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Sep 30, 1999

Practice what you preach

A corporate governance activist finds the tables turned

Neil Wollman and Abigail Fuller are professors at Manchester College in Indiana. Like many other liberal-minded college professors whose retirement savings are managed by TIAA-Cref, this husband and wife team sees investment returns in terms of more than just simple dollars and cents. They want their investment to make a positive social impact over the longer term.

TIAA-Cref is a voluble and successful corporate governance activist in New York City. Confronting company managements in closed-door sessions or in proxy fights at annual meetings, the world's largest pension system pressures public companies to be more accountable to their shareholders. Some 200 of TIAA-Cref's own shareholders, led by Wollman and Fuller, are telling the fund what it should be doing: 'Practice what you preach.'

'Social choice for social change', as their campaign is called, pushed for TIAA-Cref to introduce a social choice account in the late 1980s. It did so, and today this balanced portfolio, which screens out tobacco companies, alcohol producers, polluters and other socially irresponsible investments, has grown to $3.8 bn, which the pension fund says is the world's largest. It's estimated that about one in ten of TIAA-Cref's more than 2 mn teachers and researchers now participate in the social choice account.

Pluses & minuses

Taking a benchmark list of companies and screening out the unwanted ones – 'negative screening' – has worked pretty well for TIAA-Cref. This type of socially responsible investing (SRI) can be summed up as 'staying away from the bad guys so you can all sleep a little more soundly at night.' So says Steve Schueth, president of the Social Investment Forum and president of First Affirmative Financial Network, which is made up of SRI-oriented financial planners and registered investment advisors across the US.

Wollman and Fuller have been lobbying for TIAA-Cref to go a step further and begin what they term 'positive investing'. That means using positive screens to select companies that are 'models of social and environmental responsibility... companies that are really trying to make a difference,' Wollman says.

The college professors are asking TIAA-Cref to devote 5-10 percent of the social choice account to positive investment, investing in public companies with innovative environmental products, for example, or in low income community development projects. Wollman also sees TIAA-Cref as a potential source of venture capital for microcap companies – 'not just to feel good about putting money there, but maybe making some social change by building up smaller companies and making them stronger so they can be models for other companies to follow.'

Schueth and other members of the Social Investment Forum's members support the campaign. 'It's clear that positive investing is an integral and important part of the whole concept that we call SRI,' he says.

Perhaps the strongest plank in Wollman's platform is an internal TIAA-Cref survey from 1995. Eighty-one percent of participants in the social choice account were in favor of 'seeking out for investment companies who have a really outstanding record of good performance on social issues rather than relying on negative screens.' Only 3 percent were opposed. Moreover, a majority of the participants were 'ready to accept a higher degree of financial risk in their investments if they create more desirable social change,'the survey indicated. 'People are even willing to lose a little money to effect social change,' insists Wollman.

Tough sell

TIAA-Cref is not to be easily convinced, however. The pension fund's chief objection is that positive investing would be just too hard to administrate, and besides, it would hamper the funds' performance. 'Our fiduciary responsibility is to make investment decisions based on financial economic criteria only, of course keeping in mind the specific screens which exclude certain types of companies,' says Tom Pinto, spokesperson for TIAA-Cref. He adds that positive screening would make it more difficult to stay true to the fund's benchmarks, which are the S&P 500 for equities and the Lehman Brothers Aggregate Bond Index for the 40 percent of the portfolio invested in bonds.

Schueth counters that TIAA-Cref wouldn't have to give up any performance. 'A number of investors are doing positive investing very successfully without giving up decent returns,' he says. The one point of merit that the pension fund has argued, adds Schueth, is that positive investing does cost a little more. 'If you're asking a research team to break out of the box and start looking for the most responsible companies in America, you're asking them to do more work than they're accustomed to. That might add cost.' That cost, however, is minute compared to the $3.8 bn in the social choice account.

Pinto seems to see philosophical as well as economic problems in administering a positive investment account. 'Positive investing is particularly difficult because it's very subjective as to which company is doing good for society. What is a social good?' he wonders. But Wollman points out that negative screens can be subjective too. 'They won't invest in anything that might do significant harm to the environment. What's the difference between that and investing in companies that do significant good to the environment? Is that any more subjective?'

Saying one thing

Wollman seems baffled by TIAA-Cref's reluctance to acquiesce to the idea, especially when most of their arguments are the same ones they used when the social choice account was being debated in the 1980s. 'They're rife with cases of saying one thing and then doing another.' For example, in a letter about a 70 percent shareholder vote against divesting from the tobacco business, TIAA-Cref chairman John Biggs writes, 'The trustees would have difficulty directly opposing a majority of our participants who have indicated that they want Cref to continue holding tobacco in its portfolio.' So Wollman demands, what about the 81 percent of social choice account participants who want positive investing?

Pinto defends the fund by saying that the survey question Wollman refers to was just one of many on the 1995 survey, 'and that survey wasn't for the purpose of asking questions on new investment options and particularly ones with positive screens. We have a participant base of 2 mn plus. There might be investment options that a majority of them are in favor of, or that a minority of them want. But you can't introduce an investment option for each and every participant's particular wishes, or for a small group of participants that may be in favor of a fund.'

It looks as though TIAA-Cref, the heavyweight corporate governance activist, is finding out what it's like to be on the receiving end of shareholder fire. And its shareholders are a unique bunch. 'Individuals that work in education are probably a little bit more focused on social issues compared to those in the general population,' agrees Pinto. 'Those topics are a subject of conversation on college campuses, and are debated and studied and researched.'

That's one point that Wollman and TIAA-Cref seem to agree on. 'Part of education, presumably, is getting people to think about the world and trying to make the world a better place,' Wollman concludes.