Sunday, May 17, 2009

Minnesota vs. Iran

This past weekend in the US, there was a prime example of politics affecting State investment fund decision making. Increasingly, these large funds are permitted, indeed required, to make decisions based on political ideas. This is not new but I think it needs to be watched carefully for consequences-good and bad. We need to learn about both the consequences for the State fund and for the target of their political objective. Here, I point out the highlights of a recent bill in one US state that discourages investment in companies doing business in Iran. We leave consequences for future research.

According to a new law in the US state of Minnesota, the Minnesota State Board of Investment is required to divest its holdings in any company doing business in Iran. The Board of Investment is a State agency and manages $47 billion (USD). This figure represents monies in various retirement funds, trust funds, and cash accounts of public employees. Subdivision 7 of the Act permits the State board to retain share ownership of a company doing business with Iran, if it determines in good faith that divestment would be a breach of the fiduciary duties of the board. Also, for investments that are managed indirectly, such as shares in a hedge fund, all the Board need do is encourage those OTHER managers to divest of investments in companies actively doing business in Iran. I could not find any legislative history to find out why this Bill and why now.

It is very difficult to discover how effective these initiatives are. In comparison and historically, there are studies that demonstrate that anti-apartheid shareholder and legislative boycotts did not negatively affect corporations with South African operations or South African financial markets. I think we are worlds away from those days of ineffective campaigns. Today, we communicate much more and much faster. Corporations are more sophisticated and exceedingly media savvy. I am sure some companies doing business in Iran will no longer have the state of Minnesota as a shareholder. Others will find a way around this new restriction. How does this serve the interests of the public employees who have their retirement monies invested with the State investment board?


See Teoh, Siew Hong & Welch, Ivo & Wazzan, C Paul, 1999. "The Effect of Socially Activist Investment Policies on the Financial Markets: Evidence from the South African Boycott," Journal of Business, University of Chicago Press, vol. 72(1), pages 35-89.

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