Who Rules America?  By G. William Domhoff, University of California at Santa Cruz

Power in America

Wall Street's Pension Fund Rip-Off

From Pension Fund "Socialism" to "Stockholder Value" to Free Gambling Money for Private Equity Managers and Other "Money Managers"

by G. William Domhoff


First it was "Pension fund socialism" in the 1970s, in which the people owned and shaped the corporations. Next it was "improving shareholder value" in the 1980s by forcing boards of directors to take their fiduciary values more seriously and thereby help ordinary stockholders and institutional investors, such as public pension funds. By the 1990s, it was "investor capitalism" driven by pension fund activists who were going to get rid of underperforming top executives. The beat went on in the 2010s -- despite the lack of any successes by the activists.

There was a new burst of activity, hope, and media coverage in April 2017, when a new generation of pension fund activists tried to oust some or all of the directors of Wells Fargo, a bank whose series of misdeeds gave new meaning to the idea of "white-collar crime." But when the votes were counted, not a single director was opposed by a majority. The big private investors had quietly voted for their many corporate counterparts on the board.

The outcome of the Wells Fargo vote is consistent with the fate of all of the large claims that have been made for the potential importance of public pension funds, working in tandem with union-controlled pension funds, in shaping the decision-making of corporate boards. This emphasis on "shareholder value" led to common cause with liberal elected officials and union leaders, but the movement as a whole has had no lasting successes, just temporary and symbolic ones, as demonstrated by the rapacious and often illegal actions by a good number of corporate boards between 1998 and the present, despite decades of effort by those who thought they could use public pension funds as a way to make corporations better for employees.

This document examines these claims and casts a cold eye on them by tracing the history of the "institutional investors' movement" since the 1980s. It suggests that there always has been far less to this movement than the media attention it receives. At the outset, it was an effort by moderate Republicans and centrists, speaking in the name of stockholders in criticizing allegedly self-serving corporate executives, who supposedly do not look out for stockholder interests in a vigorous enough fashion.

Not only did the movement fail, but many of the public pension funds themselves became money pots for the biggest risk-takers on Wall Street, who carried out hostile corporate takeovers and corporate buy-outs in the 1980s with their help, then bundled mortgages -- including subprime mortgages -- into new kinds of "securities" in the late 1990s and early 2000s, which they sold to naive pension fund managers caught up in the excitement of the housing bubble. Indeed, several public pension funds ended up among the many financial organizations that received government bailouts via the billions of dollars that the Department of Treasury gave to AIG (American International Group, an insurance company) in early 2009.

At about the same time, an April 2010 study for the New York Times, discussed more fully in the next section, showed that "private equity funds" (e.g., hedge funds, venture capital funds, real estate investment trusts) made tens of billions of dollars between 2000 and 2010 by (1) charging public pension funds a "management fee" of 2% on every dollar they managed; and (2) taking 20% of the profits they made through investing the pension funds' money. The 10 largest public pension funds alone paid $17 billion to private equity firms in that time period (Anderson, 2010).

To top it all off, the biggest financiers on Wall Street tried to make money by working insider deals to invest some of the funds held by the same federal government agency -- the Pension Fund Guaranty Corporation -- that manages $50 billion in retirement funds for the unlucky souls who worked for corporations that went bankrupt. They grabbed this business by cultivating relationships with Charles E. F. Millard, the former Wall Street investment banker that the Bush Administration had appointed to head the fund. You can read the story, and excerpts from some of the very revealing e-mails, on the New York Times' Web site. (In July of 2009, under scrutiny from Congress and others, the PFGC revoked the sweetheart deals with Goldman Sachs, BlackRock, and JPMorgan Chase.)

(There are also plenty of scams being uncovered at the state level that are a total embarrassment to those who once claimed that pension funds could have any influence on corporations or be a force for the general good. Instead, they became another source of money for Wall Street to invest in risky deals, and also a way for politicians to help out businesses in exchange for campaign donations. And of course, they lost some of the people's money in the process, which has been the story of Wall Street for well over 100 years: use other people's money to pay for the riskiest gambles. This is an unfolding story, so we add new links to this document from time to time. For example, an article in the New York Times discusses the scandal surrounding the state of New York's pension fund, where one of the scammers did plead guilty.)

