Oh, what a tangled web they weave when first the managers of the California Public Employees’ Retirement System and the New York State Common Retirement Fund practice to have it both ways.
The problem is the demand from the environmental Left that the retirement funds divest from fossil fuel producers.
On the one hand, the fund managers have legally enforceable fiduciary responsibilities to current and future beneficiaries of the retirement funds to maximize risk-adjusted returns. The imposition of a politicized constraint on the assets in a fund — no fossil fuels! — cannot improve long-run returns precisely because it is artificial, divorced from the principles of rigorous financial management. The long-run data are fully consistent with this reality: Shunning investments in a particular sector reduces the scope for diversification, a particular problem with divestment from the conventional energy sector because its returns have the lowest correlation with all other sectors, and, therefore, the largest possible diversification benefits.
On the other hand, the fund managers face pressures from the environmental Left to divest from such fossil energy producers as Exxon Mobil — that is, to play political games with other people’s money. In particular, the fund managers are being pressured to oppose the reelection of some or most of the Exxon Mobil directors to its board.
What to do? On the one hand, “The CEO of $462 billion California pension fund … has hit back at calls for it to divest from the fossil fuel industry as to do so would ‘ignore’ its fiduciary duty,” according to a recent report. And although the New York pension fund has agreed to divest “about $25 million worth of Exxon shares,” that’s just a sliver of the fund’s other Exxon holdings, which total about $500 million. Why so little? Because “the [fossil energy investment] strategy is fundamental to the [New York] Fund and … removing it … would go against fiduciary duty at this time.” Violation of that fiduciary duty to retirees would subject the fund managers to serious legal actions.
On the other hand, the environmental Left is loud, not particularly polite, and has allies on the editorial boards of major “news” organizations. Accordingly, the fund managers, seeking continued goodwill from the right-thinking — are they worried that they will receive no more invitations to all the right cocktail parties? — are trying to have it both ways. CalPERS reportedly is considering voting against Exxon Mobil CEO Darren Woods’s reelection to the board. And the New York fund plans to vote against all but two board directors at Exxon “over climate concerns.”
The “climate concerns” excuse, in reality, is driven by a wholly appropriate lawsuit filed by Exxon Mobil against activist groups Arjuna Capital and Follow This. These groups are “shareholders” explicitly uninterested in maximizing the value of their (small) ownership stakes. Instead, they seek to force Exxon Mobil management to waste resources reporting its greenhouse gas emissions, those of its suppliers, and even its customers, with the obvious long-term aim of transforming Exxon from an energy company into one pursuing a private climate policy.
That is not what shareholder democracy, proposals presented at annual shareholder meetings, is supposed to pursue. Shareholders have a common interest in a maximization of the economic value of their ownership stakes in the given company — that is, the economic productivity of investments in the company — and proposals are one vehicle with which to ensure the company’s management is focused on that objective. The climate activist groups holding small stakes have for years wasted time and resources with proposals that are repetitive, inconsistent with the economic interests of the other shareholders, and continuously receive little shareholder support because they are largely political.
The groups exerting these pressures have not cited poor financial performance as a rationale — merely given the diversification matter, any such argument would not survive a laugh test — but instead have cited the Exxon Mobil lawsuit against the activist shareholders seeking explicitly to destroy Exxon Mobil’s business.
Because of new regulatory requirements from the Securities and Exchange Commission — companies now must consider proposals of “wider societal interest” — it is difficult or impossible for managements to shunt such proposals aside. The Exxon Mobil lawsuit is an attempt to protect the rights of the vast majority of shareholders to have their investments used to further their economic interests.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
If the managers of the California and New York public pension systems really believe it is inappropriate for companies to resist politicized shareholder proposals, then they have no business managing huge retirement systems dedicated to the fiduciary interests of current and future retirees.
That they have found it appropriate to try to have it both ways, to protect those interests by resisting fossil divestment while pressuring the managements to do what the environmental Left demands, is fundamentally an exercise doomed to failure. They need to display real backbone in the face of the Left’s divestment game, and if they find themselves unable to do so, they should find a different line of work.
Benjamin Zycher is a senior fellow at the American Enterprise Institute.