The Politics of Public Pension Funds

By Romano, Roberta | The Public Interest, Spring 1995 | Go to article overview

The Politics of Public Pension Funds

Romano, Roberta, The Public Interest

In most large U.S. corporations, the owners are passive investors who do not run the business. This creates an agency problem, allowing the managers to operate the business for their own ends, not the shareholders'. In the 1980s, corporate takeovers tended to mitigate the agency problem. Poorly performing managers were threatened with replacement by new owners who were willing to pay the shareholders a premium to take control of the firm in the expectation of increasing profits. With the lull in takeover activity in the 1990s, commentators concerned about corporate performance have sought alternative mechanisms to discipline management; the most prominent strategy is to encourage institutional investors to be more active in corporate governance.

Institutional investors are the principal target of corporate-governance strategies because they hold larger blocks of stock than individual investors. By being able to spread the cost of active monitoring of managers over a larger number of shares, corporate governance becomes more cost effective. Moreover, one group of institutional investors has been the focus of attention: public pension funds (state and local government employees' pension funds).

Public pension funds are typically considered the best candidates for corporate-governance activity because other financial institutions, particularly banks and insurance companies, are thought to have conflicts of interest. The conflict comes in monitoring managers of corporations whose stock they hold as a result of other business relationships they have with corporations, relationships which might be jeopardized if they opposed management on a matter of corporate governance. Corporate pension funds are suspect because they are run by corporate managers themselves.

When it comes to conflicting incentives to monitor corporate managers, however, there is no such clear-cut distinction between the public and private sector. Public pension funds are also confronted with conflicts of interest, though of a distinctive type. Namely, public fund managers are subject to political pressure to accommodate investment and voting policies to local considerations, such as increasing in-state employment. Just as certain private fund managers can be threatened with loss of business if they vote their shares against incumbent management, public funds can face economic losses if firms propose to close plants in states whose funds have not voted cooperatively or to not locate facilities in states whose funds are pro-management voters. Although these conflicts are geographically delimited compared to those involving private financial institutions, it is an open question whether one sector's decision making is more constrained than the other by its type of conflict.

While I have not attempted to measure the relative degree of conflict of interest in corporate-governance matters across private and public investors, I have investigated whether there are conflicts of interest in the public sector affecting fund decision making. There is ample anecdotal and statistical evidence to conclude that there is a significant problem and that it will increase if public funds intensify their monitoring activities. This severely limits the benefits from a strategy of encouraging public pension funds' activism in corporate governance. Moreover, the best method of mitigating the conflict of interest that public pension funds face is to privatize the funds by shifting their organization from defined benefit plans to defined contribution plans, but such a transformation will eliminate their ability to engage in corporate governance. More about this later.

A tempting target

The percentage of corporate equity held by institutional investors generally, and by pension funds in particular, has increased exponentially over the past few decades. From holding less than 1 percent in 1950, pension funds held 26 percent of corporate equity by 1989. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Cite this article

Cited article

Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

The Politics of Public Pension Funds


Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

    New feature

    It is estimated that 1 in 10 people have dyslexia, and in an effort to make Questia easier to use for those people, we have added a new choice of font to the Reader. That font is called OpenDyslexic, and has been designed to help with some of the symptoms of dyslexia. For more information on this font, please visit

    To use OpenDyslexic, choose it from the Typeface list in Font settings.

    OK, got it!

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search


    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.