Texas v. Iran: About the order banning
public pension fund investments
by Lucius Lomax
The on-going episode, which is the talk of the state’s investment community,
might say more about Perry and the limits of his power than about Sudan, Iran, AIPAC or the American
Posted on August 22, 2008
What’s the similarity between the U.S.
invasion of Iraq and Gov.
Rick Perry’s order that Texas’ public pension
funds divest themselves of stock in companies doing business with Iran?
Yes, Texans were in charge in both cases. No points will be awarded for that
In addition, both decisions were based upon bad intelligence about Al Qaeda,
both featured input from influential neoconservative Washington think tanks, and in both cases
there was ineffective resistance from people who knew better but were afraid to
And, in both cases, there’s oil involved. Or—in the case
gas. But this time around, energy is not a spoil of war, it has become a
The governor’s order has proved problematic but is going forward in an
“engagement” phase with almost two dozen foreign energy companies. The
principal Texas funds—the Teachers Retirement System and the Employees
Retirement System, both headquartered in Austin and with combined assets of
about $131 billion—have more than $1 billion total invested in
Slowing divestiture efforts have been accusations of inflated rhetoric by
Perry, yes, and also what appears to be a general dislike among some
legislators and pension managers of so-called “social investing”—investing to
achieve social or political goals as much as financial returns. The move to
divest, which the governor likes to compare to the international struggle
against apartheid in South Africa,
follows recent state legislation to restrict public investment in businesses
with interests in Sudan
and has attracted limited bi-partisan support.
It has also attracted the interest of key Washington players, including the powerful
American Israel Public Affairs Committee (AIPAC) and the American Enterprise
Institute, or AEI, which the New York Times recently described as the
conservative think tank “that has had more influence within the Bush White
House” than any other. Caught in the middle are the state’s pension fund
managers, who are supposed to have only the retirement benefits and healthcare
of more than one million teachers and other public employees in mind. Instead,
the two funds have been asked by the governor to help fight Al Qaeda.
The fund managers are now evaluating responses from the top names among
foreign energy companies, including France’s
Total and Great Britain’s
Royal Dutch Shell. These “second responses” from the companies were due in July
and follow the State of Texas’s
initial attempts at engagement, part of a process that must be followed before
selling off stock begins.
Both the American Enterprise Institute and AIPAC—together with corporate
consulting firm RiskMetrics—have helped the Texas funds to perfect a list of major energy companies
actually doing significant business in Iran which, depending on what list
you’re looking at, averages 20 or more names. The states of Ohio
and Illinois, with help from Florida,
have also provided direction to Texas
based upon those states’ own divestiture approaches. But AIPAC in particular is
actually helping the state of Texas to refine
the financial attack on Iran.
While noting that U.S. law already penalizes companies for investing more
than $20 million in any given year in Iran’s petroleum sector, AIPAC has urged
Texas to limit its targets to Iran’s energy sector because, as AIPAC Southwest
Regional Political Director Jessie Dickerman wrote to
TRS earlier this year, “Iran desperately needs foreign investment in their
petroleum sector, which accounts for 80 percent of the country’s hard currency
and over 50 percent of the government’s annual budget. By targeting this
sector, divestment will directly impact the most critical sector of Iran’s
AIPAC became involved in TRS’s decision-making
with the assistance of Democratic State Rep. Scott Hochberg of Houston, who
approached the Teachers Retirement System with the offer that AIPAC “would like
The origins of the changes in Texas’s
investment strategy appear to be in Jerusalem.
Last summer Perry returned from a visit to Israel where he held meetings with
high government officials including Prime Minister Ehud
Olmert. In September the governor wrote a letter to
both state funds, TRS and ERS, directing them “to begin the process of
divesting investments that do direct business with Iran.”
In his letter Perry described Iran “as an epicenter for terrorist
activity, having provided a safe haven, training and equipment to Al Qaeda.”
The governor noted the large size of the Texas
economy and, denying any effort to have a Texan foreign policy, he nonetheless
suggested that Austin
could be influential in world affairs. While the likelihood of any ties between
majority-Shiite Iran and Sunni-dominated Al Qaeda have recently been ridiculed
in Washington—Republican presidential candidate John McCain was dinged publicly
for making the same mistake on a tour of the Middle East earlier this year—in
Austin the concern about the divestiture plan seems to have focused as much on
risk to bottom lines as on foreign policy gaffes by Rick Perry.
Shortly after the Perry letter, Texas
pension fund managers received a second piece of important correspondence from
a Republican lawmaker: this time from Vicki Truitt, chairwoman of the Texas
House of Representatives’ Committee on Pensions & Investments. Her message
was different from the governor’s. Rep. Truitt counseled caution on using the
state’s money for political ends.
