STUMP » Articles » Divestment and Activist Investing Follies: Hey, No Fair! Climate Change, Guns, Knives, and Consequences » 11 April 2018, 22:22

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Divestment and Activist Investing Follies: Hey, No Fair! Climate Change, Guns, Knives, and Consequences  


11 April 2018, 22:22

I’ve decided to switch up my approach this time. I generally put in a bunch of news items and then do short comments, and then wrap up with my high-level commentary.

This time I’m starting with my high-level commentary, and then if you want to glory in all the supporting details, read on below. I think I will make this a habit.

Ultimately, I do not mind divestment drives or shareholder activism. These are choices, and even if I think they are foolish choices, people are allowed to be foolish (also: I could be the fool in various situations).

That said. Choices need to be tied to the ultimate consequences. (cf: Taleb’s book: Skin in the Game)

This is what I object to: the people making these choices never suffering hurt when they’re the fools.

Let’s consider public pensions: whether the politicians, public employee unions, or the money managers they hire — deciding to play the divestment/activism game where it has everything to hefting political weight, and nothing to do with really protecting the investment…. and then expecting the taxpayers to pony up (and/or bondholders to swallow defaults) to make up for the lost investment earnings.

The whole selling point of defined benefit pensions is that the pensioners are supposed to be protected from investment risk, which 401(k) and IRA holders are subjected to.

So which is it: if you’re to be protected from investment risk, then you do not get a say in the investments.

If you want a say in the investments, you’re saying you’re willing to take on the investment risk.

This is the point of the concept of fiduciary duty: it’s recognized that those acting as fiduciaries almost never have skin in the game. So you’re trying to make sure agents know consequences will be visited on them if they decide to play games with other people’s property. It’s not perfect, but it’s intended to at least make people subject to lawsuits when self-aggrandizement is at play.

Ideally, there would be some risk-sharing between the public employees in their pensions, to align them with the interests of taxpayers and bondholders…. not sure that there’s a good way of fixing the alignment of politicians’ interest, but that’s more of a long-term philosophical problem for me to think about.

Anyway: choices should have consequences that redound on those making the choices.


The following news stories tie into divestment/activism items that don’t always involve public pensions… but they primarily involve public pensions.

The two big current divestment pushes involve climate change (aka oil) and guns (aka PEW PEW). The shareholder activism surrounds these, but is also picking up items re: customer privacy in companies like facebook.

Again, divestment and shareholder activism are not always a negative thing – if they’re based in something deepr than EW ICKY.



In prior posts, I mentioned a lawsuit by some California coastal cities against various oil companies … and it’s not exactly going the way the plaintiffs planned.

via Legal Insurrection: Strikeout: Court-requested tutorial did not go as planned for Team Climate Change

Three strikes: Expert witnesses challenged by judge over graph, climate history, and claims of a “smoking gun”.

Last week I noted that U.S. District Judge William Alsup of the Northern District of California is overseeing the lawsuit that the cities of Oakland and San Francisco filed last fall against six fossil fuel giants. The two cities are seeking to hold the oil companies liable for the cost of infrastructure upgrades and remediation expected as they deal with effects of rising sea levels.

Alsup requested both sides present information related to the science of climate change, in the form of a tutorial, so he could become verse on the science and terminology. My first report on the tutorial featured the sound analysis offered by Team Big Oil.

Here is that older post on Team Big Oil: Climate change lawsuit features tutorials and role reversal. I am not going to address the soundness of the science shown there.

Back to the current post:

Alsup also castigated the plaintiff’s claims of a “smoking gun” document that would prove the conspiracy claims true. The plaintiffs pointed to a report that the companies had in their possession as proof they knew about the nefarious effects of climate change in 1995.

The “smoking gun” document in question proved to be a regurgitated summary of a 1995 report by the United Nations Intergovernmental Panel on Climate Change. At the time of its release, the report was subject to significant scrutiny by many in the scientific community because it was riddled with huge uncertainties.

“There was a conspiratorial document within the defendants about how they knew good and well that global warming was right around the corner,” Alsup said. “Well, it turned out it wasn’t quite that. What it was, was a slide show that somebody had gone to the IPCC and was reporting on what the IPCC had reported, and that was it. Nothing more.”

Hmmm, mischaracterizing documents…. that’s not gaining any points from the judge.

