Muzzling Money Managers
Should trustees engage in blackball tactics?
A unionist trustee on the nation's largest public pension fund board has reportedly raised the specter of blackballing money managers. The trustee was concerned about managers who dare to suggest that unsustainable pension plans should be replaced by other alternatives, such as defined contribution or hybrid plans. He suggested that Wall Street firms seeking to invest for CaLPERS disclose if they've supported groups critical of government pensions.
The statement may have been a well-intended defense of the value of public pension plans, but it was a wrong-headed violation of fiduciary principles. Pension attorneys, board chairs and administrators should nip this kind of thinking in the bud before McCarthyite witch-hunts of dissident money managers or pension-reform advocates becomes a pattern in the public sector.
Pension trustees are obligated by fiduciary principles to put the interests of the trust and plan beneficiaries foremost. This is called the Duty of Loyalty. Trustees are also obligated to exercise the care they would undertake in the management of their own assets and those of any other third party. This is called the Duty of Care. Finally, they are obligated in many states by the "prudent person" rule which specifically requires investments be made with prudence and care. None of these duties carries a trustee into the political beliefs and actions of a money manager. That's over the line.
This does not mean that pension funds are obligated to support the political activities of money managers who avow to destroy them. If somebody in the investment industry is so tone-deaf as to advocate the complete abolition of public pension funds, it would be reasonable for a pension trustee to question whether the payment of fees to such a money manager is consistent with the best interests of the trust. In fact, such self-destructive behavior would arguably counter the genuine interests of beneficiaries. However, that is an extreme position that few if any professional money managers or their employees espouse.
Nor should the fiduciary obligations of trustees extend to public employee unions, which have every right to express their labor-monopoly views. The unions should enjoy the same rights of free speech that money managers and their employees can exercise. Unions have every right to publicize the funding activities of pension-reform supporters during an election, for example, and if that embarrasses a money manager, it's fair game. But let's keep this stuff out of the pension boardroom when making investment decisions that should be based on the merits of performance and not ideology. Otherwise it's a slippery slope when politics replaces analysis and investment discipline.
There is a legitimate role for investment professionals and firms in the industry to advocate alternatives to public pension funds, such as defined contribution plans and hybrid plans that mix both. My previous column on "hybrid vigor" in the public pension world is an example of how a commentator in this industry can constructively suggest alternative plan structures that would enhance the long-term sustainability of public retirement benefits. In fact, there is every reason to believe that some of the investment industry's professionals might actually have insights on how to build a better mousetrap. Pension reform is not abolition. Just because a union trustee wants to preserve the status quo in plan design because it benefits those who elected that trustee, there is no justification to meddle with the policy views of money managers in a reasoned public discourse.
Public pension boards must be mindful of their monopoly powers and think twice about whether they should engage in blackball tactics that would clearly violate antitrust laws if they were private companies — especially those meddling in corporate governance in the private sector. Failure to discipline their fiduciary decision-making will invite pension reform measures that would require a majority of independent trustees and reaffirmation of the highest fiduciary standards under law for pension fund trustees. My prior column on pension governance provided food for thought along those lines.