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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