An Activist Investor Should Not Lead a Public Pension Fund

Where’s the fiduciary responsibility to taxpayers? Susan Combs eviscerates activist investor behavior by public pension funds in today’s Wall Street Journal.

It seems we’re living in the era of the “activist” investor. Not long ago, people who used their few shares to push a point at shareholder meetings may have been marginalized as oddballs. Today, hedge funds and other major players are using their clout to lobby for—and get—big changes in corporate governance.

Investor activism aimed at increasing shareholder value is appropriate. But a growing amount of it is intended to further social policies rather than returns. Eliot Spitzer, for instance, campaigning to become New York City’s comptroller, has promised to use the city’s five pension funds’ investments in public companies to pursue a “responsible” governance agenda.

And she continues:

When officials with fiduciary responsibilities for public funds shift their focus to non-financial “values” such as the environment or gun control, at best it is at the expense of these responsibilities; at worst it is a clear conflict of interest. It is a particularly risky lapse given the dismal state of many public pension funds. The Government Accounting Standards Board is changing its reporting requirements in 2014 to require increased disclosure of the financial strength of these funds. These requirements make it even more incumbent on public managers to focus on the financial needs of workers’ retirements.

The Employee Retirement Income Security Act known as Erisa specifically requires private pension funds to focus on the economic value of their investments. There’s no similar requirement for public pensions—and that may explain some of their problems. Nine states, for instance, have less than 60% of the funds they need to honor their current pension commitments, according to a recent report from CNBC.

The economic-focus requirement for the public dollar should reflect an even more stringent standard. There’s little or no credible evidence that activist investing improves shareholder financial return, and some research—such as a 2002 study in the Journal of Financial Economics—suggests that an activist orientation reduces valuations for public pension funds.

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E.J. Smith is the Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention. E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com. Sign up here to receive all the best content from Richardcyoung.com each week.