Analysis

Proposals for change

Please find proposals for how the Pension Fund could change its investment practices on this page.

Transparency

It has been difficult to get information released about the East Sussex County Council Pension Fund Investment Panel.  One Freedom of Information request for the minutes in 2006 resulted in only heavily censored versions of them being released. One request to attend the meetings of the Panel resulted in a letter from Sean Nolan, that stated: “the open session of the meeting usually only lasts for approximately 5 minutes at the start.” Later, in 2008, after reading ‘Your Right to Know – New Edition: A Citizen’s Guide to the Freedom of Information Act’ by Heather Brooke a stronger Freedom of Information request was sent asking for all of the minutes since the Pension Fund began. This was mostly successful and it is the first time they have been released to the public. Some information has not been disclosed as the letter from the FOI officer shows, however the majority of it has been released to the public.

Now that the minutes have been released it is easier to see what is and isn’t there. This is not the end of it. There is a list of questions which remain unanswered, which includes a list of information which is still missing.

It is difficult to understand why the Pension Fund is not more transparent, especially because it affects so many people. As of 30th November 2011 it “is valued at £1,867 million.” According to Chris Baker’s article in The Argus in 2002, the fund’s members include “East Sussex County Council, Brighton and Hove City Council, the University of Brighton and all five district and borough councils in East Sussex. In all, there are 50 members, among them colleges, such as Brighton, Hove and Sussex Sixth Form College and City College Brighton and Hove, more than a dozen town and parish councils, Brighton and Hove Citizens’ Advice Bureau, a handful of housing associations and public and voluntary sector organisations.” The Members page on this website gives the updated full list of who contributes to the Pension Fund.

At the very least, those who invest in this fund should have easy access to these minutes and the minute book and all other relevant information so that hey know what is being done with their money. This is not the case at the moment, although the release of these minutes is one step towards that.

Investment

It is interesting, although very dry, to read through the minutes and find out how the pension fund works and what factors affect investment and portfolio make-up. However, the Investment Panel is more concerned about inflation and interest rates, balance of payments positions, currency movements and the state of the world economy than the impacts of what they are investing their money in. Social Responsible Investment is barely mentioned in all of these minutes. It is something that is added on, and ultimately, the fund is much more focused on fund performance.

This is not that surprising because, as stated on the 10th January 1975, the aim of investment policy is “to maximise available funds within an acceptable pattern of risk and within any statutory limitations imposed on specific investment areas.”

The fund managers and councillors working on the pension fund are just trying to do their jobs. They are just trying to “to maximise available funds within an acceptable pattern of risk.” But what are the consequences of just trying to make as much money as possible for the pension fund? What are the real costs of such behaviour? How many people are killed or seriously injured because of these investments? How much of the earth is destroyed in the search for profits?

As Kate Morrison reported on the 8th February 2006, “In 2003 the fund had 46,800 shares in BAE – today it has 653,300. The arms manufacturer controversially sold Hawk aircraft to Indonesia and has done business with Saddam Hussein and ex-Chilean dictator Augusto Pinochet. Meanwhile British American Tobacco makes about 900 billion cigarettes a year, controlling 16 per cent of the global market.”

Active Shareholder Approach

We know what arms and tobacco corporations do. To this day, the Pension Fund still has an ‘active shareholder’ approach to Socially Responsible Investment (SRI) (first endorsed on 31 July 1997). According to the minutes, it writes letters to corporations, votes at their AGM meetings and monitors their environmental performance (the minutes do not tell us to what extent the pension fund does these things).

However, how can you stop an arms company from making arms or a tobacco company from making tobacco? An ‘active shareholder’ approach will never change that. No matter how many letters you write or how much you monitor their performance, they will carry on doing that. If that is the case, why does the Pension fund insist on just sticking with an ‘active shareholder approach’? Why is the fund investing in arms companies, tobacco companies, etc when we know all too well what these corporations are doing?