There’s some more fun stuff in there, like, what caused the most recent Ice Age?


So, BofA Will Stop Lending to Makers of Assault-Style Guns

As opposed to peace-loving guns, I suppose. (Seriously, what are assault-style guns?)

Bank of America Corp. plans to stop lending to companies that make assault-style guns used for non-military purposes.

“It’s our intention not to finance these military-style firearms for civilian use,” Anne Finucane, a vice chairman at Bank of America, said Tuesday in a Bloomberg Television interview. The firm has had “intense conversations over the last few months” with those kinds of gun manufacturers to tell them it won’t finance their operations in the future, she said.

Citigroup Inc., the nation’s fourth-largest bank, said in March it plans to prohibit retail chains that are its customers from offering bump stocks or selling guns to anyone who hasn’t passed a background check or is younger than 21. Investors including BlackRock Inc. and State Street Corp. are engaging with companies in their portfolios over firearms policies.

“We were heartened to see Bank of America join the list of companies stepping up to keep America safe,” said Avery Gardiner, co-president of the Brady Campaign to Prevent Gun Violence, one of the most prominent gun control groups. “Why would anyone want to help finance assault weapons that are regularly used in mass shootings?”

Hmmm, so I guess they mean handguns, too, since most mass shootings are using those, not rifles or shotguns.

And do they consider the cops part of the civilian use weaponry? They’re not military, you know.

Anyway, Bank of America doesn’t have to do business with this category of businesses, just as they could also decide not to do business with porn producers, or alcohol distributors, or pharmaceutical companies who produce opiods or whatever. But their shareholders may object to business being whittled down via some kind of morality clause.

A different bank decided to go a different way – Wells Fargo Resists Union Threats Aimed at Getting It to Drop Gun Manufacturer Clients:

The American Federation of Teachers is demanding that Wells Fargo drop its relationship with gun manufacturers (and with the NRA). To its credit, Wells Fargo isn’t budging. As the response from the CEO said (alongside the usual, and understandable, we-hear-you-and-we-want-you-to-be-our-friends business-speak),

“As I have publicly stated, I do not believe that the American public wants banks to decide which legal products consumers can and cannot buy.”

I’m not a Wells Fargo customer, but I’m considering switching from U.S. Bank (for practical reasons, not political ones), and this raised Wells Fargo’s standing in my mind. Indeed, I even called their customer service line to pass along my compliments.

The attempted demonization of the NRA and gun manufacturers also helps support, I think, many gun owners’ worry that many gun control proponents’ endgame isn’t just “reasonable regulation” but outright bans.

Ya think?

I’ve been a Wells Fargo customer for years — they had bought the bank I used, Wachovia, which had been a North Carolina bank that went national. I’ve not had issues with Wells Fargo, though I have heard about some of their iffy behavior regarding opening accounts without permission…not that Bank of America can preen for great behavior on its own part. I’ve dealt with Bank of America once, and I would rather not do that again. None of that has to do with guns, fwiw.

But if I were a direct shareholder of these banks, I’d be asking exactly how they decide which legal businesses are considered beyond the pale….because it seems that whatever reason they apply to rifles could be applied to a lot of products and services.

Such as purveyors of knives. [WARNING: TANGENT-ISH]


You may have heard about this crap.

Guns have been banned in England for a while. So while they don’t have mass shooting problems… they have mass stabbing problems.

So now it’s being argued that this:

Looks like an extremely dangerous arsenal that nobody needs, especially no children need.

Well these knives were sent to my daughters for use in cooking (though one of the knives is a utility knife, and we’ve used that for opening up containers, and some other stuff). The Cuisinart knives are a really handy set, and my kids and I have gotten a lot of use out of them… and haven’t cut themselves or anybody else with the knives (yet – accidents can happen..Stu got a splinter from a bamboo plate holder today).

I regularly have small knives in my bags… for cutting stuff. I have to cut stuff all the time. I even have a big jar full of small knives… and drawers full of scissors, and multiple screwdrivers, boxcutters, etc. I used to think that one of the defining characteristics of humans versus other animals is that we’re tool users… and English government is saying “No, no, have a banana – no point-ed sticks for you”


Hmm, I guess banana peels can be effective.

So let’s say you have the guns banned. Yay. Now, the problem becomes knives…. is Bank of America and Citigroup going to stop doing business with all the cooking stores?

