| Reviews / Comptes Rendus | Labour/Le Travail, 58

Reviews / Comptes Rendus

Isla Carmichael, Pension Power: Unions, Pension Funds, and Social Investment in Canada (Toronto: University of Toronto Press 2005)

IT IS DIFFICULT not to be intrigued by the question. If hundreds of billions of dollars are being held in trust for Canadian trade union members in the form of pension fund investments, couldn't trade unions exert influence on the investment of this money to create a better world? If we magnify the number by a substantial multiple, we can pose the same question at a global level. These questions lie at the heart of Pension Power: Unions, Pension Funds, and Social Investment in Canada.

In one of the final chapters of Pension Power, Carmichael offers her assessment of the educational efforts that are required of the trade union movement with respect to the socially useful investment of pension funds. Much of this discussion is normative and prescriptive. But Carmichael also notes a range of activities that are indicative of the broad base of interest within the trade union movement in ways of making pension fund investments contribute not only to financing pension benefits, but also to creating a better working life. These initiatives include: two large and broadly based Canadian Labour Congress [CLC] national pension conferences which focused in part on this issue; the creation of the Shareholder Association for Research and Education [SHARE] by the trade union movement in British Columbia; trustee education programs of the National Union of Public and General Employees [NUPGE]; and trade union collaboration with academic researchers on the issue. This list of trade union activities could have been extended in many directions. But, even as it stands, it gives an appropriate sense of broadly based interest in the issue. Earlier chapters give a sense of how this interest has been pursued to date based primarily on experiences in Canada and the United States.

Under the heading "Shareholder Activism," Chapter 4 looks at efforts to use shareholder positions in publicly traded companies to influence corporate behaviour. These efforts have focused mainly on issues related to corporate governance. But, they also include examples of pension shareholders addressing environmental issues and labour issues. Although the point is not pursued in depth, it is noted that strategy and tactics in this area vary in terms of the degree of ongoing engagement with companies that are involved in these efforts.

In the course of discussing "Unions, Social Investment, and Corporate Accountability," note is also made of the use of ethical screens as a guide to investment decision-making. Carmichael notes the use of screens as a basis for excluding certain investments, as well as their use in including investments. A variety of theoretical issues related to the use of screens is canvassed, including the question of their impact on the financial returns on an investment portfolio. In fact, however, there is not a great deal of Canadian experience that is reported in this area.

A final area of activity that is reviewed is economically targeted investing (i.e., investing with a view to combining financial returns with collateral benefits that may take such forms as job creation, regional economic development, meeting housing needs, and so on). The Caisse de Dépôt et Placement is cited as an important Canadian example of this genre of investing. (The Caisse invests the reserve funds of the Quebec Pension Plan along with the funds of public employee pension plans and certain other entities.) The investment of the labour-sponsored venture capital funds is cited as another significant example of this style of investing.

The discussion of economically targeted investments leads to the consideration of an initiative that forms a centrepiece for much of the discussion in Pension Power, namely the creation of a real estate development company called Concert Properties by a group of pension funds in British Columbia that are either jointly trusteed by union and management representatives, or are solely union trusteed. The historical origins of Concert as described by Carmichael are fascinating. The collaboration of the pension funds just noted is striking and unusual in itself. But, so is the cooperation between this group of pension funds and the municipal government, which faced the problem that commercial developers had abandoned the rental housing market in favour of condominium construction. The municipality had banked land that it leased to Concert (and its predecessor organizations) for rental housing development.

An important bit of contextual information that is not included in Pension Power is the fact that a much larger portion of union members in BC belong to jointly trusteed or union trusteed pension plans than in other parts of Canada. For a significant portion of the BC trade union leadership, there was no question whether they would take responsibility for pension fund investing; the question was how would they use that responsibility. Recent changes in Quebec law tilt in that direction as well.

Carmichael's interest in Concert Properties is linked to her interest in the development of social accounting frameworks that would take account of social and economic benefits and costs, as well as financial risks and returns. Indeed, as she elaborates the definition of socially responsible investing in Pension Power, the use of these accounting frameworks is incorporated into the definition (more on this below).

For anyone who is interested in how a significant segment of the trade union movement looks at pension fund investment and its scope for contributing to the public good, Pension Power is highly informative. It is also animated by very strong convictions. Indeed, Carmichael argues that if unions take control of the vast sums of pension wealth and apply a progressive investment agenda to them, they will bring about a "radical change in the role that the labour movement plays in the economy." The strong convictions that underlie the argument give the book a clear energy that offsets, by degree, occasional lapses in cogency, and balance in the presentation of evidence.