Corporations know in detail what their products are being used for. Tobacco corporations know the health impacts of their tobacco. Arms corporations know who they are selling their arms to and what will be done with them. And yet these corporations carry on in the name of profit. They often cannot sacrifice their own interests and those of its shareholders to realise environmental and social goals. This is because corporations are legally obliged to profit maximise on behalf of their shareholders at whatever cost:

“Corporate social responsibility is…illegal – at least when it is genuine.

“Corporate lawyer Robert Hinkley…[stated] “that the law, in its current form, actually inhibits executives and corporations from being socially responsible.” As he puts it:

“[T]he corporate design contained in hundreds of corporate laws throughout the world is nearly identical…the people who run corporations have a legal duty to shareholders, and that duty is to make money. Failing this duty can leave directors and officers open to being sued by shareholders. [The law] dedicates the corporation to the pursuit of its own self-interest (and equates corporate self-interest with shareholder self-interest). No mention is made of responsibility to the public interest…Corporate law thus casts ethical and social concerns as irrelevant, or as stumbling blocks to the corporation’s fundamental mandate.” (Bakan 2004: 37-38)

Nobel Laureate economist Milton Friedman goes even further than this. When Joel Bakan went to interview Milton Friedman on this subject, Friedman made his views very clear:

“Friedman thinks that corporations are good for society (and that too much government is bad). He recoils, however, at the idea that corporations should try to do good for society. “A corporation is the property of its stockholders,” he told me. “Its interests are the interests of its stockholders. Now, beyond that should it spend the stockholders’ money for purposes which it regards as socially responsible but which it cannot connect to its bottom line? the answer I would say is no.” There is but one “social responsibility” for corporate executives, Friedman believes: they must make as much money as possible for their shareholders. This is a moral imperative. Executives who choose social and environmental goals over profits – who try to act morally – are, in fact, immoral.

“There is, however, one instance when corporate social responsibility can be tolerated, according to Friedman – when it is insincere. The executive who treats social and environmental values as means to maximize shareholders’ wealth – not as ends in themselves – commits no wrong. It’s like “putting a good-looking girl in front of an automobile to sell and automobile,” he told me. “That’s not in order to promote pulchritude. That’s in order to sell cars.” Good intentions, like good-looking girls, can sell goods. It’s true, Friedman acknowledges, that this purely strategic view of social responsibility reduces lofty ideals to “hypocritical window dressing.” But hypocrisy is virtuous when it serves the bottom line. Moral virtue is immoral when it does not.” (Bakan 2004: 34)

So, bearing all this in mind, how will monitoring or writing letters to an arms or tobacco corporation change its behaviour? The real answer is that it mostly will not. Examples of the ineffectiveness of the ‘active shareholder’ approach litter history.

It is deeply saddening that the East Sussex Pension Fund has not learned these lessons from history. Because of their investments and ‘active shareholder’ approach, untold numbers of people are being oppressed across the planet. This needs to change.

Solutions?

Please see the section on proposals for change for what the pension fund could do within current legal and fiduciary rules.

There is work which is going on to reform the law around corporations, so that they are not just legally obliged to profit maximise at whatever cost but also have to take into account social and environmental considerations. Ultimately, for the economic system to become more sustainable and responsible, the rules that govern it need to change. This is beyond the scope of this website, which focuses more on what the ESCC Pension Fund itself can do within the existing corporate, financial and legal system.

For more information on this side of things, have a look at Fair Pensions work on trying to change Pension Fund’s fiduciary duties to incorporate environmental and social goals. Their report, Protecting our Best Interests: Exploring the Future of Fiduciary Obligation, is especially interesting. Joel Bakan, in his book The Corporation, also makes interesting – and further reaching – suggestions on how corporate law could be changed.

Bibliography

Bakan, Joel (2004) The Corporation: The Pathological Pursuit of Profit and Power, Constable

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