Asian investors were in shock earlier this year when the California Public Employees' Retirement System, or Calpers, announced plans to withdraw its investments from Malaysia, Thailand, Indonesia and the Philippines. While it subsequently reversed its decision on the Philippines, it has reconfirmed its intention to withdraw from the other countries.
Calpers is not just the largest pension fund in the world (it has assets of $149 billion), but one with a reputation as a leader in corporate governance and in the corporate social-responsibility movement. While Calpers' investment in Thailand, Malaysia and Indonesia only amounts to $219 million, the concern has been that other investors would follow suit. Well, relax. Commercial investors were never going to follow Calpers' lead, as it was a clear route to losing money. And now, its reputation as an investor and leader in corporate governance is in free fall.
However, its decision, particularly in regard to Malaysia, is instructive of the activist role funds like Calpers have taken on. Calpers' decision was based on commissioned research that not only concluded that these Asian countries were bad risks, but that Argentina was the most promising of the emerging markets. Since this research was completed in December 2001, the Thai and Indonesian markets have done well and the Malaysian market has held steady, while the Argentine market has collapsed (down 66% in dollar terms as of mid-July). Moreover, these trends were well-advanced and known in February when Calpers made its decision to divest.
Why would any fund pursue such a strategy? The answer, in a word, is politics. Calpers is fundamentally a political organisation. It is the monopoly provider of pension services to California's state public servants. Its board is composed overwhelmingly of political types: elected officials and political appointees. And it has close union links.
A political orientation naturally leads to activism. But for a long time Calpers restricted its activism to improving standards of corporate governance, not only in companies it was invested in but in the corporate sector as a whole. However, from 1998 on Calpers broadened its activism to include non-corporate aims; it jumped into social activism. Since then, it has joined shareholder resolutions promoting higher spending on alternative energy, reductions in greenhouse gases, free AIDS drugs and country boycotts. Calpers has also coordinated its corporate-governance resolutions with union campaigns.
Calpers crossed the rubicon by divesting from profitable investments. In 2000, at the insistence of Phil Angelides, the state's treasurer and Calpers trustee, it withdrew its investments from tobacco firms. This decision was made despite warnings from consultants and staff that it would cost at least $30 million in transaction costs. From the time of the vote to the end of May this year, tobacco stocks outperformed the S&P 500 Index by 90%. Calpers is now considering another demand from Mr. Angelides to divest from companies that operate in "offshore tax havens". The rationale is that these firms "are avoiding taxes" and are "more difficult to sue".
Calpers' decision to divest from Asia followed similar logic. In early 2000, Mr. Angelides, with union support, announced that Calpers should take into consideration labour and other human-rights standards in its emerging-nation investments. Other members of the Calpers board and staff initially strongly disagreed. According to the San Francisco Chronicle: "Opponents ... warn that if fund managers start mixing social activism with their investment decisions, the funds will lose money". At the end, the board gave in to Mr. Angelides' demands and altered its selection methodology.
Previously, Calpers had employed Wilshire and Associates to develop a selection process that incorporated the use of a range of commercially focused indexes, gathered from reputable published sources. These indexes measured market volatility, regulation and legal system, investment restrictions, settlement proficiency, transaction growth and growth of technology. The previous methodology also included indexes on the level of economic development and political stability.
In 2001 it eliminated the growth of technology index, augmented the political stability index and added two new indexes: transparency and labour standards. The transparency index measures monetary and fiscal policy, accounting standards and stock-market listing. These are commercially relevant issues and the measures are compiled by reputable independent sources. The political-stability index measures civil liberties, judicial independence and political risk. A strong argument can be made on commercial grounds for their inclusion and they were also derived from reputable sources.
Politicisation came with the measure of labour standards. Calpers hired the consultancy arm of an arguably union-friendly non-governmental organisation, Verite, to compile the measure. Verite adopted the standards promoted by the U.S. union movement. As for its methodology, it made assessments largely based on interviews with labour activists and research on newspaper articles (which in turn were largely generated by these activists).
Thailand was excluded from the Calpers list largely on market as well as transparency factors. Indonesia was excluded on the basis of a number of factors. Malaysia, however, was excluded in the end based on a labour-standard assessment. As in the past, Malaysia ranked high on market-related factors and would have remained on Calpers' list except for its low ranking on labour standards (the fifth lowest of 27 countries). Malaysia was also ranked poorly on civil liberties and some transparency issues, but it was the low ranking on labour standards that pushed it off the list.
In reality, the performance of the Malaysian labour market has been excellent, with high job growth, low unemployment and a doubling of real wages over the last decade. Moreover, it has absorbed two million migrant workers from surroundings countries whose labour standards the Calpers study surprisingly rates more highly. And in contrast to the Calpers study, Malaysia's labour market was this year rated by the World Competitive Index as number two among emerging nations in terms of attractiveness to investors, and the seventh across the world.
Malaysia has long been on the bad books of the U.S. union movement. It has been the leading critic of attempts to include labour standards in trade and investment deals and of the labour standards promoted by the union movement. And it has been highly successful in attracting investment away from the U.S.
It is important that Asian policy makers and investors see through the corporate social responsibility rhetoric of Calpers and understand the political agenda that drives this fund and others like it, for they are growing in number and influence.
No comments:
Post a Comment