And it wasn’t just knives – it’s also screwdrivers. Obviously, one can stab people with screwdrivers. One can also stab people with knitting needles. Are they going to ban that next? Let’s get the knitting grannies!

So companies, keep this in mind: it’s one thing to say you’ll not do business with a criminal organization… it’s another to go down the path where you decide you’re going to try to evaluate the morals of the legal/political popularity of the entity you’re doing business with… because that’s a great way to take a national brand and bring it down to niche.

Yeah, your appeal is more selective… and your revenue could also show that.


One of Harvard’s board members has stuck an oar in:

Harvard board member: Time for Harvard to ‘stop funding climate change’

University needs to help ‘prevent the end of life as we know it’

A departing member of the Harvard Board of Overseers has called for the university to “stop funding climate change,” arguing that “the riskiest thing is to do nothing” and claiming that the university’s addressing climate change “could give leadership insights into other pressing issues like mass incarceration, toxins into our environment, and the exploitation of labor.”

“I am not going public with this call to action lightly or to be impolite,” Kathryn Taylor writes in The Harvard Crimson, stating that she has “tried everything else—diplomatically in the background with other Overseers and outspokenly but behind closed doors in plenary.”

“But this is too important for me to remain silent,” she adds.

Taylor writes that the university needs to “adopt ethical investment principles.”

“At a minimum, Harvard should direct the Harvard Management Company to divest from fossils fuels to prevent the end of life as we know it through cascading climate-driven disasters. This single act would not only take steps to address the existential crisis of our time, but it would allow the University to lead its peers, as few, if any, American universities thus far have taken this important moral stance.”

Sounds like the Harvard Board said “Naaaah, we’d like our endowment to actually make some money.” They’re not necessarily stupid, you know. Even if they’re the U.S. version of upperclass twits (nb: I am also an upperclass twit “How =dare= Placido Domingo play Rigoletto?!”)

More to the point, one of the biggest things Harvard could do to help reduce their contribution to fossil fuel use is to move down to somewhere like Alabama. It takes a lot of fuel to keep people warm enough in the winter in Boston. The board should decamp to the Bahamas, I think, just to try it out as an experiment.


The following came via links sent to me by a reader, and I’m not excerpting the whole thing, but I will be responding to a lot of it: The Working Class Has a $3 Trillion Weapon. Are They Willing to Use It?

It feels like America’s working class has been losing the class war for as long as we can remember. But it has one wildly powerful, often forgotten tool: trillions of dollars sitting in pension funds. Might this enormous pool of capital be labor’s greatest weapon in its fight against the power of capital itself?

The awesome political potential of this money is the topic of “The Rise of the Working-Class Shareholder,” a new book by David Webber, a law professor at Boston University. Even though organized labor has been getting its ass kicked politically for decades now, its vast pension funds can exercise an incredible amount of power—though their ability to do so is under continuous assault.

Webber answered our questions about labor’s capital, and how it can serve all of us.

Splinter: Is it accurate to say that the pension funds of labor organizations are the single most powerful economic force aligned with the interests of the working class? Should we be encouraged or discouraged by the answer?

Webber: I think that’s probably right. There are different ways of assessing the total value of these pension funds. They run from $3-$6 trillion. One estimate by the Federal Reserve puts the number around $5.6 trillion. These funds own roughly 10-15% of the stock market, and somewhere closer to one-third to one-half of private equity. They are certainly the most powerful working class institutions that operate directly inside the markets. No other financial institutions come close either in terms of size or alignment of interests. Their power is loaded with contradictions and ironies. They’ve been described as “labor’s capital”—I think Teresa Ghilarducci first used the term—and it’s certainly odd that, of all the institutions created by labor in the 19th and 20th centuries, labor’s capital may have the best chance of surviving into the 21st.

Ha, Teresa Ghilarducci. Mmmhmm.

I think the strongest power on Earth today is the capital markets. During the financial crisis ten years ago, they broke Greece, pushed Italy and Spain to the edge, forced massive bailouts. I remember watching the Republicans reject the bailouts, and then after the stock market went into free fall, they came right back to Congress and passed it. $700 billion from a Republican House of Representatives. And then the car manufacturers had to beg to for a $17 billion bailout, and their CEOs were ritually humiliated on Capitol Hill before they could get it. The power differential was striking. Given the power of markets, I think unions and workers absolutely must have capital strategies departments, staffs, employees.