Then, just at 2010 ended, one of the most respected Wall Street financiers of the past 25 years, Steven Rattner -- a one-time New York Times reporter who went to work for a fabled investment firm, Lazard Freres, and then opened his own firm, Quadrangle -- sort of and indirectly admitted guilt to bribing a pension fund official via a kickback scheme. He did so by reaching an agreement with the attorney general of New York to pay a $10 million fine and accept a five-year ban on his involvement with any work involving state pension funds. Earlier, he had reached an agreement with the Securities and Exchange Commission to pay a $6.2 million fine and agree to a two-year ban on working in certain Wall Street businesses for the same alleged kickback scheme.

But, since Rattner did not have to admit to any wrongdoing, he can still say his record is without blemish. (He can say he paid the unfair fines and accepted the bans because the government is so powerful.) However, his net worth was down to the $188 to $608 million range, according to a 2009 filing with the Securities and Exchange Commission, and his chances of becoming Secretary of the Treasury, a goal made plausible by his role as a major Democratic fundraiser on Wall Street, were probably ended -- at least for the next few years. However, Obama did appoint him to lead the restructuring bailout of the auto industry in 2009 as a counselor to the Treasury secretary. By 2011, he was a regular contributor to the New York Times op-ed pages on the topics of economics and finance, pointing out the flaws in Republican economic policies.

Something even bigger popped up in March 2013, when the former chief executive of the California Public Employees Retirement System (CalPERS) was indicted for stealing $14 million from one of the private firms (Apollo Global Management) that invested money for CalPERS. Apollo had been paying one of the CalPERS chief's buddies to steer at least $48 million in CalPERS business its way, which gave Apollo the opportunity to make hundreds of millions from investing some of the pension fund's billions. But that was apparently not enough for the chief and his partner in crime, so they perpetrated the $14 million fraud. When the chief exec left CalPERS in 2008, he too became a "placement officer" for investment firms, but the law finally caught up with him five years later.

The New York Times called the March 2013 indictment the latest in "a nationwide pay-to-play scandal that erupted several years ago. Regulators from numerous states, including California and New Mexico, have cracked down on widespread influence peddling in how their state pension funds were invested."

As impotent as the pension fund movement was during the bubble years and amidst the wreckage of the post-bubble years, as one scam or scandal after another was revealed, it's back in the headlines in early 2017. In April, CalPERS (the pension fund for California state employees), the New York City pension fund, and many other public pension funds announced they were going to challenge some or all of the Wells Fargo directors for not knowing about the crooked schemes the company was up to, such as opening 2 million false new accounts to make it look like their client base was expanding. Most of these directors were top executives at other corporations, along with a former dean of a business school in Nebraska and the head of a consulting firm. As the board gathered for the annual company meeting in the Florida resort town of Ponte Verda, the New York City comptroller asserted that "If there is a serious failure in oversight, directors need to be held accountable." "Board members are elected by shareholders to be our watchdogs," intoned the treasurer of the state of Rhode Island. He thought it was inexcusable to be unaware of widespread fraud within the company they were "directing." But one of the two richest people in the United States, Warren Buffett. who owns 10% of Wells Fargo's stock, along with numerous other wealthy investors and corporate pension funds, thought it was enough that the CEO had been fired, along with 5,300 other employees; in the end, every director received at least 53% of the overall vote, and nothing changed as far as the Board of Directors (Cowley, 2017; Cowley & Crookery, 2017).

This long introduction was meant to give you some quick -- and hopefully provocative -- highlights of the ongoing story about pension funds, which are always in peril for one reason or another. Now it's time to show how all of this relates to the structure and distribution of power in the United States, and what it tells us about the study of power by journalists and social scientists. It's a history that should prepare readers to expect more allegedly "new" twists and turns in the future, which turn out to not be very new after all.

Pension funds and other institutional investors

One of the most persistent claims about corporations in America is that the rich people who benefit from their stock dividends do not control them. The idea is that everybody owns and controls the corporations, even though the corporations seem to dominate the economy to the benefit of a wealthy few. Taking this idea to its extreme, a few analysts have claimed that the accumulations of money owned by everyone through various types of public employee pension funds, union pension funds, mutual funds, and other forms of "institutional investors" might even come to have a significant role in shaping corporate behavior.

