must be because the fund is getting a riskier investment for the same rate of return or a below-market rate of return for average risk...
...The economy of the 1980s led pension fund activism in two distinct directions...
...Public pension funds, in addition, have trustees who are public officials and who can easily transfer the principles of electoral democracy to corporate democracy...
...Its managers looked to the most obvious place: securities backed by Small Business Administration (SBA) loans...
...In Boston and in New York, building trades' pension funds have invested in federally insured certificates of deposit at financial institutions, rolling them over for a designated period of time, to free up funds for construction lending by those institutions on favorable terms to local developers...
Vol. 38 • January 1991 • No. 1
