Panel Detail:

Tuesday, April 29, 2008
2:15 PM - 3:30 PM

Moderator:

Betsy Zeidman, Research Fellow and Director of the Center for Emerging Domestic Markets, Milken Institute

Robin Wiessmann, Pennsylvania’s state treasurer (left), outlines her investment principles with Christa Velasquez of the Annie E. Casey Foundation (right).

Christopher Ailman of the California State Teachers' Retirement System (CalSTRS) started off by emphasizing that his singular focus was on getting returns: "Other, ancillary things are just ancillary." Ailman recalled Milton Friedman's famous words – the business of business is business, and anything else is a violation of fiduciary standards. Boards should act in the sole benefit of plan participants. As public pension plan trustees come from diverse organizations, when they enter the boardroom, they need to leave their other hats off. Ailman did acknowledge that his organization just adopted, after a long internal debate, an environmental-social-geographic (ESG) policy. He stressed that they are viewing most screens as tools for either reducing risk or increasing value. Moreover, he referred to research indicating that alpha can be generated via ESG investing, and seemed to lament that Wall Street, in the grip of short-termism, was showing little concern for ESG. He noted that Europe was more sensitive in these matters, and argued that ESG is an approach to evaluating the management of a company.

Regarding the effectiveness of screens, Ailman commented that no screen will catch fraud: "If you can't get inside the boardroom, you cannot understand what's going on." In terms of executive pay, he argued that boards typically bow to compensation consultants or fear confronting the CEO. He recounted a brief story on how CalSTRS, as a large shareholder, intervened in the issue of executive pay at Morgan Stanley and ensured at least better disclosure of pay arrangements when the firm was in CEO transition. Ailman emphasized that CalSTRS challenges not the level of compensation but the alignment of pay with shareholder interests.

James Katzman of Goldman Sachs concentrated on shareholders. He elaborated on the different time horizons of different investors and the implications this creates for asset managers. He noted that it might be hard to balance sometimes competing interests of short-term and long-term shareholders. In reaction to some of the comments from other panelists, Katzman remarked: "It's a little shortsighted to say that Wall Street is ignoring these things." He added that sometimes research can find that higher returns might be associated with social or environmental screens, but this does not necessarily mean causation – it might be just simple correlation. Katzman also noted that it's not yet clear what metrics should be used in assessing activist investing. In the realm of corporate governance, he emphasized that the real question is how to get corporate performance targets to happen. He mentioned that, for instance, he was not aware of any research concluding that a dual CEO-chairman role is worse for shareholders.

Robin Wiessmann, Pennsylvania's state treasurer, seemed to hold a position similar to Ailman with more sympathy toward ESG principles and Wall Street. She did note that one should never be expected to give up yield for other considerations, but announced that Pennsylvania has adopted investment principles that deliberately embrace non-financial criteria: "You need to recognize what's wrong with a business you’re investing in." She acknowledged that the nature of fiduciary responsibility on the part of plan managers assumes different statutory definitions depending on the state. In her current state, the definition includes the "prudent person standard." But she also recognized that one cannot legislate every detail and things need to be principles-based. As for the stance of markets on ESG investing, she expressed confidence that Wall Street would sort things out.

In terms of the practicalities of ESG-conscious investing, Wiessmann noted the emergence of a cottage industry taking care of the screening business for institutional investors. This is bound to happen as public pension plans typically don't have the resources to screen in house. She argued that the concepts of transparency and governance, perhaps better packaged together as "accountability," make a big difference, and lauded Sarbanes-Oxley for driving that process. However, she also said that a lot of investors felt cheated by what happened in markets recently.

Coming from the non-profit world with no shareholders hungry for high financial return, Christa Velasquez of the Annie E. Casey Foundation presented the most positive view of socially or environmentally conscious investing. Her foundation, which by law and regulation is not prohibited from ESG investing, has set aside $100 million for such purposes. She noted that the mission of the portfolio is the key, in line with Casey's being a mission-driven organization. Velasquez lamented that less than 0.1% of foundations report making socially responsible investments. She also drew attention to possible lack of patience on the part of donors regarding investment returns. For instance, some donors might express dissatisfaction with short-term results of a foundation-financed project to enhance job creation.

An intriguing comment/question from the audience was well positioned for concluding the session. The participant, who happened to be the chairman of a state's pension plan, brought to the panel's attention a CalPERS study finding that divesting South African investments for ESG concerns had cost the organization in the order of billion dollars. He went on to argue that divesting from Petrochina helps people in Sudan but not the beneficiaries of the pension plan. Ailman's response was brief yet to the point: "Divestment is just a sell decision; it does not change anything in the company."

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