Public Pensions and the Promise of Shareholder Activism for the Next Frontier of Corporate Governance: Sustainable Economic Development

Abstract

In this paper, I bring together recent developments in shareholder activism, responsible investing, and "new governance" regulation, to consider the role of public pension funds as a surrogate regulator for corporate sustainable development. Although a handful of public pensions are active in issues related to sustainability, this paper provides evidence showing that the vast majority are not. These conclusions, and explanations for why this is the case, are based in part on a survey of public pension fund trustees conducted in fall 2006. I propose that public pensions be required to disclose the extent to which (if at all) they incorporate sustainability issues into their investment policies and practices. This proposal is consistent with new governance regulatory approaches that recognize the limits of traditional legal mechanisms in improving corporations' social and environmental performance and seek to harness the potential of informed and interested third-party actors to develop flexible and efficient regulation. Public pensions can serve a powerful role under this approach. These pensions have a natural interest in sustainable economic development, but there are hurdles in the way of their greater involvement. The disclosure requirement serves to motivate action and then continually improve the quality of their involvement. Evidence from a similar law in the United Kingdom supports these arguments. In addition, pensions are a catalyst for change, as their actions can spur greater consideration of long-term responsible investor issues throughout the financial industry. This proposal is not without potential pitfalls. Thus, I also discuss what additional reforms may be necessary to ensure the success of this proposal and respond to potential criticisms from those that believe public pensions will act primarily based on the private interests of politicians or special interest groups and not based on serving the best long-term interests of the corporation or society.

Keywords: Public Pensions, Institutional Investors, Shareholder Activism, Social Investing, Sustainability

JEL Classification: G23, G28, M14, Q20, Q28