Coyright © 2007 by KLD Research & Analytics, Inc. All rights reserved.

Alicia H. Munnell, the Peter F. Drucker Professor of Management Science at Boston College, has asked, “Should Public Plans Engage in Social Investing?” in a briefing paper published by the Center for Retirement Research of which she is Director.¹ Her answer:

But even assuming that divestment is an effective mechanism to stop genocide and reduce terror risk and that state legislatures and pension fund boards are the right place to make foreign policy, the issue remains whether pension funds are an appropriate vehicle for implementing that policy. The answer seems unquestionably “no”.²

Is Prof. Munnell saying something outrageous here? If divestment by public pensions could halt genocide and “reduce terror risk”, they still shouldn’t do it?

I will leave to others the moral questions Prof. Munnell’s position poses. Here I will focus on some of her antique arguments about what she calls “social investing” and how she fails to support them. Her article deserves this attention not for what she argues but for what it reveals about a style of attacking social investing and how it should be responded to.

Problems with Definitions

Prof. Munnell begins by defining “social investing” as “a movement that advocates incorporating social and environmental considerations, as well as financial factors,” in investment decision-making.

She’s on course here, apart from not referring to corporate governance – a strange oversight since her introduction claims she’s going to explore “the current world of social investing”.³ The public pensions – whose policies she hopes to shape – have led the governance effort for nearly 20 years.

In her third paragraph, she describes social investing as taking three primary forms: shareholder advocacy, community investing and screening. She spares her readers definitions of shareholder advocacy or community investing which she blows past without explaining them or their relationship to screening.

Failing to acknowledge the role of shareholder advocacy in social investing and the roles public funds have played individually and through organizations such as the Council of Institutional Investors and the UN Principles of Responsible Investment further limits her picture of “the current world” and ignores social investing’s history. But her working definition of “social investing” is even more narrow – and shallow.

Divestiture = Social Investing?

Prof. Munnell characterizes screening as “either excluding ‘bad’ companies or including ‘good’ companies”.⁴ That is the last reference to using screening to identify “good” companies. So from her third paragraph her main focus lies on divestiture, a term she doesn’t define formally.

Why is that a problem? For one thing, it’s not an accurate depiction of how social investing has worked. In terms of her own argument by not defining “divestiture”, she leaves her readers ignorant of the fact that there are two types:

• categorical divestiture – selling all companies in a particular industry or who have a common, problematic business interest as when the $295 billion Norwegian Government Pension Fund – Europe’s largest public fund⁵ – decided to sell off cluster-bomb makers.⁶

• selective divestiture – selling a particular name for a particular reason as when the Norwegians divested Wal-Mart and Boeing on ethical grounds.⁷

Prof. Munnell’s lack of precision allows her to imply that the only reason to divest, to sell, is “social”, thereby implying a debased decision-making process. She can ignore the hosts of non-social screens managers apply that force sales or narrow buy lists: a growth stock slips into the value category, a price/earnings ratio becomes too high…. She also presumes that indexing or closet indexing are the only investment options.

Further, emphasizing divestiture – which she implies is almost always categorical – she avoids having to explain how incorporating environmental, social and governance (ESG) criteria might work, might even improve the quality of the decision even on “bad” companies.

Prof. Munnell relies heavily on examples from the 1970s and 80s⁸ to create an imagined past when social investing meant only South Africa divestiture. She ignores the profound changes both among institutional investors and social investing itself. The Principles of Responsible Investment (2005) and its public fund adherents get not a mention.

Divestiture ca. 1990 is Prof. Munnell’s “current world of social investing”. Based on what I hear at conferences, she is not alone in trying to marginalize it in this way.

Divestiture & the Federal Courts

In her conclusion’s next-to-last paragraph, Prof. Munnell asserts that “the fundamental question” of divestiture is “where foreign policy should be made”.⁹ (One may gauge how “fundamental” the question is by her bare allusion to it in the midst of the preceding 3000 words.¹⁰) She goes on:

Additionally, in more than one instance, federal courts have ruled that state legislation regarding social investment was unconstitutional on grounds that it overlapped with federal regulations.¹¹

Her authority for this is a Reuters story.¹² The case reports, themselves, are readily available. So it is not difficult to learn that there is exactly one federal lower court case dealing with social investing as she has defined it, and it held in 2007 a form of Sudan divestiture illegal.¹³ Exactly one.¹⁴

The Supreme Court had the opportunity in 1990 to hear an appeal from an unsuccessful challenge to a Maryland municipal ordinance mandating South Africa divestiture by a city and a county pension. The Court declined to hear the case,¹⁵ leaving the law in force. Prof. Munnell does not acknowledge the existence of this case, nor does she dispose of its holdings.

