The international newspaper of money management
Divestment is the wrong answer
It raises costs and false expectation of
accomplishment
By Edwin
T. Burton
Posted:
Politicians have found a new
way to lower future retirement benefits for employees covered by public pension
funds — divestment. Divestment laws, proposed and enacted in various state
legislatures around the country, require public pension funds to divest,
meaning sell, all stock holdings in companies that do business in particular
countries. The current list of countries includes
The thinking is that, in each
of these countries, there are bad people doing bad things. On this, we can
probably all agree. There are definitely some bad people doing some very bad
things in
Now here are the areas of
disagreement.
What difference does it make
whose name is on the stock certificate? How are the bad guys affected by who
owns the stock? It seems likely the new owners could care less that the bad
guys are bad guys. How does that help?
Who really knows for sure which
companies are doing what? A recently released Securities and Exchange
Commission website was laughed out of existence because of its ludicrous
attempt to identify bad actors by looking for country names in SEC filings. In
any event, companies doing business in bad countries might be providing more
benefit to the good people in these countries than to the bad people — who
knows? What about companies that sell cigarettes to the dictators of
The divestment movement, if
completely successful in forcing public pension funds to divest of companies
that the movement doesn’t approve of, will most likely have no effect
whatsoever on events transpiring in Sudan, Iran, North Korea, Syria or anywhere
else. If there is any impact at all, it will probably aid the bad guys at the
expense of the good guys because the ownership of the various companies
involved would shift to investors with a less heightened sense of moral outrage
at the activities in these countries.
But, what is the effect on
our public pension funds?
Well, to begin, a public
pension fund that sells the stock of a company doing business in the targeted
countries will probably end up owning the company anyway. Why? Most public
pension funds have private equity investments and many (a growing many) have
hedge fund investments. Virtually all private equity and hedge fund investments
do not allow investors to impose restrictions on their investment activity.
Unless the public pension fund intends to divest its private equity (the most
lucrative investment activity in the last 20 years for public pension funds)
and hedge funds (the fastest growing investment area for public pension funds),
then you are still going to end up owning the “divested” company anyway. You
will just own it in a different part of your fund. The fund will be poorer
because shifting the company from your left hand to your right hand will
involve transaction costs.
It is instructive that
several of the divestment initiatives expressly exclude private equity funds
from their divestment regime. This means it is OK to own stocks in targeted
countries in your private equity fund but not in your public equity fund. Wow!
That should really scare the bad guys!
So, in all likelihood, divestment
will simply mean moving an asset from one part of your portfolio to another
with no real change of ownership but a reduction in fund assets to pay for the
transition.
But what will be the real and
lasting impact of the divestment movement? Much time and effort will have to be
devoted to figuring out which stocks to sell and which to hold and, of course,
this list has to be constantly updated. Companies do spinoffs
and acquisitions with dizzying frequency. Therefore an entire industry must be
created to analyze what company is doing what in what country. There will be
some new millionaires creating these lists, producing companies to feed the
demand by public pension funds to know which stocks they are permitted to own
(in their public equity portfolios). These new multimillionaires created by
this new research industry will be financed by a combination of higher taxes
for taxpayers funding the additional contributions required to support the
pension funds or, what is more likely, lower pension benefits for the working
folks who are members of the public pension funds so affected.
There are no real winners in
the divestment movement other than the politicians, perhaps, who might discover
that this kind of wrap-yourself-in-the-flag investing will fool some voters.
But, the losers for certain will be the public pension plan beneficiaries, the
taxpayers who fund them and even, quite possibly, the victims of the terrible
things going on in
The divestment movement gives
the false impression that something useful is being accomplished that will
prove helpful to the victims in
Divesting is done at the
peril of those it is intended to help, not to mention the negative
ramifications for public pension plan stakeholders, the potential interference
with federal international relations initiatives and the weakening of the
future influence of the
For every complex problem
there is a simple, easy to understand, wrong answer — divesting is a prime
example.
Edwin
T. Burton is a trustee of the Virginia Retirement System, Richmond, and a
professor of economics at the University of Virginia,