This recent op-ed originally appeared in The Washington Examiner on May 21, 2019.
Amid growing calls for divestment from several industries, Milton Friedman’s view on the role of business in politics bears repeating. Friedman explained that corporate executives are agents of the companies to which they are employed, acting on behalf of the company’s owners and tasked with the responsibility of increasing earnings.
Whereas principal actors make decisions about how to spend their own time or money, agents are entrusted with the resources of others. As an agent, executives accept a fiduciary responsibility to the company’s shareholders. Directing investments strategically in an effort to enforce or oppose a political agenda distorts what should be a data-driven decision geared towards maximizing returns.
Furthermore, politically motivated investments erode the integrity of our democratic system by utilizing private entities to carry out processes that traditionally have to earn popular support through the legislative system.
We are seeing a worrying trend of fiduciaries giving in to activist pressure instead of prioritizing fiduciary responsibility. For example, vocal opponents of current immigration policies, which are not new to this administration, have advocated for divestment from private prison companies. This is regardless of the fact that private companies don’t dictate public policy. The California Public Employees’ Retirement System (CalPERS) felt this pressure as it faced a pending bill to divest its holdings from these companies, which total over $10 million in stocks. The transaction costs alone associated with such a move would reach an estimated $175,000.
Breaking from its public pension peers like the California State Teachers Retirement System (CalSTRS) and the New York City Employees’ Retirement System, CalPERS recently voted to oppose the pending bill which would mandate divestment. CalPERS’ decision to uphold its fiduciary responsibility to its plan members, the millions of retirees who have contributed to the fund to guarantee a stable income after dedicating their careers to public service, reminds us what’s at stake.
The private sector should follow CalPERS’ lead and prioritize its fiduciary responsibility over that of political expediency.
In a statement, JPMorgan spokesman Andrew Gray attributed the decision to no longer provide credit to private prisons to “a robust and well established process to evaluate the sectors that we serve.” Nonetheless, the pivot cannot be disentangled from the enormous political pressure that the company faced.
Following this decision, Senate Banking Committee Chairman Mike Crapo sent a letter to the CEOs of eight of the largest banks, stating that they “should not seek to replace legislators and policymakers.” Instead, these executives must focus on the vital role that banks serve in strengthening the economy and creating jobs. Hence, lending decisions ought to be based on creditworthiness, not politics. When politics become a factor in lending, banks run the risk of punishing companies that operate in full compliance with state and federal law while also providing necessary services.
Beyond the authoritarian implications of weaponizing private asset management dealings against politically disfavored industries, the decision to divest from companies with reliable returns harms both the shareholders as well as the local economies that are enriched through employment opportunities.
But the question now is where does it stop? In a subsequent House Financial Services Committee hearing, JPMorgan received criticism for lending to the gun industry. For public pensions, it started with calls to divest from tobacco in the ‘90s; today, it’s everything from fossil fuels to gun manufacturers. Considering the negative health effects of sugar, will soda companies be next?
Friedman’s championing of fiduciary responsibility doesn’t need to be at odds with social justice values. In keeping politics out of investment strategy, fund managers help facilitate economic growth that benefits communities across the socioeconomic spectrum. While it is prudent to mitigate perceived reputational risks, investors cannot allow the political causes of the day to compromise their fiduciary responsibility to secure long-term returns. This is true across the public sector, but we must also remind our private sector counterparts that adhering to their fiduciary responsibility is not an option, it’s an obligation.
Ken Blackwell is a board member of the Institute for Pension Fund Integrity and a senior fellow at the Family Research Council. He is the former Ohio State Treasurer from 1994-1999 and is a former member of the Board of Directors of Fifth-Third Bank and the Fifth-Third Bank holding company.