The Emergence of Universal Owners

Challenge, July, 2000 by James Hawley, Andrew Williams

Another example occurred when CalPERS weighed in on the controversy surrounding the Maxxam Corporation and the headwaters forest controversy. [12] CalPERS owned a substantial stake in Maxxam and was deeply interested in the economic implications of any settlement that Maxxam might make. Negative publicity and a disregard for the concerns of an important, organized, and potentially powerful group were economic issues for CalPERS, which considered this a contingent liability. [13] In a similar vein the Colorado PERA focused on what they considered to be the narrow corporate governance issue of how well Maxxam's management was handling this issue. [14] In this way the narrow economic performance of a company merged with the impact of the company's actions on the economy as a whole.

Education and Training

The quality of the skills arid education of a labor force are widely recognized as crucial to the long-run economic growth of a country. It has also long been recognized that a company will tend to underinvest in the education and training of its workforce because it can't capture all of the benefits the training provides. [15] However, a universal owner does capture those benefits because it captures the benefit of enhanced education and training to the economy at large. These returns are likely to be quite substantial since it has been estimated that the social returns to education are from 1.6 to 1.7 times the private returns. [16] CalPERS and the various New York City public pension funds recognize this through their "High Performance Workplace" programs. CalPERS has a "workplace" screen in which it surveys companies about their human resource policies and publishes the results. Both New York and CalPERS have issued studies on workplace practices and economic performance. [17]

In the area of education and training, as in many others, the question arises as to whether the policy should be pursued by individual firms or by society at large. In fact, both avenues are appropriate, and universal owners should be concerned with general educational policy as well as with human capital investments made by individual portfolio companies.

Research and Development

A telling example of the divergence between firm-specific self-interest and the interests of a universal owner can be drawn from the high-tech industry. Research and development activities in this industry are crucial to its success. But some firms might be tempted to underinvest because they cannot capture all the returns, as illustrated by the following story told by Gordon Moore, one of the founders of Intel Corporation. Before forming Intel, Moore and Robert Noyce, the company's other co-founder, started Fairchild Semiconductor. The research and development department at Fairchild was quite successful at identifying a large number of important technical advances, but the company lacked the ability to commercialize many of these discoveries. As a result, numerous ideas that had been developed at Fairchild actually ended up benefiting their competitors. When it came time to found Intel, Moore and Noyce made a conscious decision not to have a permanent R&D department. Instead, technical teams would be assemb led on a project-by-project basis and disbanded when the project was completed. This was an explicit attempt to avoid the spillover benefits that Fairchild had contributed to other companies (and, of course, to the economy as a whole) and to better capture for Intel the benefits of its R&D expenditures. [18]