Peter Drucker

The idea that pension funds could be used to control corporations first gained visibility through the claim by management guru Peter Drucker (1976, 1993) that workers' legal right to their pensions -- whether through a company or a local or state government -- meant they now owned a significant percentage of corporate stock. It followed for Drucker that this was a form of socialism. As the dramatic first sentence of his 1976 manifesto put it: "If 'socialism' is defined as 'ownership of the means of production by the workers' -- and this is both the orthodox and the only rigorous definition -- then the United States is the first truly 'Socialist' country" (Drucker, 1976, p. 1). Now that workers owned the economy, it was just a matter of asserting control.

But as the most detailed analysis of the role of pension funds points out, "The idea of 'pension fund socialism' is an exercise in political rhetoric rather than reality" (Clark, 2000, p. 43). Employees who contribute to pension funds have a legal right to their pensions, but they rarely have any rights when it comes to voting any stock purchased by the pension fund. As for the pension fund trustees themselves, they have a fiduciary responsibility to invest the money they receive from employees as wisely and prudently as possible, but no legal ownership of any stock they purchase. To exert any influence on corporate boards they have to argue that insisting on "good corporate governance" is part of their fiduciary duty because it makes shares more valuable. This line of reasoning is rejected by corporate leaders and most Republicans.

Drucker's flawed idea led nowhere, but the possibility of public pension funds as active participants in corporate governance arose again in the mid-1980s when partners at the Wall Street investment firm of Kohlberg, Kravis, Roberts convinced the director of the pension fund in the state of Oregon to contribute major sums to their takeover projects. Takeover specialists soon drew other public pension funds into the action. For a while, pension managers made some extra money for their funds, but it was clearly the private financiers who were calling the shots and making the big money.

However, the full extent of the private financiers' lucrative use of public pension funds from the 1980s to the present was never fully grasped by anyone until the New York Times commissioned a special study of the ten largest of these funds in early 2010 (Anderson, 2010). Between 2005 and 2008, eight of the 10 handed 45% or more of their total funds to private equity firms to manage, which is why these financiers could make $17 billion investing workers' future pensions between 2000 and the end of 2009. (Recall that the financiers receive a 2% management fee on the amount of money they manage and also receive 20% of any profits they make.)

The author of the study asks why the pension funds agreed to these huge fees and profits for private equity firms. The answer is not hard to find. First of all, the private financiers claimed that their superior talents would lead to higher returns for the pension funds than they would receive if mere public employees invested the money in the ordinary ways. In fact, they often said they would likely make 20% to 30% returns with the pension fund money.

Second, the partners in private equity funds could influence pension fund officials due to a combination of clout -- they give campaign finance donations to the elected officials who appoint the pension fund managers -- and mystique (if you are rich, you must be smarter than everyone else). But it is unlikely, according to two different academic studies cited in the New York Times article, that they delivered on these promises if their management fees and private profits are factored into the equation. For example, one of these studies concluded that between 1980 and 2003, the private equity funds did 3% less well than Standard & Poor's 500-stock index (a generally accepted financial index) after the equity funds' fees and profits are deducted. In other words, the public pension funds could have done a little better by investing in a standard mix of stocks as of 2003.

As for the more recent years, state and local pension funds lost an average of 27.6% of their holdings between 2007 and 2009 because of the collapse of Wall Street's housing bubble and the near meltdown of the entire financial system -- which was not due to subprime mortgages or derivatives, but to wild speculation encouraged by Wall Street. The exotic financial schemes that would supposedly bring big returns through innovation and efficiency, and provide "resiliency" to the financial system besides, led to major problems for public pension funds -- and for the endowments of universities, foundations, and cultural organizations as well, because they had all turned some of their monies over to private equity funds. Although many smaller hedge funds were hurt by the financial collapse, the larget of them were not, and certainly not in terms of the personal finances of their top owners and managers. They were thriving as of early 2010, as reported in an April 1, 2010 report in the New York Times on the still-huge salaries of the managers at the top hedge funds (Schwartz & Story, 2010).

And just how important were public pension funds to the private equity billionaires over the past three decades? Just look at the numbers: the amount of pension fund money that was invested by private equity firms rose from $200 million in 1980 to $200 billion in 2007 -- a thousand-fold increase. As the New York Times succinctly concludes: "Private equity owes its explosive growth largely to America's pension funds" (Anderson, 2010).

So, that's the material reality -- the incredible profit-making background -- that readers should keep in mind as I recount the brief history (and meager results) of the pension fund movement that was supposed to have great influence over corporations by the late 1990s at the latest. While the pension fund activists were making the headlines that follow, the nation's financial districts, which we can think of collectively as "Wall Street," were making bundles of money.