Problems of Citation

Taking Prof Munnell to task for less than perfect sourcing and for ignoring precedents contrary to her position may seem petty. But the author is a full professor, and she uses academic conventions to lend her article authority – 62 endnotes for eight double-columned pages. So, how she argues her case merits scrutiny.

Prof. Munnell’s endnotes often offer less support for her contentions than their presence implies. Consider this:

In contrast, the evidence from the early days of the South Africa divestiture suggested that screening out stocks meant large losses. For example, in the 1970s, Princeton University reported that the stocks that had been excluded because of South Africa ties had outperformed other holdings by 3 percent.¹⁶

The supporting endnote reads “Malkiel (1991).”¹⁷ Her References section (some pages later) reveals the source: a 1971 speech given by Burton Malkiel which was anthologized twenty years later.¹⁸

Prof. Munnell does not bother readers with a page reference to the anthology or a cite to the original report. All the reader can gather, when she says “in the 1970s”, is that she’s referring to, at most, the decade’s first two years – more likely, another source on the Princeton report indicates, the decade’s first two months.¹⁹

But here’s something her readers can’t learn from her text or notes: Contrary to Prof. Munnell’s implication (“stocks that had been excluded”), in the early 1970s Princeton had not divested any stocks based on South Africa, nor would it in that decade.²⁰

Divestiture & its Motivation

The Norwegian Government Pension Fund (formerly called the petroleum fund) currently is the largest, most sophisticated and most broadly based exponent of divestiture of both varieties. Last Spring, the Norwegian Finance Minister, Kristin Halverson, told the New York Times, “We’ve managed to combine professional fund management with an ethical approach. We see them as two sides of the same coin.”²¹

The best articulation of the motivation of proponents of various types of divestment came from the US Ambassador to Norway who vehemently objected to the Times about the Norwegian fund’s decision to divest a number of large US companies.

“An accusation of bad ethics is not an abstract thing,” Benson K. Whitney said. “They’re alleging serious misconduct. It is essentially a national judgment of the ethics of these companies.”²²

In an earlier interview, Mr. Benson told the St. Paul Pioneer Press, “I believe that the current ethical investment process is inconsistent with what I have come to know as the fair, just, and transparent values of the Norwegian people. The stain of an official accusation of bad ethics harms reputations and can have serious economic implications.”²³

“I’m not sure the Norway government understands the power of being one of the largest investors in the world”, Mr. Benson told the Times.²⁴

Actually, it does. It also understands its responsibilities as such and as the sponsor of one of the world’s largest public funds. It is this understanding – and the willingness to implement it – that Ambassador Whitney and Professor Munnell find objectionable.

Problems with Representative Government

Hence, it may be unfair to focus on Prof. Munnell’s weak and unsupported arguments on social investment. Her inattentiveness to them may signal larger concerns. For at root, Prof. Munnell’s attack is not so much on divestiture as it is on the representative government that makes it possible.

Consider her “three aspects of public pension funds [that] make them particularly ill-suited vehicles for social investing.”²⁵

Her first is that “the decision-makers and the stakeholders are not the same people.”²⁶ Leave aside the fact that Prof. Munnell is wrong: trustees of public pensions and legislators often are plan beneficiaries, as are their professional staffs. Is there a decision made by government at any level that would not fail her test? It would surely call into question the Department of Labor’s restrictive interpretations of ERISA as it affects social investing.²⁷

Her second is that

…whereas the investment policies of many large public funds are first rate, other boards are much less experienced. The boards of smaller funds often consist of … mayors, treasurers, comptrollers, city councillors, union leaders, and citizens.²⁸

Who might better serve on the boards of public funds than these elected officials and citizens? Prof. Munnell doesn’t say. And the only evidence she offers for the alleged inadequacies of these public servants is a New York Times report of a very few examples where “political money sometimes affects pension investment decisions.”²⁹

For her third and final “aspect” making the public funds inappropriate vehicles for social investing, she revives the old “slippery slope” argument, which one can imagine 17th century Quakers hearing when they got out of slaving. For Prof. Munnell, today, it’s Sudan, Iran and terror; tomorrow, Saudi Arabia.³⁰

A more illuminating approach would have demonstrated how South Africa divestment, which ended in 1994, led public funds to slide down the slippery slope on many other issues. But since it did not….

Conclusion

The case the Supreme Court declined to review 17 years ago disposed of Prof. Munnell’s arguments about public funds and divestiture. In a clearly stated opinion with full and specific citations, the Maryland Court of Appeals³¹ (in a case Prof. Munnell neglects to mention much less refute) responded to the question, can a municipal government order divestment by a public pension?

If the trustees have discretion as to how to implement the divestment and its costs are relatively minimal, the Maryland court of last resort answered, unquestionably yes.³²

If Prof. Munnell wishes to suggest that the court’s decision was wrong – based as it was on a full trial record, expert testimony, extensive briefs by competent counsel, etc. – she should match its rigor in her arguments, deal specifically with its precedents and array her counter-arguments and precedents for testing. And, she should deal with the fact that social investing has changed in the 13 years since the end of South Africa sanctions.

