July 22, 2004

Critics Fear Pension Activism

by David Hafetz

When Winn-Dixie Stores Inc. announced plans this month to explicitly bar discrimination based on sexual preference, gay and lesbian employees of the Southern supermarket chain owed their victory to an unlikely champion.

The new policy was at the request of the New York City comptroller,William Thompson Jr., who has made a point of using the $80 billion in investments held by the city's five pension funds to muscle companies like Winn-Dixie into making an array of social changes.

Like his predecessors, Mr.Thompson and the funds' trustees take advantage of their stake as shareholders to venture into corporate structure, environmental policy, and social reform. On Monday, Mr.Thompson said that, in the case of Winn-Dixie, his request was the “right thing to do.”

Not everyone, Mayor Bloomberg included, agrees with his methods. Some critics fear that such activism — which has a long tradition in New York City — could steer the city's pension funds into questionable territory and may not be in the best interest of those owed pensions.

“You're politicizing public investments and that's a dangerous precedent,” said Jon Entine, an author and adjunct fellow at the American Enterprise Institute.

Mr. Entine said city officials like Mr. Thompson are “opening a can of worms” that potentially can lead them into areas where they lack expertise, especially when their proposals involve complicated scientific questions such as global warming or genetically-altered food.

Mayor Bloomberg, who is a trustee of the fire and police pension funds, told reporters on Monday that while he supports the goal of prohibiting discrimination based on sexual preference, he does not believe that pension funds should be a tool to achieve it.

“I don't think that we should be using the city's investments policies…to advance social goals, no matter how admirable those goals are and no matter how much I believe in it,” he said.

His position conflicts with that of his finance commissioner, Martha Stark, who heads the New York City Employees' Retirement System and the Teachers' Retirement System.The two funds sponsored the request for the change at Winn-Dixie. Together, the funds have about $1.6 million in Winn-Dixie stock.

Ms. Stark praised Mr. Thompson for using the pension funds to champion equal employment rights.

The mayor's office did not respond to a request for comment for this story, and Mr.Thompson was not available for an interview.

Using pension funds to advocate change is a tradition in New York City that dates back to the apartheid era, when the city asked companies operating in South Africa to change their business practices. At the time, the city's pension funds divested some shares in some of those corporations.

Now the city pension funds prefer to hold onto the investments and, as shareholders, lobby from within the company. City pension officials said they do not screen investments based on social values or sell shares of companies whose policies they dislike.

Mr. Thompson's requests have come in the form of shareholder resolutions that can be put to a vote at a company's annual meeting. Often a board of directors agrees to make a change before such a vote.

“It's an embarrassment tool,” Mr. Entine said. “They want to avoid the public relations bullet.”

Ken Sylvester, assistant comptroller for pension policy, said he disagreed.

“It's not about a big stick or having an adversarial relationship,” he said. “It's about coming to a common agenda in the best interest of shareholders.”

Mr. Sylvester said promoting antidiscrimination policies helps strengthen a corporation and, therefore, protects the pension funds' investment. Without such a policy, he said, a company may fail to hire or keep the best employees or leave itself open to a lawsuit. Winn-Dixie has faced just such a suit.

“Doing good in society is doing good business,” Mr. Sylvester said. “There's no downside to a good, sustainable approach to business activity…we're calling on [companies] to be responsible.”

Mr. Sylvester said the issue of discrimination on the basis of sexual preference “has been on the front burner since the early '90s.There is no federal law banning discrimination because of sexual identity.”

Each year, the city's pension funds target more companies, many of them on the Fortune 500. Mr. Sylvester said that in 2004, the city submitted requests to 18 companies, eight of which agreed to amend their employment policies.

The city's list of victories has included FedEx,Goodyear Tire & Rubber,and Waste Management Inc. Companies that have not complied include Exxon-Mobil, which has resisted the city's request for several years. The company did not return a call seeking comment.

Mr. Sylvester said many Fortune 500 companies already have the anti-discrimination policy in place. Others are receptive to adopting it and just “need a push,” he said.

Anti-discrimination is just one of a bevy of causes seized on by the city's pension funds. The funds also have questioned different companies about employment practices in Northern Ireland, child and slave labor issues, and ties to countries that sponsor terrorism.

Mr. Sylvester said the city's funds had pursued General Electric over PCB pollution in the Hudson River and also had addressed a number of corporate management problems that later surfaced in the Enron scandal.

“We believe these things are in the best interests of the shareholders and the companies,” he said.

Shareholder activism is not unique to New York City. In California, the state's teacher pension fund has pressured a number of corporations to make structural changes. In Texas, the teachers pension fund sold holdings in Disney after deciding its films were not sufficiently pro-family.

“A lot of public pension funds say they can't afford to sit back and be passive,” said Meg Voorhes, Director of Social Service Issues at the Investor Responsibility Research Center. “New York City is probably the most active.”

Ms. Voorhes said shareholder activism dates back to the 1970s, when a federal court ruled that companies could not stop shareholder proposals from being heard at annual meetings.

This year, she said, companies are seeing an increase in proposals on social issues, including requests to make companies disclose information about political contributions.

A spokesman with the Securities and Exchange Commission in Washington said trustees of public pension funds, like private shareholders, are free to propose changes if they hold a minimum number of shares.

The commission allows companies to exclude some requests, depending on what the proposals concern and how they are phrased, said SEC spokesman John Heine.

Some critics of shareholder activism say pension funds should not take policy positions without consulting the individual members they represent. Others say the pension funds should never take a stand.

“They should be concerned primarily with safeguarding the investments,” said E.J. McMahon, a senior fellow at the Manhattan Institute.“Politicians of every stripe have been monkeying around with pension funds for years.”

In New York, Carl Haynes, a trustee of the city employees' pension fund, said that the funds provide needed leverage over companies on a number of issues, including securing equal opportunities for all workers.

“You're going to use your influence to get [corporations] to think like you,” said Mr. Haynes, president of Teamsters Local 237. “I want my money to represent my interests…I don't you want you investing in something opposite to what my views are.”

Mr. Haynes said he had not polled the funds' members about requests like the policy change at Winn-Dixie. But he said that he is driven by what the members think and what they want.

A spokesman for Winn-Dixie said that the company felt that it already had a solid anti-discrimination policy in place but agreed to add new language at the Mr. Thompson's request.

“We just went ahead and formalized it,” said Kathy Lussier, communications director for Winn-Dixie.

The city's pensions funds have a relatively small stake in Winn-Dixie, holding less than 300,000 shares out of about 141 million outstanding. The stock, traded on the New York Stock Exchange, closed at a 52-week low of $6.19, down 21 cents, or about 3%.

Still, Ms. Lussier said, “they're partners in this business with us, and that's important.”