Anne Stausboll

The current push for Sudanese divestment is getting a lot of attention, eclipsing the powerful inside game that institutional investors are playing.  By holding their stock rather than selling it off, large institutional investors like the California Public Employees’ Retirement System (CalPERS) can stay in the game to potentially achieve more positive change than would occur through divestment.

Public pension funds with responsibility for large amounts of investment capital are frequently faced with issues regarding the social, moral or political impact of their investments.  These issues range from controversies over specific products (“sin stocks” such as tobacco, guns and alcohol), to issues of corporate responsibility (e.g. environmental sustainability or labour issues), to human rights abuses in the countries in which corporations are doing business.  

CalPERS is the largest United States public pension fund, with over $225 billion in assets under management.  Its mission is to advance the financial and health security of its 1.5 million members and their beneficiaries.  Consistent with its fiduciary duty, the goal of the CalPERS investment program is to achieve the highest possible return at an acceptable level of risk.

As a large investor, CalPERS has faced many situations where divestment has been advocated. These have been as disparate as South African apartheid to Northern Ireland’s labour practices to the genocide currently occurring in Sudan.  Historically, CalPERS has preferred to address these types of issues by maintaining its holdings and advocating change within the companies, rather than through divestment. 

Although there has been no lack of detractors, CalPERS has generally been well-known and received high praise for its activist corporate governance program, which began in the mid-1980s.  The underlying tenet of this program is that fully accountable governance structures produce, over the long-term, the best returns to shareowners.  A similar model has been used for addressing broader issues of corporate responsibility. 

Actual Divestment Has Been Rare

Beyond advocacy, the more controversial issue of divestment traditionally has been urged by entities external to CalPERS – often the legislature or an advocacy group.  For example, CalPERS’ divestment in the 1980s from South Africa was mandated by the California State Legislature at the insistence of international human rights organizations.  Although the California Legislature has since introduced numerous other divestment bills, only one – a recently enacted Sudan divestment bill – has been passed and signed by the Governor.  Consistent with CalPERS’ philosophy favoring shareowner activism, the Sudan legislation provides for an extensive and meaningful pre-divestment process of engagement and negotiation.

In 2000, the CalPERS Board itself decided to divest from passively-managed tobacco stocks and bonds.  This decision was based on a portfolio risk-return analysis, including a review of the litigation, regulatory, and reputational risks that could affect the long term sustainability of the tobacco industry. 

Constructive Engagement Has Led to Significant Change

Short of divestment – and arguably more effective – CalPERS has consistently used its influence as a large shareowner to demand and obtain change in the companies, and even in countries, in which it invests. CalPERS has successfully engaged with many entities throughout the world on a wide array of topics.
 
Corporate Governance Program
CalPERS is most well-known for its activism on corporate governance issues such as executive pay practices, director accountability, and shareowner rights.  The centerpiece of this program is the Annual Focus List Program, which originated in 1992.  In recent years, multiple studies have indicated that the CalPERS Focus List adds significant economic value to CalPERS, in addition to providing a positive market impact by influencing publicly traded companies to adopt good governance principles.  This impact has been termed the “CalPERS Effect”. 

Foreign Emerging Markets
In 2000, CalPERS adopted a policy to evaluate foreign emerging markets based upon a combination of market and geopolitical factors.  The market factors include market liquidity/volatility, market regulation, capital market openness, and settlement proficiency/transaction costs. The geopolitical factors – targeted towards “event risk”– include political stability, transparency, and labour practices. 

CalPERS uses third-party experts to annually score foreign emerging markets on these factors.  Preliminary scores are sent to each country’s embassy and primary stock exchange, which allows for vetting and verification of the scores.  Ultimately, countries falling below a specified threshold are not eligible for investment. 

Since inception of this program, positive governance changes have been implemented in several countries.  In 2002, CalPERS approved thirteen countries for investment.  This year, it is anticipated that twenty countries will be approved. Countries that have been added to the approved list since program inception include India and the Philippines.

Sudan
In the spring of 2006, CalPERS adopted a Sudan Position Statement, which reaffirmed its position that constructive engagement is the most powerful tool investors can use to effect change at portfolio companies.  CalPERS has been a leader among institutional investors in developing an engagement process with companies doing business in Sudan to understand the extent and implications of the company’s presence in Sudan, determine whether the company has any complicity in human rights violations, and urge companies to take substantial action to end human rights abuses.

In addition, the California State Legislature has enacted a bill that requires CalPERS to address this issue, including divestment as a last resort.  CalPERS was instrumental through the legislative process in obtaining language that provides for a meaningful engagement process prior to divestment.  This legislation is now being used a model in many other states.

Conclusion
The recent Sudan divestment legislation adopted in California reflected that “picking up your marbles and going home” may not be the most effective way to achieve change.  As CalPERS and other large investors have demonstrated over the years, shareowners can positively influence the behavior of their portfolio companies by keeping their place at the corporate table.

Anne Stausboll is the Assistant Executive Officer, Investment Operations, for the California Public Employees’ Retirement System (CalPERS). She was appointed in June 2004 to work closely with the System’s senior investment officers to implement investment strategies for real estate, alternative investment, and public market portfolios, including the development of portfolio trade and management systems. Previously, Ms. Stausboll was Chief Deputy Treasurer to California State Treasurer, beginning in July 2000. She serves on the Ceres Board, as well as the governing board for the United Nations Principles for Responsible Investment and the Toigo Foundation Advisory Board. Ms. Stausboll received her Bachelor of Arts degree in English from Oberlin College and her Juris Doctor degree (Order of the Coif) from the University of California, Davis School of Law.