Robert A. G. Monks

The pension funds' direct involvement with Wall Street was followed by a new theory from an unlikely source: pension funds could spark a movement that would bring in other institutional investors to make corporations and their boards more responsible to stockholders. A wealthy Republican maverick from Maine, Robert A. G. Monks, floated the idea while serving as the pensions administrator in Reagan's Department of Labor in 1984-1985. From this perch he decided to make it government policy that institutional shareholders had a fiduciary duty to behave as owners. He said this would improve "corporate governance" through pressures by ordinary stockholders on boards of directors to deliver better "shareholder value." His proclamation did not have the force of law, and could be easily changed by a new appointee or challenged by Congress, and it was ignored thereafter, but it did give the idea some legitimacy.

Not that Monks thought this idea up all by himself and out of nowhere. The idea of "stockholder value" was "in the air" and all the rage in the early 1980s, thanks to Mike Jensen, a new guru at the Harvard Business School. He argued that the only way that a big, complex corporation can make intelligent decisions is if it focuses on maximizing on a single goal, and that goal should be maximizing shareholder value. His seemingly sensible argument was based on system optimization theory, which drew upon models and was heavy on logic and quantification. His claims provided the perfect rationale for all the increases in top-level executive pay in the 1970s, and for the even greater increases that have come ever since. Higher executive salaries, and especially CEO salaries, are justified when they deliver greater value to their stockholders, which is measured by higher stock market prices. Conveniently enough, many of these high executives, and especially the CEOs, were beneficiaries of these higher stock market values for their companies through a long standing device to enrich executives and provide a tax write-off for the companies as well.

Here I am referring to the legerdemain of conferring "stock options" on executives, who reap huge fortunes if the value of the stock goes up in the next six months to two years, and if the executives "choose" to exercise their options. They take the money from selling "their" stock," pay the company back for what they would have owed in theory six months or two years before, and pocket the difference. This is not exactly rocket science in terms of deep economic thinking; it is scammer-level legerdemain.

The whole story has been told from beginning to end in The Golden Passport, a searing 2017 book by financial journalist Duff McDonald on the influence of the Harvard Business School on the corporate community in the United States. Although Jensen, the progenitor of the theory, retired with two seasonal luxury homes to live in, he was not without his qualms in 2007 about the impact of his work -- even though he still believed in "pay for performance" in terms of stockholder value. "There are all kinds of mistakes, and we can do a lot better," he told a New York Times reporter, and he was looking for ways to put reins on CEOs, perhaps through the discipline he hoped would be provided by private equity funds. He especially disliked big undeserved pay-off packages to fired or retiring executives whose companies had not performed well (Uchitelle, 2017).

Nell Minow

To further his goals, Robert Monks founded Institutional Investors Services shortly after he left government to provide advice to institutional investors about the quality of the leadership at the corporations in which they invested. He was soon joined in this effort by Nell Minow, the daughter of the chair of the Federal Communications Commission during the Kennedy Administration, Newton Minow, which gave the effort a bi-partisan cast. Although public pension funds only held about 5% of the market value of all corporate stock at the time, they were seen as the key starting point because they were projected to grow in size and importance (see Table 1 for the percentage of market value held by various types of stockholders in 1975, 1985, and 1994.)

Table 1: Percentage of Market Value Held by Five Major Categories for All Corporate Stock in the United States
Households (privately held)57%51%48%
Personal Bank Trust Funds11%7%3%
Mutual Funds4%5%12%
Corporate Pension Funds13%20%18%
Public Pension Funds3%5%8%
Total for These Five Categories88%88%89%

Source: Margaret M. Blair, Ownership and Control (Washington, D.C.: The Brookings Institution, 1995), p. 46, Table 2.1

Note: The percentages do not add up to 100 because the holdings of commercial banks, savings and loans, insurance companies, closed-end funds, brokers and dealers, and foreign groups are not included.