But most importantly, she must explain why responsible representatives of the people should not use investments they control to implement public policy, so long as the commitment to pay the beneficiaries is not affected.

Until then, all Prof. Munnell has on offer is a blast from social investing’s past.

Endnotes

1. Alicia H. Munnell, “Should Public Plans Engage in Social Investing?”, Center for Retirement Research at Boston College, No. 7-12, August 2007.

2. Id., p. 8.

3. Id., p. 1.

4. Id.

5. Elizabeth Pfeuti, “Norway excludes gold firm”, GlobalPensions.com, April 11, 2007

6. Barbara Ottawa, “Norway fund axe drop [sic] cluster bomb firm - report”, Investments & Pensions Europe, IPE.com, April 12, 2007

7. Mark Landler, “Norway Keeps Nest Egg From Some U.S. Companies”, New York Times, May 4, 2007

8. E.g., Munnell, op. cit., p. 5.

9. Munnell, op. cit., p. 8.

10. Id. A paragraph earlier, Prof. Munnell implies that divestiture doesn’t work in effecting a change of regime. She had not mentioned this before either. She supports her implication with an assertion based on a Financial Times op-ed piece that “many South Africans” now say “the cultural boycott – particularly in sports – rather than divestiture” led to the peaceful change in regime. Id., citing John Authers, “There are Clear Arguments for a Clear Conscience”, Financial Times, July 28, 2007. Since Authers appears first and out of order (viewed on Aug. 21, 2007) in the list of references, (id., p. 13), this argument may have been an after-thought.

11. Id.

12. Id., p. 8n.62 and related reference.

13. National Foreign Trade Council v. Giannoulia, 2007 U.S. Dist. Lexis 13341 (N.D. Ill. 2007).

14. In another case brought by the same plaintiff a decade ago, the Massachusetts selective purchasing act relating to Burma was declared unconstitutional. Selective purchasing has nothing to do with “social investing” as Prof. Munnell defines it, apart from sharing an issue – repression in Burma – with some social investors. See National Foreign Trade Council v. Baker, 26 F. Supp. 2d 287 (D. Mass. 1998).

15. Bd. of Trustees v. Mayor of Baltimore City, 317 Md. 72, 562 A.2d 720 (1989), cert. den. sub nom. Lubman v. Baltimore City, 493 U.S. 1093, 107 L.Ed. 2d 1069, 110 S.Ct. 1167 (1990). The Supreme Court’s denial of what is in effect a motion for leave to appeal has no precedential importance. Put differently, it says nothing about the Court’s view of the issues in the case or the lower court’s holdings. But it did leave in place the Maryland Court of Appeals decision.

16. Munnell, op. cit., p. 6.

17. Fn. 43, id., p. 11. In 1971 Prof. Malkiel was in the Princeton economics department.

18. Id., p. 14. In addition to forcing the reader to go to two separate pages to get her inadequate references, Prof. Munnell fails to supply URLs for articles in publications such as the Financial Times or the New York Times that are available on the web.

19. For a highly critical discussion of the Princeton report, which Prof. Malkiel authored, see Robert Kinloch Massie, Loosing the Bonds: The United States and South Africa in the Apartheid Years (New York: Talese/Doubleday, 1997), p. 251 and the note to p. 251 on pp. 754-55. According to Mr. Massie, the report appeared in February 1970. And it was based on a hypothetical sale of stock.

20. I participated in a formal debate of divestment in the early fall of 1969 in the Council of the Princeton University Community. The Council rejected the idea. I know of no source indicating a reversal of that policy at least through 1978. See e.g., Massie, op. cit.,, p. 433 and the notes thereon, pp. 788-89.

21. Landler, op. cit.

22. Id.

23. “Beware Wrath of the Norse” St. Paul Pioneer Press (Minn.), November 19, 2006, p. 3D.

24. Landler, op. cit.

25. Munnell, op. cit., p. 7.

26. Id.

27. Id., p. 2. Her discussion of ERISA fails to mention the test the Administrator established for trustees considering investments with non-financial benefits. Nor does she note the Administrator’s later opinion on defined contribution plans. Compare, Kinder, op. cit., p. 32.

28. Id., pp. 7-8.

29. Id., p. 8.

30. Id.

31. Bd. of Trustees, op. cit.

32. I have discussed the Baltimore case at length in Kinder, op. cit, pp. 33ff. Pensions & the Companies They Own. I don’t regard Prof. Munnell’s omission of this case as accidental. She acknowledges John Langbein’s “valuable comments” at p. 1n. Prof. Langbein, as I’ve noted, is probably responsible for omitting the same case from the notes to the Uniform Prudent Investor Act.