There is ample scope for quarreling over the detail in Pension Power. For the moment, it may be more salient to address a small number of big issues to which Pension Power gives rise. Carmichael creates a tension between seeking financial returns on pension fund investments and seeking positive social and economic consequences. There is an ebb and flow to the acuteness of the tension as it vacillates between awkward compatibility and open warfare. But the tension runs through the book from stem to stern. The case for paying attention to social and economic consequences is ever-present. But, the issue that is not adequately addressed is why any heed at all is paid to financial returns.

In fairness, the issue is addressed in the context of discussing fiduciary duty. Carmichael properly notes that the very narrow construction of fiduciary duty that emerged from the 1984 case of Cowan versus Scargill, which suggested that fiduciary duty precluded any and all non-financial considerations in investing, is now the outlier interpretation. But at a practical level, the issue is not addressed. Put somewhat differently, the role of financial returns on investment in the overall financing scheme of pension plans is not discussed and Pension Power ends up presenting an animated view of one side of what may (or may not) be a dilemma. All other things being equal, higher returns mean lower contributions and/or higher benefits. The positive pension outcomes that flow from financial returns may be shared in various ways between plan members and sponsors.

Given the purely financial risks involved in trying to achieve higher returns, the relationship between financial returns and other key components of the financing system should not lead to a headlong rush to maximize financial returns. Indeed, for reasons that have nothing to do with socially responsible investment, many pension professionals have gone in exactly the opposite direction as is manifest in the Boots Pharmacy plan recently holding 100 per cent of its assets in bonds. But, by the same token, one should not feel free to address the tension between social and economic outcomes and financial returns without acknowledging the role of financial returns. It would be a huge mistake for union pension trustees to try to address the question of social and economic benefits without understanding the role of financial returns in overall pension financing. To the extent that union pension trustees encounter a conflict between their desire to achieve social and economic objectives and the financial returns they have anticipated, either financial plans need to be revised or other objectives need to be sacrificed. This problem is not resolved by the development of social accounting frameworks. Trustees still have to have a clear framework for assessing any trade-offs that might exist between social and economic outcomes on the one side, and financial outcomes on the other.

The social accounting frameworks promoted by Carmichael are well suited to the assessment of capital investment projects in real estate and, in principle, any other sector, whether the projects are financed by pension plans or by any other means. Unfortunately, it is typically only a minor fraction of pension fund investment that is so closely associated with new capital investment. In public securities markets, ownership claims and debt instruments are traded back and forth but the connection to specific capital projects is unclear at best. One can develop criteria for assessing the behaviour of the corporations and governments that issue stocks and bonds, but they would not have the marginal impact focus of those proposed by Carmichael.

As was noted above, one of the approaches to pension fund investing that is documented in Pension Power is shareholder activism. Again, much of this activity has focused on corporate governance issues as institutional investors have reacted against situations where corporate management and insider shareholders have profited at the expense of non-controlling shareholders, including pension funds. In addition, some initiatives have focused on environmental and labour issues. In principle, initiatives of this sort are likely to be relevant to a bigger portion of a pension investment portfolio than are Concert-type initiatives. It is interesting that Carmichael does not note any attempt to use shareholder activism to drive a company from a low road (cost reduction) to a high road (product and service quality, and innovation) path to profitability. Nor is this reviewer aware of one.

There is still a great deal of exploration to be done on the possible areas of active shareholder involvement and much to be done too in terms of measuring impacts. It is worth noting, too, that many of these shareholder initiatives that challenge corporate insiders are undertaken in part with a view to enhancing the long-term value of shareholders' investments. Within this view, the tension between financial returns and social and economic outcomes that animates so much of Pension Power disappears. It is probably too much the world of Dr. Pangloss to hope that the long-term financial interest of shareholders will always line up with social and economic progress. But it is just as unlikely that they are always in opposition to each other. It is instructive too that many shareholder actions challenge the treatment of the corporation as a homogenous entity as Pension Power tends to do; many of these actions are built around the conflicting interests of corporate insiders and outsiders.

Initiatives of the sort described in various parts of Pension Power in which trade unions try to exercise control of pension fund investments in order to achieve both financial and non-financial objectives reflect a movement that has some history behind it, but is still in its early days. Despite the contradictions and dilemmas that go with it, it is also an agenda that needs to be explored as fully as possible. In this regard, I don't share Carmichael's view that we know we can change the world by doing so. But, I do think we have to find out what can and cannot be achieved in this area.

Also, for reasons that have nothing to do with socially responsible investing, employers who run pension plans for their employees face too many conflicts of interest on all aspects of their operation to be allowed to operate them on their own. Even if trade unionists were to reject root and stock the notion of trying to combine financial and non-financial objectives, they would still have good reason to want to be involved in all aspects of pension plan governance, including decision- making on pension fund investments.


Bob Baldwin Canadian Labour Congress

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