The Emergence of Universal Owners

Challenge, July, 2000 by James Hawley, Andrew Williams

The activist institutions quickly realized that making an example of a few select companies would also get the attention of other companies--and that there would be a positive spillover to nontargeted companies in the form of a renewed focus on providing value to the shareholders. To quote one of the most activist institutions: "As the result of its focused activities at selected companies, the System has also gained the attention of other companies, as to common issues in a peer group and concepts of corporate governance in a general sense. Taking advantage of this phenomenon, CalPERS seeks to 'move the herd' rather than follow it, while still retaining the risk-reward reliability of an indexed portfolio." [9]

While there is still a great deal to be done in traditional areas, the time has come for institutional investors to explicitly recognize that economywide macroeconomic issues heavily influence the returns they will earn on their investments. As the above quotation illustrates, some institutional investors already recognize in a general way the impact that broad issues in the economy can have on their portfolio return. This is the beginning of universal owner "consciousness," but there have been only a few tentative steps toward working out its implications for their role as a universal owner. An examination of several specific areas will illustrate the types of issues that universal owners might find fruitful areas of attention.

The Environment

In standard economic theory, negative externalities lower the cost to the firm generating the externality by imposing those costs on other firms and on citizens at large. Because of their ownership of the economy as a whole, universal owners end up bearing those costs both as owners of other firms and, in the case of public funds, as involved third parties linked to the tax base. Since the costs are generally larger than the benefits that accrue to the company causing the externality, universal owners experience an overall net loss. Consequently, a universal owner's portfolio returns would be directly enhanced by a proper treatment of the externality in the first place.

Some institutional investors are acutely aware that environmental issues are important economic considerations. For example, Kim Johnson, general counsel for the Colorado Public Employee Retirement Association (PERA), reports,

You bet that we look at environmental issues very, very closely. We know that aside from the ideal that it is socially desirable to have a healthy and long-term stable environment, there are also some good economic reasons for our actions. We have suffered the consequences of holding property with environmental problems, so we know the costs first-hand. But I also think our trustees are aware that in a macro sense this is a good thing to do. [10]

The Wisconsin State Investment Board also considers these issues explicitly. The board's general counsel, Kurt Schaht, says:

We have a rather lengthy discussion of social responsibility issues in our proxy voting guidelines. If something in a company's product or service is inherently bad for the environment or social well being of the United States, that is taken into account in the economic analysis because those products or services are going to become less attractive, less competitive over time. [11]