Monks then encouraged a liberal Democrat, serving as the elected treasurer of California, and the head of the New Jersey Division of Investment to take advantage of his ruling by holding boards of directors accountable for delivering maximum "shareholder value," meaning the highest possible stock prices. In 1985, Monks, the California treasurer, and the New Jersey investment official together urged the leaders of several public employee and union pension funds to form a Council of Institutional Investors that would help them influence corporate governance through their combined voting power with the stocks they held. The leaders of the New York City Employees Retirement System and the State of Wisconsin Investment Board also supported an activist approach. Monks and Minow then provided the Council with advice through their new company, Institutional Investors Services. (They sold the company in 1996, then went on to found The Corporate Library, a web site and consulting service that provides information on corporate governance, including information on the interlocking directors among corporations. Their information is excellent, and they have colorful graphics, but the information is too expensive for academic researchers to purchase.)

Led by the head of CalPERS, another activist public pension fund, the reformers at the Council of Institutional Investors made several efforts to influence corporate behavior by introducing various shareholder resolutions calling for more responsiveness to stockholders concerns. All of the resolutions were overwhelmingly defeated, although a few corporations did alter their policies to allow confidentiality in voting on stockholder resolutions. In 1989, at a secret meeting with members of the Business Roundtable, which is the main leadership group within the corporate community, the pension fund activists were quietly urged to criticize General Motors for its poor profit performance. Shortly after this attack began, the CEO at General Motors was ousted and new policies were put in place, with the Council of Institutional Investors receiving some of the credit for the change. There followed several other pension fund campaigns against CEO's whose companies were performing poorly, and the movement seemed to be launched (Dobrzynski, 1994).

The small but highly visible successes of these efforts through 1993 suggested the possibility of an "investor capitalism" to one sociologist, Michael Useem, who studies corporate governance at the Wharton School of Business at the University of Pennsylvania. Acknowledging that the largest institutional investors are commercial banks, insurance companies, mutual funds, private investment managers, and corporate pensions that are not prone to challenging corporate boards, he nonetheless claimed that the activists at public pension funds, unions, and church groups affiliated with the Interfaith Center on Corporate Responsibility had come together to "play a role akin to that of political leadership in social movements" (Useem, 1996, p. 54). If they could pull in more cautious institutional investors, the movement might continue to grow.

But other institutional investors never joined the effort. Furthermore, the fledgling challenge to corporate managers all but died after 1993, just as Useem completed his research, because the public pension activists drew criticism from elected officials and some of the people appointed to their boards by the political leaders. The decline of these efforts is mirrored in the career of one of its leaders, Dale Hanson, a long-time state employee in Wisconsin, who was appointed head of CalPERS in California in 1987 to lead the pension fund into shareholder activism. He then took a major role in introducing stockholder resolutions in the late 1980s and was highly visible in the public criticism of the CEO of General Motors mentioned two paragraphs earlier. He was lionized in newspapers and criticized in business magazines.

But public pension fund managers such as Hanson are beholden to a board of directors that is in part appointed by governors and state legislators, so it was not long before Hanson and other activists were facing criticism at home. Since CalPERS was viewed as the leader of the insurgency, business leaders complained directly to the state's newly elected Republican governor in 1990, who reportedly tried to muzzle Hanson (Dobrzynski, 1991). Hanson became especially vulnerable when CalPERS itself did not do well in its investment returns for a year or two. By 1993 he was taking a quieter approach.

In May, 1994, Hanson resigned from CalPERS to become head of American Partners Capital, an investment firm funded by a Republican fundraiser. He also became a member of the board of directors of ICN Pharmaceuticals, a California company with 2,500 employees. Leaders of other public pension funds, faced with similar criticisms from politicians and appointed board members, adopted a slower and quieter approach, simply meeting with individual CEO's or directors to express their concerns, or merely publishing lists of underperforming companies.

The reining in of the public retirement funds was reinforced in 1996 by leadership changes at the Council of Institutional Investors, which by that time included insurance companies, mutual funds, and corporate pension funds as well as public and union pension funds. The majority of members expressed their lack of enthusiasm for activism by electing the director of the pension fund for a large corporation, TRW, as president, despite protests from pension fund activists. (A manufacturing company, TRW was the 125th largest corporation in the country in the mid-1990s.) The vote for the TRW executive was widely interpreted as a rebuff to the leaders of union funds and activists at public employee funds (Dobrzynski, 1996a, 1996b).

