A controversial decision by the second-largest US pension plan, the California State Teachers’ Retirement System (CalSTRS), to divest its holdings in two private prison companies, became a reality by just one vote, shows a video stream of the system’s investment committee meeting.
A CalSTRS press release after the Nov. 7 decision laid out the bare details that were picked up by the national media: the $219.1 billion pension system would divest of stocks and bonds it holds in two US prison companies, CoreCivic and GEO Group, within six months.
Beyond the press release, however, was an investment committee meeting so emotional that two committee members, Board President Dana Dillon and Nora Vargas, who represents school boards, could be seen crying as they discussed their pending votes to divest from the two companies whose facilities have housed immigrant detainees caught up in President Donald Trump administration’s immigration crackdown. The vote ended in a 6-5 split decision for divestment.
“It is an emotional issue,” said Dillon at the meeting, noting that “it is going to be another 20 years before we see the repercussions of the [Trump] administration’s decision to separate children from their families.”
“But no matter what we do, I shouldn’t say that, but if we divest, those conditions are still going to exist, the policies will still be the same, the negative public opinion, it’s going to continue, the abuses will continue,” she went on.
Dillion said CalSTRS would not have a seat to attempt to influence the companies through its corporate governance program to make positive changes if it divested from the companies, but she ultimately voted for the divestment.
Neither CoreCivic or GEO Group housed immigrant children separated from their families but both companies individually ran their own shelters in the San Antonio, Texas, area, that housed immigrant children and families together that were detained under the administration’s policies.
The issue of divestment also split California State Treasurer John Chiang and California State Controller Betty Yee, both who serve on the CalSTRS board. Chiang, who has championed another divestment implemented by CalSTRS, against manufacturers of firearms and ammunition that are illegal for sale or possession in California, voted to divest from the two private prison companies.
Lynn Paquin, Yee’s chief financial advisor, cast Yee’s vote against divestment.
“It has been a really hard discussion and the controller obviously feels that there is a moral issue at stake too,” Paquin said. The controller’s representative said she was casting a no vote because Yee felt CalSTRS needed to adhere to its divestment and risk policies.
CalSTRS rules allow for divestment of companies when they are determined to be violating the pension plan’s environmental, social, and governance (ESG) investment policy or other pension plan risk factors.
A CalSTRS review by investment staff issued in November didn’t offer a specific opinion as to whether the ESG policy or other risk factors were being violated by the two private prison companies.
“Staff does not take a position on whether or not private prisons violate the ESG policy to the point of justifying implementation of the CalSTRS Divestment Policy,” the Nov. 7 written review said. “Staff realizes the operation of prisons (public or private) pose noteworthy risks under the CalSTRS ESG policy. However, in several cases, it is the contracting agency, such as the US Government, that creates and carries the risk.”
CalSTRS Chief Investment Officer Chris Ailman told the investment committee at the Nov. 7 meeting that their votes would be difficult.
“I understand and actually share the anger and the pain that has been caused by this current administration’s immigration policy,” he said. “As fiduciaries to CalSTRS, you have to make a decision as best you can without any emotion. And I know on this issue it’s tough.”
Ailman had begun the divestment review in July after receiving complaints about CalSTRS holdings in the private prison companies from teachers’ groups. Generally, Ailman has been an opponent of divestment, arguing that the pension plan has more influence on changing corporate policy as an investor.
CalSTRS has one of the largest corporate engagement programs in the world as it challenges companies on board diversity, sustainability, treating workers fairly, and other issues.
CalSTRS’s holdings of Core Civic and GEO Group are relatively small given the size of the pension plan, around $12 million combined in stock holdings and $2 million combined in bonds.
Some investment committee members said at the Nov. 7 meeting that the small size of the holdings helped sway their decision to divest, but investment committee member Paul Rosenstiel objected to that line of thinking, saying a series of small divestments of different securities could start adding up and have an effect on the CalSTRS portfolio. Rosensteil ended up voting no on the divestment plan.
“We’ve been trying to avoid having non-financial, non-investment arguments because God knows what goes on with these companies,” he said. “The pain and suffering that goes on in these facilities—I don’t think anyone on the board doesn’t think it isn’t tragic. We are trying to function as fiduciaries and get the returns that we need rather than turn this board into a discussion or this social issue or that social issue, which are really important social issues, but may not be what this board is about.”
Vargas, the other board member who cried while explaining her yes vote to divest, said she lived near the US-Mexico border.
“This is a really personal issue for me because I live by the border in San Diego and I see [immigrants being detained] every day, so for me it’s a very important emotional issue and it is a moral issue in addition to it being an issue that I think we have the power to make a difference.”
Both private prison companies say that they are working as government contractors and have nothing to do with setting immigration policy. They say their facilities meet all regulations. It is California educators who will be missing investment opportunities due to the divestment, they insist.
Dillon said the divestment will satisfy California teachers who were upset with CalSTRS investments in the private prison companies, but wondered if the pension system made a mistake because it will not have a seat at the corporate table.
“I think the members of our system will say I’ve washed my hands of that because my pension system is no longer invested and I’m not sure that’s where we should be,” Dillon said.
Tags: CalSTRS, CEO Group, Corecivic, Divestment, Pension