Gov. Arnold Schwarzenegger last week proposed shifting California's pensions for state workers from a massive plan guaranteed by taxpayers to individual 401(k)s controlled by the workers themselves. It's a great idea, not just because it would save taxpayers billions but because it would keep the politicians and union activists who currently run the state's pension funds from improperly meddling in corporate boardrooms.
That's what they do and they're increasingly effective at it. Over the last 20 years, public pension funds have grown nearly sevenfold to more than $2 trillion nationwide, outpacing private sector fund growth by more than one third and making them tremendously powerful in boardrooms across the country.
Why do they want to meddle? Because they can. Although private sector fund managers focus on picking lucrative investments because that's how they get paid public fund trustees have different incentives. Sure, they want funds to perform well. But if they don't, they know that taxpayers will make up the shortfall. So they're free to pursue political objectives.
Public funds first discovered their political strength in the mid I980s, when they successfully pressured companies with business in South Africa to lobby against apartheid or to withdraw from that nation. For years, activist pension funds focused on broad brush issues like apartheid. They didn't meddle with corporate management.
But the public funds have taken the corporate scandals of the Enron era as a license to step up their interference with corporate boards. "The age of investor complacency must be replaced by a new era of investor democracy," said Phil Angelides, California treasurer and a member of the board of CalPERS, the state's main pension fund.
Of course, when you look more closely, the trustees are more interested in advancing their own self interested political agenda than in advancing democracy. Democracy, after all, would mean letting workers control their own retirement accounts, as Schwarzenegger wants to do.
Take CalPERS. Its board was headed until two weeks ago by Sean Harrigan, who moonlights as the regional director of one of California's most powerful private sector unions, the United Food and Commercial Workers. This resulted in a hopeless conflict last year, when the fund mounted a fight against Safeway just after the supermarket chain had resolved a four month strike by Harrigan's union.
CalPERS decided that right after the strike ended was an auspicious time to take up the cause of "shareholder value" against Safeway's board of directors. CalPERS mounted an unsuccessful campaign in mid 2004 to vote down Safeway's CEO in an effort, purportedly, to safeguard the pension fund's shareholder interests.
It's true that Safeway stock is a dog, but that's because the company must grapple with low-cost competitors like Wal Mart while burdened by an untenable labor cost structure thanks in part to Harrigan's union members. A rational investor with no confidence in Safeway's board would simply have sold Safeway stock, as many did.
But if CalPERS didn't own a piece of Safeway, it wouldn't have had a platform to fight management on. Who bears the risk of CalPERS' continued investment in Safeway? Taxpayers. Harrigan says he recused himself from issues involving Safeway, but when you're the chairman of the fund, it's not really possible to switch hats at will like that.
Harrigan's likely successor to head CalPERS' board trustee Rob Feckner is wedded just as irrevocably to labor. When the duly elected Lucia Mar school board privatized its school bus operations in 2000 to save taxpayers money, it laid off nearly 50 drivers. The drivers were represented by the California School Employees Assn. on whose board Feckner serves.
The CSEA was mad and pressed CalPERS to sell shares in private sector companies that take over work previously done in the public sector. In November 2003, CalPERS voted to reduce further investments in such companies so taxpayers who guarantee the pension fund are now cut off from a lucrative source of investment returns.
When union advocates and politicians dependent on unions serve as trustees of public pension funds, they have an irreducible conflict of interest: For them) the union workers they represent always come first, rather than the success of the corporations in which they invest. Ten of CalPERS' 13 board members, for instance, are union members, union officers or current or former politicians who depend or once depended on union support. There's no question that their political interests get in the way of what should be a trustee's only goal: maximizing financial performance to keep the pension fund stable and to cut the annual pension bill for taxpayers.