Romano (1993): Public Pension Fund Activism

1. Romano (1993): Public Pension Fund Activism • 1996: Public pension funds own over $300 billion; 30% of corporate equity. • Political pressure on Public Pension Funds • ERISA exempt. • State laws prescribe investments. Table 1 • Legislation recommends that investments be made to enhance local economic development and/or employment. Examples: • Pennsylvania / Volkswagen • CALPERS / Construction in California • Illinois / KKR

2. Romano (1993): Public Pension Fund Activism (continued) • Legislation recommends that investments be made to enhance local economic development and/or employment. So what? • Page 813: “ If a particular small business or residential project is unable to attract financing from the private sector, it is far more probable that the difficulty is due to the market’s efficiently pricing the risk at a cost greater than the project developers are willing to pay, rather than the result of capital market failure.”

3. Romano (1993): Public Pension Fund Activism • Pressure for social investing is not a problem for private (corporate) pension funds. In defined benefit plans, employer bears risk of lower returns. • Page 811. “ Public pension funds are backed by a state’s taxing power… The cost of lowered investment returns provides a weaker incentive for public fund managers to avoid suboptimal social investments than their private counterparts because the bearers of the cost, taxpayers, are even more diffuse group… than shareholders and are therefore even less likely to monitor a (public) pension fund’s management.”

4. Romano (1993): Public Pension Fund Activism • State statutes fix the composition of public pension fund boards • Gubernatorial appointees (57%) • Ex-officio (25%) • Elected by beneficiaries (18%) • Table 3: Positive relation between fund earnings and proportion of board elected by fund members (beneficiaries). • Table 4: Estimated loss of income attributable to lack of an independent board: $15 billion for 1985-1989 !

5. Romano (1993): Public Pension Fund Activism • Table 6: No significant difference on social responsibility votes (on N. Ireland and Environment issues) between public and private plans. • Suggests political pressure on public funds may be directed towards investment, not voting.

6. Romano (1993): Public Pension Fund Activism • Romano’s suggestion to the problem of suboptimal investing by public pension plans: • DEFINED CONTRIBUTION PLANS. State employees (plan beneficiaries) can decide where to invest their retirement funds. • Question: Proxy voting rights of shares owned by a mutual fund reside with the fund managers. What is the record of mutual fund managers’ involvement in corporate governance matters?

7. Del Guercio-Hawkins (1999): Public Pension Fund Activism • Consider proposals submitted by the largest and most activist pension funds during 1987-1993: CREF, CALPERS, CALSTRS, SWIB, NYC. • Table 1 • Board issues becoming more common in the 1990s. • Antitakeover issues becoming less common. • Voting issues remain popular.

8. Del Guercio-Hawkins (1999): Public Pension Fund Activism • Table 2 • Total domestic equity portfolio value • CREF: $31.8 billion • CALPERS: $19 billion • Average dollar holding in target firms • CREF: $67 million • CALPERS: $34 million • Total dollar holding in target firms • CREF: $2.1 billion • CALPERS: $1.1 billion • Average % ownership in target firms • CREF: 1% • CALPERS: 1%

9. Del Guercio-Hawkins (1999): Public Pension Fund Activism • Table 4: Frequency of announced events in the target firm in the four years after the firm is targeted. • Does pension fund activism have a significant impact on target company business policies, organization, and governance? • Management and board turnover is significantly higher for targeted firms. • Shareholder lawsuits and public “no” votes for directors are significantly higher for targeted firms. • Asset sales/spin-offs/restructuring/layoffs are significantly higher for targeted firms. • Table 6: Do pension funds choose targets that are (even without being targeted) likely to engage in above policy/organizational changes? No.

10. Del Guercio-Hawkins (1999): Public Pension Fund Activism • Impact of pension fund activism on long-term performance • Pages 326-327: No long-term improvement in performance. • Implication of above • Pension fund activism has no long-term improvement in performance. • Measurement techniques are not powerful enough to pick up “small” improvements in performance.

11. Measurement techniques are not powerful enough to pick up “small” improvements in performance. • Barber and Lyon (Journal of Financial Economics, July 1996) • Accounting operating performance: Return on assets (ROA) after controlling for industry performance: • Superior ROA performance of 1% : Detected 2 times out of 10. • Superior ROA performance of 2% : Detected 7 times out of 10. • Superior ROA performance of 3% : Detected almost every time.

12. Measurement techniques are not powerful enough to pick up “small” improvements in performance. • Kothari and Warner (Journal of Finance, 2001) • Using state-of-the-art techniques, can we detect superior mutual fund performance? • 100 basis points annual superior performance: Undetected. • 500 basis points: Detected once every three times. • 1500 basis points: Detected (almost) every time. • Ability to detect superior performance improves if one tracks a mutual fund’s stock trades.