Discussion of

1
Romano (1993) Public Pension Fund Activism

• 1996 Public pension funds own over 300
  billion 30 of corporate equity.
• Political pressure on Public Pension Funds
• ERISA exempt.
• State laws prescribe investments. Table 1
• Legislation recommends that investments be made
  to enhance local economic development and/or
  employment. Examples
• Pennsylvania / Volkswagen
• CALPERS / Construction in California
• Illinois / KKR

2
Romano (1993) Public Pension Fund Activism
(continued)

• Legislation recommends that investments be made
  to enhance local economic development and/or
  employment. So what?
• Page 813 If a particular small business or
  residential project is unable to attract
  financing from the private sector, it is far more
  probable that the difficulty is due to the
  markets efficiently pricing the risk at a cost
  greater than the project developers are willing
  to pay, rather than the result of capital market
  failure.

3
Romano (1993) Public Pension Fund Activism

• Pressure for social investing is not a problem
  for private (corporate) pension funds. In defined
  benefit plans, employer bears risk of lower
  returns.
• Page 811. Public pension funds are backed by a
  states taxing power The cost of lowered
  investment returns provides a weaker incentive
  for public fund managers to avoid suboptimal
  social investments than their private
  counterparts because the bearers of the cost,
  taxpayers, are even more diffuse group than
  shareholders and are therefore even less likely
  to monitor a (public) pension funds management.

4
Romano (1993) Public Pension Fund Activism

• State statutes fix the composition of public
  pension fund boards
• Gubernatorial appointees (57)
• Ex-officio (25)
• Elected by beneficiaries (18)
• Table 3 Positive relation between fund earnings
  and proportion of board elected by fund members
  (beneficiaries).
• Table 4 Estimated loss of income attributable to
  lack of an independent board 15 billion for
  1985-1989 !

5
Romano (1993) Public Pension Fund Activism

• Table 6 No significant difference on social
  responsibility votes (on N. Ireland and
  Environment issues) between public and private
  plans.
• Suggests political pressure on public funds may
  be directed towards investment, not voting.

6
Romano (1993) Public Pension Fund Activism

• Romanos suggestion to the problem of suboptimal
  investing by public pension plans
• DEFINED CONTRIBUTION PLANS. State employees
  (plan beneficiaries) can decide where to invest
  their retirement funds.
• Question Proxy voting rights of shares owned by
  a mutual fund reside with the fund managers. What
  is the record of mutual fund managers
  involvement in corporate governance matters?

7
Del Guercio-Hawkins (1999) Public Pension Fund
Activism

• Consider proposals submitted by the largest and
  most activist pension funds during 1987-1993
  CREF, CALPERS, CALSTRS, SWIB, NYC.
• Table 1
• Board issues becoming more common in the 1990s.
• Antitakeover issues becoming less common.
• Voting issues remain popular.

8
Del Guercio-Hawkins (1999) Public Pension Fund
Activism

• Table 2
• Total domestic equity portfolio value
• CREF 31.8 billion
• CALPERS 19 billion
• Average dollar holding in target firms
• CREF 67 million
• CALPERS 34 million
• Total dollar holding in target firms
• CREF 2.1 billion
• CALPERS 1.1 billion
• Average ownership in target firms
• CREF 1
• CALPERS 1

9
Del Guercio-Hawkins (1999) Public Pension Fund
Activism

• Table 4 Frequency of announced events in the
  target firm in the four years after the firm is
  targeted.
• Does pension fund activism have a significant
  impact on target company business policies,
  organization, and governance?
• Management and board turnover is significantly
  higher for targeted firms.
• Shareholder lawsuits and public no votes for
  directors are significantly higher for targeted
  firms.
• Asset sales/spin-offs/restructuring/layoffs are
  significantly higher for targeted firms.
• Table 6 Do pension funds choose targets that are
  (even without being targeted) likely to engage in
  above policy/organizational changes? No.

10
Del Guercio-Hawkins (1999) Public Pension Fund
Activism

• Impact of pension fund activism on long-term
  performance
• Pages 326-327 No long-term improvement in
  performance.
• Implication of above
• Pension fund activism has no long-term
  improvement in performance.
• Measurement techniques are not powerful enough to
  pick up small improvements in performance.

11
Measurement techniques are not powerful enough to
pick up small improvements in performance.

• Barber and Lyon (Journal of Financial Economics,
  July 1996)
• Accounting operating performance Return on
  assets (ROA) after controlling for industry
  performance
• Superior ROA performance of 1 Detected 2 times
  out of 10.
• Superior ROA performance of 2 Detected 7 times
  out of 10.
• Superior ROA performance of 3 Detected almost
  every time.

12
Measurement techniques are not powerful enough to
pick up small improvements in performance.

• Kothari and Warner (Journal of Finance, 2001)
• Using state-of-the-art techniques, can we detect
  superior mutual fund performance?
• 100 basis points annual superior performance
  Undetected.
• 500 basis points Detected once every three
  times.
• 1500 basis points Detected (almost) every time.
• Ability to detect superior performance improves
  if one tracks a mutual funds stock trades.