The New Global Investors
Robert A.G. Monks
Capstone 2001 ISBN: 1-84112-109-6

Can Pension Funds Change the World?

Pension funds are not generally renowned for revolutionary acts or activisim. Monks however, designates them as potential change agents 'par excellence'. Calling them the new global investors, he believes their economic clout (without historical precedent ), and global reach affords them the opportunity to effect widespread societal change. 'By exercising their fiduciary duties to increase the wealth of their beneficiaries, they can literally change the world, since so much of the world is theirs', he says. He sees these pension funds wielding enormous power and influence not just by who they distribute their money to but their impact in how that money is managed.

Pension funds are enormous, and growing. Funds in the UK account for an amount equivalent to 62% of the UK's GDP, in the US 45% of the US GDP, and in Australia 18% of Australia's GDP.

Monks believes pension fund trustees must demand transparency of the corporations they are invested in, and actively manage their investments rather than being content to 'sit back and passively pick up profits without knowing or caring where they came from'. Monk's game plan for affecting this change focuses on the pension funds adopting a three point global corporate constitution requiring the companies they invest in to:

n Fully disclose their impact on society n Reveal how much they spend on involvement in the elective, administrative and regulatory public processes n Obey the law.

Point one is receiving growing public and government support. Since July 2000 pension fund trustees in the United Kingdom have been obliged to disclose in statements of investment principles 'the extent (if at all) to which social, environmental and ethical considerations are taken into account'. Legislation similar to this is currently under consideration in Australia.

Monks argues that socially and environmentally responsible investing is a part of a pension fund's fiduciary responsibility in meeting their legal requirements to invest in their beneficiaries best interests. He points out that socially and environmentally irresponsible behaviour will result in externalised costs such as environmental damage and risks to public health. These costs are eventually reflected in the company's stock price when the market perceives increased risks to future revenue from loss of reputation, possible lawsuits and fines. Pension fund trustees, Monks holds, have a duty to demand that the management of the companies in their portfolios are not only working effectively to maximize profits today, but also acting in a socially and environmentally responsible manner as the most effective way to ensure sustainable value for the future.

Transparent, accountable corporate governance has received renewed attention recently with legislation in the United Kingdom proposing the so-called "corporate killing" crime, rendering companies liable for corporate manslaughter and directors being subject to disqualification. In Australia, the Victorian Government has released a draft of the Crimes Industrial Manslaughter Bill which makes directors criminally liable for negligent acts within their company. Queensland is planning similar legislation.

To date, however fund managers have remained unconvinced that responsible environmental and social management results in a better economic performance. Initiatives such as the FTSE4Good Index being launched next month in the UK which will weigh up the share prices of companies that conform to SRI principles, will be watched closely by fund managers and pension trustees. It will be interesting to see the effects on the market if they can provide evidence of such a link.

Monk's call to arms for pension funds, and his vision of a global corporate code of governance for pension trustees is inspiring. He positions pension funds as 'the real guardians of the corporate future, with primary responsibility for expressing the interests of the ultimate owners in the governance of the modern business corporation'. Surely at least some pension trustees will see this as an exciting opportunity to effect positive societal change while delivering economic benefits to members.

A long term shareholder activist, Monks has the experience, and demonstrated fund performance, to back up his claims. He is the founder of Lens, an institutional activist investment fund which has achieved returns in excess of the S&P 500 average, since 1992 and over the last three years exceeded them by over 100%.

Monks vision, which advocates working within the current framework, should be a palatable one for pension trustees and fund managers. He believes the market system is the best system yet created to bring prosperity to the many, requiring only internal adjustment to deliver sustainable profits. His vision is that pension fund trustees will play a key role in avoiding the collision between the boundless growth of large corporations and the long-term welfare of the populations they serve. He sees them doing this in their capacity as the new global investors by demanding transparency from, and actively managing their shareholdings in, corporations.

Reprinted with permission - Ethical Investor Magazine, Issue 2, July 2001, Australia