He’s acting like “power of the capital markets” broke Greece, as opposed to Greece being a spendthrift. Poor little Greece, how should it have known not to have issued all those bonds? People were just throwing money at it! How could it say no?!

So you can see how credible I find this guy.

I agree that the bailouts of 2008 were disgraceful. And the unions should not be bitching too much about one bailout at least — it was essentially a UAW bailout when GM was bailed out.

Q: In your book you discuss various ways in which certain pension fund investments might actually be harming the working people whose money is being managed. What are some of the most blatant or harmful such investments, that working people should look out for in their own pension funds?

A: I think the most harmful investments have been in privatization. In the book, I use an example of a public school custodians union whose pension fund was invested in Aramark. Then Aramark shows up in town and underbids the union for the schools contract. These workers had been making $20 an hour. They were offered their jobs back for $8.50. And this transaction had been financed with their own retirement funds.

So let’s think this through.

The pension funds can’t invest in the public schools – and if they could, they’d probably get a shitty return, as paying janitors $20/hour doesn’t necessarily lead to profits (whatever a public school profit would be.)

But the pension funds can invest in companies like Aramark (and really – is there something that says governments much have all their services provided by government employees? I rather imagine they buy paper from a paper company, and don’t run the paper factory themselves).

But here’s the kicker: sure, the janitors are part of the public employee union. Important aspect: part of the union. I have seen various public employee unions, but they seem to fall into a few major categories: police, fire fighters, teachers, and everybody else. The judges and politicians generally aren’t in unions, but they can take care of themselves.

So the janitors go into the “everybody else” pile. This includes the various bureaucrats sitting staring at computer screens all day, some people who actually have to go outside once in a while, and many more. So if the janitors are about 5% (total guessing) of the full union – the full union may have an interest in getting that damn return, which Aramark gets by actually winning contracts to provide services at a reasonable cost.

But let’s step back even further: there are retirees. They can’t strike (they’re retired), they can’t negotiate a contract (what’s there to negotiate?) — they’re there collecting pension checks and hoping that these checks don’t get stopped due to money running out of the pension fund.

They may not have any problem with outsourcing overpaid janitorial services.

(I’ve got an even better suggestion, because I had to do this in my last two years of public high school: make the kids do some of the school clean up… after all, they produce most of the mess. And it would be very educational for many of them to learn how to clean a toiler.)

Back to that Q&A:

A: The New York Times recently did a series on private equity taking over the public square. But what is truly shocking is how much of that is actually being financed by the very workers whose jobs are being replaced. This is the main example I use in the book. I first heard about such investments at a pension trustees meeting, when some worker trustees started to complain that their funds had been forced into these privatizing investments. There were firefighter funds invested in private firefighting companies, teachers’ funds in private school servicing companies, etc.

Fortunately, the more alert funds are on top of this issue. Some have adopted policies saying that they simply do not invest in privatization schemes. Others have developed policies that minimize the effect on public workers. More recently, the New York City pension funds adopted a responsible contractor policy for infrastructure investments, meaning that they will invest in such projects if the private equity fund pays fair wages and benefits to workers. Other funds invest only on projects that hire union labor. That’s a positive deployment of worker shareholder power.

Sure. And how are your retirement funds doing? Are you telling the valuation actuaries you should use a much lower expected return on assets as a result?

And what do the retirees think of this?

Q: Many people argue that retirement funds should be invested in a way that earns the highest return, and no outside political concerns should be taken into consideration. What’s wrong with this argument?

A: Returns are certainly crucial. After all, these funds are paying out retirement benefits to workers over a thirty-to-forty year time horizon. But returns are not the only source of revenues for these retirement funds. So are contributions from employers and employees. The privatization example I just used illustrates the problem. What if you make great returns by killing your own contributors’ jobs? That can undermine the funds themselves, employee and employer contributions to them, and the workers.

Ah, but the contributions should be paying for that year’s accrued benefit, right?

This is more indicative of the “pay more later” strategy being an awful way to fund the pensions. It has not worked well for either public pensions or multiemployer pensions. It doesn’t matter if the positions are privatized away or the janitors are replaced with Roombas or Braavas. One should be paying for the benefits as they accrue, and not assume that you’ve got 30 years + to pay down the shortfall you’ve accumulated.