“The goal of the investment portfolio and the policy guiding the decisions
affecting the portfolio must be to maximize investment return,” she wrote,
telling TRS and ERS leaders that their responsibility was to provide safe and
healthy returns “exclusively for the benefit of the members.” She said that
decisions based upon any other standard risked violating the Texas
Constitution, “endangers the system’s tax exempt status and potentially
breaches the board’s fiduciary duties as trustees.” Her message couldn’t have
been more direct, and in early meetings of pension board meetings there was
indeed some grumbling at the Perry directive. That apparently didn’t go over
well at the governor’s office.
“This is just another example of issues in working with TRS management and
the TRS board chair,” Natalie Foerster, the
governor’s point person on Iran
wrote ominously in a November email to Perry’s chief of staff, referring to TRS’s slow pace of obedience to Perry’s marching order. In
March, after the TRS chairman’s term was allowed to expire he was replaced. But
concerns about the wisdom of the governor’s decision continue.
Four years ago, both TRS and ERS got into hot water after multi-million
dollar investments in a private company that bought interests in businesses
across the state as part of a policy goal of “creating jobs.” Unfortunately,
some of the investments were questioned for being politically-motivated, or as
bailouts of failing companies with well-connected owners, and then there were
poor financial returns—and the Teacher’s Retirement System was warned by outside
counsel about the dangers of “social investing.” TRS was told that given two
investments, the pension fund could choose the one that met social goals only
if the returns were equal to the one that did not.
With that warning in mind, Texas
is theoretically attempting to find equally-lucrative investments to replace
those stocks that will be eliminated from the state portfolio. But since most
of the eliminated stocks are energy companies, during a time of booming energy
prices, it’s hard to see how the state will find equally-lucrative investments
(if there were equally profitable stocks available the funds presumably would
already have invested in those too). As a practical matter the state is
divesting first and looking for other stocks second.
There is an added complication. Texas—indeed,
the United States—no
longer has unchallenged economic power. With huge sovereign wealth investment
organizations in Asia and the Middle East ready to invest in Iran, using pools of capital far bigger than the
state of Texas’s checkbook, it’s hard to
believe that foreign energy companies really are afraid of what Austin will do.
“You can be sure,” AIPAC’s Dickerson told ERS as
letters first went out to the targeted businesses, “that some companies will
attempt to rhetorically obfuscate their involvement with Iran so as to
avoid any consequences.” That may have happened. But some of the replies the
state received previously to its divestiture calls, in the case of Sudan for
example, were pretty clear: “It does not appear from these responses that any
of the responding companies, which included Alstom, Wartsila Oyl, PetroChina,
and BHEL, provided information or displayed a willingness to embark on Substantial
Action in a way that would warrant their removal from the Texas TRS
scrutinized companies list,” a Texas government analyst wrote after reading the
companies´ answers to TRS and ERS correspondence. Only one company, Spanish
energy conglomerate Repsol, appeared willing to bow
down before Austin: “Let me tell you first that
I appreciate the opportunity you are giving our company,” Repsol
Director of Investor
Plaza wrote to the
Employees Retirement System, “to explain the involvement we have in the Islamic
Republic of Iran for the time being.”
For their part the French were characteristically nonchalant. Total, the
French energy giant, noted that it is acting within the bounds of French and
European law, and has received exemptions in the past from U.S. sanctions.
It also suggested that Iran’s
oil and gas business should not be confused with Iran’s nuclear ambitions. And in
another echo of the prelude to the Iraq war, when the Bush administration
ignored world opinion, Total noted that “our position is strengthened by the
fact that the United Nations Security Council, in its resolutions aimed at
suspending Iran’s nuclear enrichment program, established a clear distinction
between potentially proliferating forbidden activities and customary authorized
industrial activities like those we are conducting.”
But in perhaps the most important response to Perry’s decree, J. Harold Hatchett III, Royal Dutch Shell’s Vice-President for
Investor Relations remarked on the small amount of business the company does in
Sudan and its humanitarian works there. Then, on the subject of Iran, he explained the reality of the energy
business to the people of Texas
(who actually invented that business):
is a major resource holder. It has the second largest natural Oil and Gas
resources. At current global gas usage, Iran’s gas is enough to supply the
entire world for about ten years. Given the size and global importance of
Iranian hydrocarbon resources, the Group finds it hard to see a future in which
production of these resources would not, at some point, play a role in the
global energy supply and demand balance.”
Meanwhile, a mystery has arisen in Austin
not about who is being asked to divest, but who is not being asked to
make their portfolio politically correct. Any move to promote non-fiduciary
ends—in other words to implement “social investing”—at one of the state’s other
publicly-owned funds, the $25 billion at the University of Texas Investment
Management Company, were stopped dead in December.
Regarding the Sudan
divestiture legislation, passed in 2007 by the Texas Legislature, UTIMCO CEO
Bruce Zimmerman wrote to the chairman of the UT System Board of Regents,
“UTIMCO invests solely in the interests of its beneficiaries . . . .
Specifically, the Board’s Investment Policies prohibit UTIMCO from investing
the board’s funds ‘so as to achieve temporal benefits for any purpose including
use of its economic power to advance social or political purposes.’
