Who owns Exxon? We do.
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Thus, however well-intentioned its design, the pension-fund system has evolved into a monstrosity. It faces the same built-in dilemma as Social Security -- funding an ever-growing proportion of senior citizens from an ever-shrinking work force. Another problem stems from the nature of trading: if one investor goes after quick gains, he or she will likely prosper. But if all major investors do the same, they will all lose. (Indeed, many pension funds, despite best efforts, have consistently undershot the stock market.) Meanwhile, the pension funds' need for quick profits, on top of debt from Gekko- like takeovers (which pension funds encourage) pressures managers to cut back new investments to the bone. That makes it hard for a healthy economy to thrive in the long run. It also undercuts environmental protection: Consider Pacific Lumber's desperate battles to cut down its old-growth redwoods in California, to satisfy its debt-laden new corporate parent, Maxxam. In the end, the system of pension-fund investment hurts the very future which pensions were designed to safeguard in the first place. End of joke. Drum roll
Yet that punch line holds a hidden promise. Some sharp political veterans now have jobs managing pension funds: former New York City comptroller Harrison Goldin, current comptroller Elizabeth Holtzman, and Gray Davis, the chief of staff of former California Governor Jerry Brown. What if they -- and the workers they represent -- woke up to the fact that they own the corporations? What attitudes might emerge about growth, the legacy of the future, the way companies are managed? Eventually somebody had to pose the question. During the past year or so, that task fell -- of all people -- to a group of environmentalists.
"The conscience of a company has to rest somewhere. The managers feel it's the CEO, the CEO feels he's accountable to his Board, and the Board is trying to second-guess the shareholders. So let's give our voice about ... building a kind of world that the children of our participants will live in. The quality of that society will be the single most important factor in the quality of their retirement."
The speaker was Wayne Silby, a slim, dark-haired man in his early 40s; the audience was the Financial Executives Institute, composed of the most powerful corporate pension-fund administrators from Fortune 100 companies. Originally from Iowa, Silby has a quick-witted, sardonic, and yet wholesome mien; he could have been a model for the running shoe entrepreneur played by Kevin Kline in The Big Chill. He had traveled through India, then (after law school) had co-founded the Calvert Investment Group, which dealt in "variable-rate securities" --refinancing government-insured loans. Calvert had endured its own Big Chill-like rite of passage. In the late 1970s, employees worked in blue jeans and bare feet; "customers would come in," Wayne would later reminisce, "and put their life savings down on a cardboard table." Then one of his staffers tried to steal $1.5 million. "I started wearing a tie the next day
In 1982, Silby had set up a "social investment" fund within Calvert (which by then managed $1 billion overall). They screened out companies which dealt in tobacco or alcohol, polluted the air or water, built weapons systems, discriminated against women or minorities, produced nuclear power, or did business in South Africa. That list -- taken verbatim from a Washington Post story -- sounds simple, but the screening was not. Contrary to the expectations of some Calvert staffers, the fund took off. Silby discovered that a company with good "social" indicators and solid finances made for good investments in the long run. Environmentalism, after all, breeds efficiency; fair workplaces inspire enduring loyalty. And as the Japanese have demonstrated, efficiency and loyalty lead to stable profits.
Calvert did not dramatically outperform other money-market funds, but it remained above average throughout the 1980s and built a following. It also inspired a half-dozen similar funds (the Sept-Oct 1990 GARBAGE analyzed most of them). More importantly for this story, Silby found himself increasingly tapped to be an arbiter of corporate performance. When he questioned Arco's environmental protection policies in Alaska, the oil company's chairman invited him to visit; he and his group tooled around Arco's drilling sites with the president of Alaska operations. And other leaders of social-investing funds were having similar experiences -- most notably Joan Bavaria, the charismatic 45-year-old president of Franklin Research and Development, an independent Boston-based company which performed much of the research on which "social investing" companies based their decisions.
In 1989, Bavaria assembled CERES, the "Coalition for Environmentally Responsible Economies," whose 165 members were evenly divided between environmental groups, investment groups (like Wayne Silby's Calvert), and miscellaneous government agencies and economists. Significantly, the members included Elizabeth Holtzman and Gray Davis, representing two of the largest pension funds in the country: New York City and California employees. Another founding member, and co-chair along with Bavaria WAs Denis Hayes, who is best known as the organizer of Earth Day in 1970 and 1990. But Hayes is also a lawyer, and during the mid-1980s he had begun investigating the potential poverty of the pension-fund system, thinking of writing a book about it. "Then I got lured," he said recently, "into doing some legal work against sleazebags who looted and pillaged savings & loans." CERES fit not just with Earth Day, but with his other current project too -- the still-under-development Green Seal rating system for products.
Bavaria had the idea that brought CERES together: creating a list of potential rules for environmentalist companies, along the lines of the Sullivan Principles for corporate investment in South Africa. Of all the people who had tried to reform institutional investing (including Peter Drucker), only the Sullivan Principles had ever seemed to have much influence on pension-plan managers. Here again, General Motors figured prominently: a black minister from Philadelphia, Leon Sullivan, had been added to the GM board after a proxy battle over minority representation in the early 1970s. Sullivan developed his principles as a guide to fair treatment of blacks within businesses that operated in South Africa. But he later changed his mind, denounced his own principles as lacking teeth, and (working with a coalition of church investment groups) pressured many companies, including GM, to divest from South Africa entirely