Pension Fund Activism

8/6/2019 Pension Fund Activism

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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.ERISA exempt.

State laws prescribe investments. Table 1State laws prescribe investments. Table 1

Legislation recommends that investments be made toLegislation recommends that investments be made to

enhance local economic development and/orenhance local economic development and/oremployment. Examples:employment. Examples:

Pennsylvania / VolkswagenPennsylvania / Volkswagen

CALPERS / Construction in CaliforniaCALPERS / Construction in California

Illinois / KKRIllinois / KKR


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Romano (1993): Public Pension Fund Activism(continued)

Legislation recommends that investments be made toLegislation recommends that investments be made to

enhance local economic development and/orenhance local economic development and/or

employment. So what?employment. So what?

Page 813: If a particular small business orPage 813: If a particular small business or

residential project is unable to attract financing fromresidential project is unable to attract financing from

the private sector, it is far more probable that thethe private sector, it is far more probable that the

difficulty is due to the markets efficiently pricingdifficulty is due to the markets efficiently pricing

the risk at a cost greater than the project developersthe risk at a cost greater than the project developersare willing to pay, rather than the result of capitalare willing to pay, rather than the result of capital

market failure.market failure.


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Pressure for social investing is not a problemPressure for social investing is not a problem

for private (corporate) pension funds. Infor private (corporate) pension funds. In

defined benefit plans, employer bears risk ofdefined benefit plans, employer bears risk of

lower returns.lower returns.

Page 811. Public pension funds are backed by aPage 811. Public pension funds are backed by a

states taxing power The cost of loweredstates taxing power The cost of lowered

investment returns provides a weaker incentive forinvestment returns provides a weaker incentive for

public fund managers to avoid suboptimal socialpublic fund managers to avoid suboptimal socialinvestments than their private counterparts becauseinvestments than their private counterparts because

the bearers of the cost, taxpayers, are even morethe bearers of the cost, taxpayers, are even more

diffuse group than shareholders and are thereforediffuse group than shareholders and are therefore

even less likely to monitor a (public) pension fundseven less likely to monitor a (public) pension fundsmanagement.management.


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State statutes fix the composition of publicState statutes fix the composition of public

pension fund boardspension fund boards

Gubernatorial appointees (57%)Gubernatorial appointees (57%) ExEx--officio (25%)officio (25%)

Elected by beneficiaries (18%)Elected by beneficiaries (18%)

Table 3: Positive relation between fundTable 3: Positive relation between fundearnings and proportion of board elected byearnings and proportion of board elected by

fund members (beneficiaries).fund members (beneficiaries). Table 4: Estimated loss of income attributable to lack of anTable 4: Estimated loss of income attributable to lack of an

independent board:independent board: $15 billion$15 billion for 1985for 1985--1989 !1989 !


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Table 6: No significant difference on socialTable 6: No significant difference on social

responsibility votes (on N. Ireland andresponsibility votes (on N. Ireland and

Environment issues) between public andEnvironment issues) between public and

private plans.private plans.

Suggests political pressure on public funds maySuggests political pressure on public funds may

be directed towards investment, not voting.be directed towards investment, not voting.


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Romanos suggestion to the problem ofRomanos suggestion to the problem of

suboptimal investing by public pensionsuboptimal investing by public pension

plans:plans: DEFINED CONTRIBUTION PLANS. StateDEFINED CONTRIBUTION PLANS. State

employees (plan beneficiaries) can decideemployees (plan beneficiaries) can decide

where to invest their retirement funds.where to invest their retirement funds.

Question: Proxy voting rights of shares ownedQuestion: Proxy voting rights of shares owned

by a mutual fund reside with the fundby a mutual fund reside with the fund

managers. What is the record of mutual fundmanagers. What is the record of mutual fund

managers involvement in corporatemanagers involvement in corporate

governance matters?governance matters?


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Del Guercio-Hawkins (1999): Public Pension Fund Activism

Consider proposals submitted by the largest and most activistConsider proposals submitted by the largest and most activistpension funds during 1987pension funds during 1987--1993: CREF, CALPERS, CALSTRS,1993: CREF, CALPERS, CALSTRS,SWIB, NYC.SWIB, NYC.

Table 1Table 1

Board issues becoming more common in the 1990s.Board issues becoming more common in the 1990s.

Antitakeover issues becoming less common.Antitakeover issues becoming less common.

Voting issues remain popular.Voting issues remain popular.


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Table 2Table 2

Total domestic equity portfolio valueTotal domestic equity portfolio value

CREF: $31.8 billionCREF: $31.8 billion

CALPERS: $19 billionCALPERS: $19 billion Average dollar holding in target firmsAverage dollar holding in target firms

CREF: $67 millionCREF: $67 million

CALPERS: $34 millionCALPERS: $34 million

Total dollar holding in target firmsTotal dollar holding in target firms

CREF: $2.1 billionCREF: $2.1 billion

CALPERS: $1.1 billionCALPERS: $1.1 billion

Average % ownership in target firmsAverage % ownership in target firms

CREF: 1%CREF: 1%

CALPERS: 1%CALPERS: 1%


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Table 4:Table 4: Frequency of announced events in the target firm in theFrequency of announced events in the target firm in thefour years after the firm is targeted.four years after the firm is targeted.

Does pension fund activism have a significant impact on targetDoes pension fund activism have a significant impact on targetcompany business policies, organization, and governance?company business policies, organization, and governance?

Management and board turnover is significantly higher for targetedfirms.

Shareholder lawsuits and public no votes for directors aresignificantly higher for targeted firms.

Asset sales/spin-offs/restructuring/layoffs are significantly higherfor targeted firms.

Table 6: Do pension funds choose targets that are (even withoutbeing targeted) likely to engage in above policy/organizationalchanges? No.


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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 upsmall improvements in performance.


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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.


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Kothari and Warner (Journal of Finance, 2001)

Using state-of-the-art techniques, can we detect superiormutual 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 tracksa mutual funds stock trades.

Pension Fund Activism

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