The futility of challenges to corporate boards of directors by public pension funds and their allies is also seen in a case in which the New York City Employee Retirement System tried to influence the homophobic employment practices of Cracker Barrel Old Country Stores, a restaurant chain headquartered in Tennessee, after it explicitly stated in policy documents that it would only hire straight people, and then proceeded to fire over a dozen gay employees. The Securities and Exchange Commission rejected the New York City pension fund's proposal for a proxy resolution against the policy each year from 1991 to 1998. At that point it allowed the challenge to be sent out to stockholders, who rejected it by a vote of 26.5 million shares to 5.5 million shares. But even if the challenge had won, the resolution would have been purely advisory. The board could have continued with its anti-gay policies. Ironically, the battle left corporate boards in general with even more control over company employment policies (Davis & Useem, 2002).

Reflecting on their efforts in September 2000, many of the leading pension fund activists expressed disappointment with the cautious approach adopted by most institutional investors. The head of the Council of Institutional Investors said that they had "won the easy battles," such as being able to have nonbinding shareholder proposals sent out along with company proxies, but that they were in danger of ending up merely writing letters asking executives why they ignore the proposals. She noted, "We are seriously thinking about closing shop because we may be wasting money. We are at a turning point. The more (companies) ignore shareholder proposals, the more they realize they can do that, if they can withstand the embarrassment" (Day, 2000, p. 19).

By 2003 the New York Times was calling the movement a "Revolution That Wasn't" based on interviews with its disheartened leaders (Deutsch, 2003). In 2004 the longtime executive director of the Council of Institutional Investors resigned, having grown weary of the conflicts between representatives from corporate and union pension funds, each of which thwarted reform efforts in their own self-serving ways (Walsh, 2004b).

Matters also went from bad to worse about that time for activists at CalPERS, which had revived its efforts to influence corporate boards when Democrats took control of both the governorship and state legislature in California in 2000, only to see those efforts decline again with the election of a Republican governor, Arnold Schwarzenegger, in 2003. The union leader who had recently been elected chair of the pension fund's board was ousted in 2004 because of pressures he brought to bear on several prominent companies for excessive executive pay and inadequate health care benefits, including the Disney Corporation headquartered in Los Angeles. Prior to his removal, the California Business Roundtable, one of the voices of the corporate community in California, had written an open letter to Schwarzenegger complaining that renewed shareholder activism was the result of organized labor trying to settle contract disputes in the boardroom instead of through collective bargaining. When activists claimed that Schwarzenegger was bringing pressure against the board, one of his public relations assistants called the idea "paranoid musings and conspiracy theories" (Walsh, 2004a, C1). As for the California Business Roundtable, it denied that it had any involvement in the firing except for its general letter of criticism. Taking these denials at face value, the point is that the ascension of a Republican to the governorship, with his power to appoint several new members to the CalPERS board and other state pension boards, had changed the political climate considerably for pension fund activists.

Any lingering thought that many public pension funds were not much more than happy hunting grounds for Wall Street sharks came crashing down in 2008-2009 as it became clear that public officials, pension fund managers, and political operatives had been for all intents and purposes bribed by rich financiers who wanted the opportunity to take big risks, and make huge profits, with government employees' money. With 40% of all public pension funds investing some of their money in hedge funds in 2008, a cool $78 billion overall, they were a huge source of investment funds for hedge fund managers (Wayne, 2009b),

In addition to large losses for some pension funds due to the risks taken with their money, there were legal problems and scandals for Wall Street bankers and their political go-betweens as it was discovered that criminal activities were part of the picture. For example, in April, 2009, a hedge fund executive pleaded guilty to securities fraud after admitting that he had been paid a stunning $5 million for helping to make it possible for the politically well connected Carlyle Group (an "equity fund" that invests large sums of money for wealthy people) to invest $500 million of New York state pension funds in an energy investment fund managed jointly by Carlyle and another private equity firm (Hakim, 2009; Wayne, 2009a). There are several other such scandals that could be recounted here, and many more that will have surfaced after this document has been completed. It is like a rerun of what happened with "other people's money" in the first ten years of the twentieth century and then again in the 1920s.

As of 2007, institutional investors owned 76.4% of the stock in the 1,000 largest U.S. corporations, an all-time high, up from 46.6% in 1986 when the institutional investor movement began. The list of institutional investors now includes investment companies, mutual funds, hedge funds, insurance companies, banks, and foundations and endowments as well as pension funds. Strikingly, public pension funds only control 10% of these assets, double the percentage they had in 1985, but not much more than the 8% they held in 1994 (Brancato & Rabimov, 2008). Even if public pension funds had the political independence and will power to try to influence corporate boards, they don't have enough assets to make a push without allies. As for their best allies, the union pension funds, they have been decimated for the most part by corporate downsizing, union-busting strategies, offshoring, and and a general all-out effort to push profits even higher at the expense of the workers that the pension fund activists want to help out when they reach old age.