“The list of social or political causes that have lobbied for investment
restrictions in just the recent few years includes, but is not limited to,
alcohol, tobacco, gambling, pornography, nuclear proliferation, environmental
and other issues,” Zimmerman continued in his thinly-veiled “no” to the
governor and, indeed, to the legislature. “Finally, while it appears likely
that investment restrictions will have cost implications for the investments
funds, it is less likely that such restrictions would have any meaningful
long-term effect upon the targeted companies.” In a brief interview at the most
recent UTIMCO board meeting in July, Zimmerman said that prohibitions against
social investing would also prevent divesting in stocks of companies doing
business in Iran.
He called such divestiture, at least for UTIMCO, “unconstitutional,” which was
also the phrase invoked by Representative Truitt of the Committee on Pensions
& Investments. The divestiture moves at ERS and TRS continue, however.
“They’re not punishing Iran and Phillip Morris, or whoever, they’re
punishing the teachers of Texas,” a former TRS fund manager complained earlier
this month, noting the efforts to use schoolteachers´ pensions to achieve the
political ends of high government officials.
The reality may be that the on-going episode, which is the talk of the
state’s investment community, says more about Perry and the limits of his power
than about Sudan, Iran, AIPAC or
the American Enterprise Institute.
First, Rick Perry does not like to be confused with the facts. As with his
role model George W. Bush, attention to details is not the governor’s strong point.
But no one—not his enemies among Democrats, or in his own party—underestimates
Rick Perry’s political instincts. His timing, after all, generally has been
excellent. He knew when to abandon the Democratic Party, when to run for
statewide office, when to grab the Bush coattails, and now, it makes people
wonder, what does he know about Iran that has prompted this action?
Because the issue of divestiture is much about appearances
as reality. As Bruce Zimmerman, the UTIMCO CEO, concluded in his “no”
letter to the regents, “Perhaps most importantly, while UTIMCO does not engage
in social investing, we do understand that social or political considerations
may very well have a bearing on the ultimate value of certain investments.”
That means that divestiture can become a self-fulfilling prophecy. If Iran is
attacked militarily, or even credibly threatened with attack, such action could
make the stocks of companies doing business there bad investments; it doesn’t
matter what’s right or wrong, just how the market reacts. In that sense—claims
about Al Qaeda and the “epicenter” of terrorism notwithstanding—Governor
Perry’s instincts may be right, and his action may have the result of
protecting the value of the state’s portfolio.
But even if Rick Perry is ready to take on “enemies” abroad, that doesn’t
mean he is equally fearless at home. The governor appears to have chosen TRS
and ERS to do his bidding because the state’s teachers and public employers are
relatively powerless in Austin.
UTIMCO, on the other hand (whose total value equals the size of the ERS
portfolio and would seem, by the governor’s logic, to be just as strong a
weapon against Al Qaeda) has enormous political clout at the Legislature. UTIMCO’s funds represent the University of Texas, Texas A&M—and, in effect, the two school’s influential alumni.
Even Rick Perry treads lightly there. Were UTIMCO’s
Zimmerman working for ERS or TRS, his refusal to divest, or his talk of
“unconstitutionality” would likely be seen as insubordination by the governor’s
office and his fate would be in doubt. Instead it’s a closed subject, as the
universities continue to put their money where they can get the biggest bang
for their bucks.
There may have been a dose of hypocrisy in the governor’s stance, as well.
While Perry cites the success of sanctions against South
Africa in the 1980s, the state of Texas initially fought tooth and nail
against joining sanctions. And the wave of divestiture from South Africa
was not exactly a product of conservative thinking—a la the American
Enterprise Institute—but the work of starry-eyed liberals, many of them
university students. So it’s odd now that this governor, who prides himself on
social conservatism and being hard right, is using South Africa
divestiture as a battle standard. Had Rick Perry been governor back then, and
had it been up to the state of Texas,
Nelson Mandela might still be in prison today.
divestiture did not pass the last legislative session but has suddenly been
accomplished by the governor’s order. Sudan divestiture legislation, which did
pass last legislative session, after eloquent support by the state’s most
prominent African-American leaders—including Railroad Commission Chairman
Michael Williams—actually has offered a more compelling case than that of Iran,
where there is reason to suspect that confrontation with Tehran is being pushed
by interested parties in Washington.
Finally, and perhaps most critically, the governor seems to be taking a risk
that makes some Texas
business leaders especially nervous.
The Lone Star
State has a large energy industry too
and, like Iran, the United States
recently has not been the most popular government in the world. Norway’s huge sovereign investment fund, for
example—which is three times the size of the Teachers Retirement System of
Texas—also has a long blacklist of companies that Norway will not invest in. The
majority of the names on the Norwegian list are American.
They are mostly arms companies not energy conglomerates but, in the future,
anyone who wants to “punish” the United States may now have a blueprint for
action, and a precedent, courtesy of Governor Rick Perry.
is a freelance writer in Austin
and can be reached