Thinking Like a Capitalist

The largest public pension funds, including CalPERS, have always been conflicted in their obligations to workers and retirees. They are supposed to invest only in the "best interests" of their beneficial owners, which traditionally has meant seeking the best financial returns. But they have often seemed to be playing for the other side--trashing the environment, workers and communities, and cutting costs in ways that undermine long-term economic prospects. Dennak Murphy, a West Coast organizer for SEIU, crisply explains: "We have nearly 800,000 members, most of whom are in public employee retirement funds [including 210,000 in CalPERS]. The pension funds take their money and buy stocks in two or three thousand companies. Then a lot of those companies turn around and screw the workers."

No other major investors in finance capital would tolerate such abuse for long--they would dump the stocks and perhaps plot retaliation. Pension-fund managers are expected to look the other way and accept collateral damage to their members as unavoidable on the grounds that diversification--spreading their investments across the entire stock market and effectively owning the broad economy--reduces their risk. Passivity does not protect them from horrendous losses, however. CalPERS lost $586 million on WorldCom alone.

Grossly oversimplified, the reform strategy is guided by two interacting principles: First, pension funds should invest to restore the once-common understanding that, in the long run, you can't have a successful economy and a failing society (roughly speaking, that's what the "market ideology" ignores). Second, while pension funds adopt this perspective to advance the self-interest of their members (including long-term financial soundness), they should also use their leverage to make the financial system incorporate these principles as the system's operating routines.

If the happy day ever arrives when the financial system itself recognizes and reinforces the values of long-term investing, miscreant corporations will be punished in terms they can readily understand: falling stock prices and higher costs on their borrowing. Stock-market analysts will then have to calculate what they now routinely ignore--the long-term economic consequences of social destruction--and investors will learn to prefer shares in healthy companies. The marketplace, in effect, will have the information to "mark down" bad guys and reward managements that are truly forward-looking. That, at least, is the vision.

Angelides is familiar with the accounting fallacies of capitalism because he's a capitalist himself, a developer and investor who made his fortune in California real estate. "I would make the case--this comes from my experience in real estate--that the best, most highly regarded companies are the ones that are profitable and also produce products that are of utility to society, that increase our productivity and enrich our lives," he says. "When people step back and ask what they most want to see in the private sector, it is both profitability and good results for society. There is no reason capital shouldn't be held to the same standard."

Angelides led a tough, two-year fight to persuade CalPERS and CalSTRS to dump tobacco company stocks from their portfolios, but he prevailed on hard facts of investor risk, not social sentiment. "We worked day and night to lay out the risks to the companies--the increasing regulatory climate, the increasing lawsuits the companies would face," he recalls. "It wasn't simply that we don't like tobacco."

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