The University of California's board of regents has decid ed to divest UC assets from companies that do business with the Sudan. A number of other institutional investors, mostly universities, have done likewise. In addition, however, the UC system will be the only university not only to divest stocks of companies that do business in Sudan but will also divest from index funds that contain such companies in their portfolio.
Although I deplore the genocide in Sudan, it is difficult to regard the regents' action as anything other than symbolic gesture. Indeed, according to the Daily Bruin, the decision was made "with little discussion" and "on a moral instead of financial basis."
As I have detailed in prior columns, social activist divestment tends to have little impact on the targets of divestment, but does reduce returns to investors who divest. (According to the DB, the UC system claims to have taken steps to avoid a portfolio impact. We'll see if it works.)
In life, of course, there are times when a costly but symbolic gesture seems appropriate. Indeed, some situations absolutely require that "a really futile and stupid gesture be done on somebody's part."
Yet, there's a very important difference between an individual deciding to make such a gesture and an organization like the UC board of regents deciding to do so. If the regents who passed this proposal were simply dealing with their own investments, who could gainsay their right to shoot their portfolios in the foot? But they have ordered that the university divest its endowment and retirement funds. As such, their decision illustrates a perennial problem of institutional investment; namely, Quis cusotdiet ipsos custodies.
Like the vast majority of large institutional investors, the UC regents manage other people's money, a large chunk of which comprises the pooled savings of small individual investors. But UC employees and retirees have even less control over the election of regents than shareholders do over the election of corporate directors. Worse yet, although an individual investor can always abide by the Wall Street Rule with respect to corporate stock (its easier to switch than fight), we cannot do so with respect to our pension plans.
Like all managers of pension plans, the UC regents are fiduciaries of the beneficiaries of those plans. When they pursue a social agenda nearly certain to result in poorer performance, they are disserving their beneficiaries. All for the sake of a gesture that experience teaches will be fruitless. I'd call that a pretty clear breach of fiduciary duty.