I’ll also note that, more generally, it is not easy to sort out political from investment motives. Whenever someone wants to deride an investment, they call it political. For years, funds like New York City and others filed shareholder proposals at companies on global warming issues. Those were regularly derided as political. But last year, two of those proposals were adopted by energy companies with the backing of prominent mainstream investors like Blackrock and Vanguard. What was once viewed as political is now seen as an investment concern. And there is, of course, a tradition of making political concerns central when they are viewed as important enough, going back to the divestment movement over South African Apartheid in the 1980s.

Okay, and what have the results been? The Blackrock and Vanguard moves are totally political, as far as I can tell. The only reason there’s an investment concern is they’re concerned the disfavored companies will be regulated to death…and that potential clients want to see them doing this.

Q: Why are labor pension funds so uniquely positioned to promote better corporate governance policies at big companies? Why don’t all big investment firms want to promote such democratic policies?

A: One of the main reasons why these big public pension funds, these worker funds, have been so well-positioned to promote better corporate governance is because they lack many of the conflicts that other funds have.

You have got to be kidding me.

For better or worse, companies have often been hostile to corporate governance reforms pushed on them by “outsiders”—meaning their own shareholders. Corporate managerial culture is often: we know best how to run ourselves, thanks very much. Given the hostile posture, many funds like mutual funds prefer to stay quiet about these issues, to operate behind the scenes if, at all, or at most to support initiatives brought by others. Remember, mutual funds make a lot of money from managing the 401(k) plans of big companies. They don’t want to undermine their own business prospects by aggressively challenging the CEO’s pay, for example.

…and union funds don’t use asset managers? What?

FWIW, I started out at TIAA-CREF, and they had always been strong on corporate governance. They pushed on say-on-pay as an institutional investor… and they were backing Defined Contribution plans – that is, their customers were exposed to investment risk and would be unhappy with poor performers.

Some of the biggest activist shareholder/investors are similar organizations and people who are providing asset management for others. And yes, sometimes public pensions or MEPs.

It’s rarely the employees or retirees themselves who are the ones at the shareholder meetings putting these things out there, but agents (working in the biz) representing them.

Think on that.

Maybe the most blatant example of the difference between worker funds and everyone else is in litigation. Roughly 40% of securities fraud class actions and deal class actions are brought by public pension funds and labor union funds. Other investors tend not to take action in the face of fraud, in part for the reasons just described.

That may indicate something else entirely, but maybe he’s correct.

I’m thinking that public pension funds think they can push the cost of litigation on taxpayers if they lose their cases, and so don’t have a cost/benefit tradeoff to consider; mutual funds know that they are the ones who will get soaked with litigation costs. (I cannot speak on the MEP situation, but it can be they go after companies where their own union members are employees — there’s nothing angelic about any of the people involved… and nothing particularly demonic, either).

All that said, the guy’s book is of reasonable cost, and it’s only 352 pages (who know how many of those pages are index, footnotes, etc.) so I’m thinking of getting a copy and seeing what he has to say.

He may have proof with respect to the litigation, and some other governance stuff. But it’s not clear to me that the various union pensions – whether public or MEPs – are not stuffed full of their own conflicts of interest. I wonder what he has to say about Calpers and its governance. Because that’s a lovely ball of conflicts in many ways.

You can’t get away from the principal-agent problem in any of these, whether it’s union-driven or otherwise. It always comes down to a handful of people representing the interests of many other people.


Here’s the leftover stuff that I’m not interested in commenting on, but I am interesting on providing links for:

It might be amusing to ask Calstrs about its own governance.

I haven’t even gotten on the BDS movement (that is: boycott, divestment, and sanctions) that is all about anti-Israel. BDS is so obviously about politics, and not about fiduciary duty, that those pursuing that strategy/goal/whatever don’t even try to hide it, so it’s mainly been trying to find a foothold in endowments of various sorts (where there is not necessarily a well-defined liability to fund) and not so much in pensions, where they know they could be in deep doo-doo for pursuing something so obviously political.

The guns campaign is falling into that same area as BDS, and it does seem it’s going well in some places….

…but it does make one wonder about pension funds for cops, and what they think about such divestment campaigns going after the companies making and selling the guns they use as part of their jobs.

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