California Treasurer Expands Social Investing’ to Include Freedom-Based, Financially Prudent Principles

(Washington, D.C.): A groundbreaking front page story in the Sunday New York Times of 11 February appeared under the headline “On Wall Street, More Investors Push Social Goals.” In it, reporter Danny Hakim drew attention to new investment criteria adopted by the influential California Public Employees Retirement System (CalPERS) which now include “companies in foreign countries that restrict freedom of the press, political freedom or workers’ rights.”

The Times notes that the market trend of “socially responsible investing” is described as growing “far more popular…with offerings customized to many faiths and beliefs.” In recent years, there has also been an appropriate surge of interest among U.S. investors in knowing where their money is going — and how it is being used. Interestingly, the Times adds that “financial institutions now jumping in say that socially responsible investing can also produce stronger returns.”

California Leads the Nation

Arguably, one of the most important recent developments in the world of social investing has been the dramatic changes since the beginning of last year in the decision-making process at CalPERS with respect to the purchase of foreign securities. In part, this shift was catalyzed on 5 January 2000 by the testimonies of William J. Casey Institute Chairman Roger Robinson, Paul Marshall of Freedom House, and Brian Kennedy of the Claremont Institute before the Joint Legislative Audit Committee of the California State Legislature. This panel of experts — invited to appear before the committee by State Senator Ray Haynes — discussed the national security and human rights dimensions of CalPERS’ foreign holdings.

The individuals most responsible for actually seeing to it that these considerations were added to the so-called “due diligence” risk assessments performed by CalPERS and its external fund managers (i.e., investment firms mandated to purchase foreign securities on CalPERS’ behalf) have been State Treasurer Philip Angelides and his able deputy, Jennifer DuCray- Morrill. As Treasurer Angelides put it in the New York Times article: “There is a correlation between good practices [presumably including insistence on press and political freedoms] and good investment results. People in the investment industry often want to put up a wall between the two things, but they are related.”

Will CalPERS Continue Resisting Change?

Regrettably, CalPERS, and its sister organization, the California State Teachers Retirement System (CalSTRS), have to this point largely resisted efforts to ensure that the foreign companies’ securities purchased for their respective international portfolios are engaged in “good practices” with respect to national security, political and press freedoms and other human rights issues. Concerns about CalPERS’ inattention to these factors prompted the the California State Legislature’s Joint Legislative Audit Committee on 27 June 2000 to direct an audit of the fund’s international portfolio.

The audit was not released until 19 December. As soon as it became publicly available, however, it was apparent that it had been conducted in close coordination with CalPERS and its external fund managers, causing it to be flawed in important respects.

These shortcomings were subsequently the subject of an eight-page, point-by-point critique on 8 January 2001 by Senator Haynes and his staff. The Senator bitterly complained about the methodology employed by the State Auditor’s office:

…We do know of some sources that were not reviewed. When Mr. Hendrickson of [the State Auditor’s] office briefed my staff about the audit’s findings, he admitted that your auditors did not bother to obtain a copy or read the extensive congressional investigations of these and other potentially dangerous companies, contained in the Cox Committee and the Deutch Commission reports….Instead, a review of “Appendix B” reveals that they simply paraphrased our allegations and then recited financial data from CalPERS’ external fund managers….Since you chose not to investigate the five companies we cited to you, I suppose we should not be too surprised that you failed to review any of CalPERS’ other Chinese and Hong Kong-based investments. (Emphasis added.)

Sen. Haynes’ damning analysis concluded with a summary of his objections:

…This audit represents a complete abdication of your statutory duty to ensure that a report approved by the Legislature be complete and thorough, and actually comply with the will of the Legislature which authorized it. Were these oversights the result of mere gross negligence or stupidity by your staff, or was there a systematic concealment of the truth by your auditors in this matter?

It appears that your auditors simply chose to ignore all available evidence — including the evidence that was spoon-fed to them — and simply whitewash the entire affair. This abdication of your statutory duty is distressing and seriously damages the reputation for objectivity and nonpartisanship for which your office supposedly strives. (Emphasis added throughout.)

Time for CalPERS to Shape Up

CalPERS’ apparent cooperation in subverting the intention of the California Legislature is all the more extraordinary insofar as, according to the San Francisco Chronicle of 14 November 2000, the thirteen members of the CalPERS Board met the day before and — after a reportedly contentious session — voted for “a far-reaching step to link social concerns and the financial markets…[in order] to attach tough human rights standards to its investments in developing nations.”

This outcome was correctly described as a “victory” for Treasurer Angelides. It was made all the more significant by the Board’s admission that CalPERS had “lost money in recent years by buying stocks and bonds in unstable, undemocratic, crisis-prone countries.” Afterwards, Mr. Angelides told The Chronicle that the new plan to take into account press and political freedoms and other human rights criteria in the course of CalPERS’ purchasing decisions is “a much-needed step that recognizes the correlation between political stability and human rights and the long-term stability and profitability of our investments.”

As a result of this decision by CalPERS Board, the “Global Sullivan Principles” — a commitment to human rights and community and workplace practices first devised in 1977 in connection with foreign investment in South Africa — will reportedly be employed to “screen all its investments in so-called emerging market nations.” In addition, all of CalPERS’ investments in emerging-markets will be placed under “active management, in which advisors are contracted to pick stocks one-by-one rather than simply buying index funds.” (Emphasis added.)

Bottom Line

Thanks to the bipartisan work on this matter by Treasurer Angelides, Senator Haynes and their staffs, there is now a prospect of greater scrutiny, accountability and security- and human rights- mindedness on the part of those making multi-billion dollar investment decisions on behalf of California pensioners. Nevertheless, the attempted audit “whitewash,” suggests that the battle for transparency and discipline at CalPERS is not over since its staff, which seems irreconcilably opposed to financially prudent and freedom-based social investing principles, would still be left, as The Chronicle put it, with “some leeway to interpret the new rules.”

All of those associated with socially-responsible investing — and others in the markets who wish to steer clear of divestment campaigns, politically-radioactive IPO’s and other loss-producing, non-financial developments — should demand answers to the following questions as the CalPERS saga continues:

• How will the California State Treasurer’s office react to the deeply flawed legislative audit of CalPERS’ foreign holdings?
• Will CalPERS faithfully implement its new, Board-approved criteria for the purchase of securities from emerging market countries as outlined in the New York Times article of 11 February?
• Will CalPERS continue to hold the securities of as many as seventy Chinese companies (including Honk Kong-headquartered entities) — some of which are documented to be engaged in dubious activities? And
• Will the California State Teachers Retirement System follow CalPERS’ lead in divesting the stock of the highly-controversial Canadian company, Talisman Energy, Inc. — which has been financially aiding the odious Khartoum regime via Talisman’s oil development activities in the Sudan?