No one can be 100% sure, but it seems highly unlikely that institutional investors from public employee and union pension funds ever will be able to create a coalition of institutional investors that could do anything more than chide, chastise, or confer with directors and executives from the large corporations in which they invest. They are not a threat to the current power relations in the corporate community. They actually play their largest role when rival private investors vie for their voting support in takeover battles, or when they agree to take part in the profit-making schemes hatched by billionaire financial firms. However, in spite of all their defeats, the Council of Institutional Investors and the Corporate Library still soldier on, hosting meetings concerning "good corporate governance," providing hopeful interviews to newspapers and magazines about the likelihood that things are going to change soon, and selling their advisory services to institutional investors. They are gadflies who do well while doing good.

Looking back at the most vigorous days of the movement, from roughly 1988 to 1993, very little was accomplished. It is now possible for small stockholders to communicate with each other more easily, thanks to a ruling by the Securities and Exchange Commission in 1992, and corporate executives more readily meet with institutional investors. However, no stockholder resolutions relating to corporate governance came close to passing during or after the heyday of the movement. Even the most positive assessments of this activism conclude that it had "negligible" effects on the major issues that ostensibly motivated it, higher earnings and higher share prices (Karpoff, 2006)

By 2002, Useem seemed to agree that the pension fund movement had no power. Writing with a colleague, he noted that shareholder activism is too diffuse to matter (Davis & Useem, 2002). He and his co-author also showed that corporate takeovers have not been a threat to boards since around 1990, and that financial analysts have no clout because they are not objective (they don't dare to criticize the companies their firms are connected with and they rarely suggest that a stock be sold because a company is performing badly). Useem and his colleague are thus left with the possibility that boards and top management can do pretty much what they want to unless they run the company into the ground.

But they save the day by claiming that "share price" is a powerful restraint on corporate governance due to the "efficient market" hypothesis (i.e., the market is always right in its evaluations and can do no wrong, a belief that was totally accepted by many economists and business school professors between 1975 and 2005). Managers and directors are powerful, they conclude, but they are forced to focus on delivering shareholder value by efficient markets that set the price of their companies' stock. It is a theory that has been all but destroyed by the financial collapse of 2008-2009. Thus, contrary to the hopes of the public pension fund activists and those who wrote about them, the largest corporations in the United States are still controlled by a combination of their high-level executives, the for-profit financial institutions that are concerned with the price of their stockholdings in the corporation, and top individual stockholders, all of which are usually represented on the board of directors.

In addition to showing that the pension fund movement had very little impact when it comes to corporate power, this documents demonstrates that any success for activists in charge of public employee pension funds depends upon the success of the liberal-labor coalition in electing legislators and governors who are supportive of, or at least willing to tolerate, challenges to the governance of private corporations. When the newly elected Republican governor and conservative legislators in California began to question the efforts by Hanson and CalPERS in the early 1990s, it was not long before he gradually began to lower CalPERS's profile. And when the Republican Schwarzenegger replaced the Democratic governor in 2003, pension fund activism by CalPERS began to decline. There are no shortcuts to taming corporate power.

Further reading

For in-depth commentary on public pension funds, including the big problems they now face, by an experienced analyst, see "Are Pension Funds Drifting Towards Disaster?" at the Pension Pulse blog.


Anderson, J. (2010, April 3). Pension Funds Still Waiting for Big Payoff From Private Equity. New York Times, p. B1.

Brancato, C., & Rabimov, S. (2008). The 2008 institutional investment report: Trends in institutional investor assets and equity ownership of U.S. corporations. New York: The Conference Board.

Clark, G. (2000). Pension fund capitalism. New York: Oxford University Press.

Cowley, S. (2017, April 26). Shareholders retain board at Wells Fargo. New York Times, p. B1.

Cowley, S., & Crookery, M. (2017, April 25). After Scandal, Wells Fargo's board faces a contentious re-election vote. New York Times, p. B1.

Davis, G., & Useem, M. (2002). Top Management, Company Directors, and Corporate Control. In A. Pettigrew, H. Thomas & R. Whittington (Eds.), Handbook of Strategy and Management. Thousand Oaks, CA: Sage Publications.

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