BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Martha M. Escutia, Chair
2003-2004 Regular Session
SB 1632 S
Senator Figueroa B
As Amended April 22, 2004
Hearing Date: April 27, 2004 1
Government Code 6
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SUBJECT
Public Pension Systems: Corporate Investments
DESCRIPTION
This bill would make legislative findings and declarations
about the need for more information about the overseas
corporate practices of companies in which public pension
systems may invest. Specifically, the findings and
declarations relate to information about corporate
practices that affect the environment, public health,
labor, and human rights here and abroad and which are not
readily available to the public.
This bill would:
to the extent feasible, require a public pension
system to request information from a corporation whose
capital stock is held within the internal equity index
fund of the pension fund's investment portfolio. The
information requested relate to corporate practices
that affect the environment, public health, labor and
human rights;
require each public pension fund to report to the
Legislature regarding the corporate information
received and to make the information available to the
public by whatever means feasible, including posting
on a website, unless to do so would violate fiduciary
duties to its members and retirees;
require that any action taken by a public pension
fund system with a corporation that fails to provide
(more)
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the requested information be consistent with its
fiduciary duty to as a prudent investor; and
make a corporation liable for damages or equitable
relief for submitting information that it knows or
should have known is false or contains material
misrepresentations of fact.
BACKGROUND
California, as the sixth largest economy in the world,
contributes significant financial and labor resources to
the global market. The California Public Employees
Retirement System (CalPERS) and the California State
Teachers Retirement System (CalSTRS) are the largest and
third largest pension funds in the nation, with combined
assets of $250 billion.
According to the sponsors of SB 1632, these combined assets
give California pension funds considerable ability to shape
corporate practices through the influence of markets, while
simultaneously improving financial performance. They cite
studies that have shown both financial as well as
nonfinancial information to have significant impacts on
corporate earnings potential. They state that the ability
of investors and fund managers to access this information
is critical to making sound investment decisions.
This bill is double-referred from the Committee on Public
Employment and Retirement.
CHANGES TO EXISTING LAW
1. Existing law imposes fiduciary duties on boards of
directors of public pension and retirement systems and
requires them to act as prudent investors when making
investment decisions.
This bill would require public pension systems to obtain
specified information from a corporation if the system
holds stock in the corporation, to report to the
Legislature regarding that information, and to make that
information available to the public, unless prevented by
its fiduciary duties.
SB 1632 (Figueroa)
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This bill would require the public pension system to
obtain the following information from a corporation in
whose stock the public pension system has invested:
Whether the corporation complies and monitors
compliance with human rights standards such as those
of the International Labor Organization;
Whether the corporation has been cited or punished
for public health or human rights , environment,
employment, consumer protection, or corruption-related
violations abroad and if so, the cumulative value of
the penalties;
Whether the corporation has adopted an
environmental management system or is a member of
CERES or the Global Management Reporting Initiative
and ensures that its facilities, contractors, and key
subcontractors are environmentally responsible.
This bill would not apply to small businesses as defined
by the Small Business Administration, would not limit the
public pension fund's ability to execute its fiduciary
duty, and would not require any public pension fund
system to make any investment decision or to impose
different criteria on existing or potential investments.
2. Existing law imposes civil liability or civil and
criminal penalties on corporations for failing to file
specified documents relating to the company's operations,
for failing to comply with state or federal law
requirements or for other offenses.
This bill would make a corporation that submits
information that the corporation knows or should have
known is false or contains material misrepresentations of
fact subject to liability for damages or equitable relief
under applicable provisions of law.
COMMENT
1. Stated need for the bill
According to the sponsors of SB 1632, "[a]s the business
activities of multinational corporations extend across
the globe, the practices of these corporations
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increasingly affect the environment, public health, labor
and human rights of communities everywhere?. California
consumers and investors potentially have tremendous
influence on worldwide environmental and public health
practices. Unfortunately, shareholders and citizens have
little or no access to the overseas environmental, human
rights and labor practices of corporations as this
critical information is not publicly disclosed, even when
corporations are violating human rights or are harmful to
the communities and the environment."
These statements are incorporated in the legislative
findings and declarations in SB 1632.
2. Public pension fund system must request the
information when it owns stock, act as a prudent investor
when corporation fails to provide information
SB 1632 would require a public pension fund to request
specified information from a corporation in which the
pension fund owns stock. The information requested
relate to corporate practices here and abroad, in the
areas of the environment, public health, labor, and human
rights.
The bill justifies the need for this information with
legislative findings and declarations that state current
securities regulations do not provide sufficient
disclosures of social and environmental risks and
liabilities, thus constraining proper risk analysis and
threatening shareholder value. The legislative
declarations cite studies that "increasingly show that
good management of environmental and social issues is
linked to good overall management practices."
The bill would require that any action taken by a public
pension system with respect to a corporation that fails
to provide the requested information "shall be consistent
with the system's fiduciary duty to act as a prudent
investor."
Essentially, what this means is that the information on a
corporation's practices in the areas of environment,
public health, labor, and human rights, whether or not
such practices have any direct bearing on the primary
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Page 5
business of the corporation, would be part of the public
pension system's due diligence inquiries in making
investment decisions.
While there are no penalties specified in the bill, the
prudent investor principle imposes fiduciary duties on
and subjects the public pension system to liability for
shareholder actions.
In fact, a lot of information is already available on the
Internet on a wide range of corporations that impact the
global market. [See for example, articles on "green
investing" available at a variety of websites, to
identify corporations that have dismal environmental
records.]
By requiring corporations to provide the information
requested under this bill and requiring the public
pension system to act as a prudent investor, SB 1632
would ensure that public pension systems gather
information directly from the corporations.
The amendment made in the Public Employment and
Retirement Committee dilutes this requirement "to the
extent feasible."
3. Corporation liable for false information or material
misrepresentations
California's "blue sky law" subjects a corporation to
civil and criminal liability for material
misrepresentations, fraud, and other actions related to
the sale of securities in the state.
The U.S. Securities and Exchange Commission (SEC) and the
state Department of Corporations (DOC) regulate the
filing of information by corporations doing business in
the state and their activities related to the sale or
exchange of stocks. Corporations are thus subject to
numerous filings of information both at the state and
federal levels, although in some instances filings with
the SEC are deemed by the DOC to comply with state
requirements.
SB 1632 would provide that a corporation that submits
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information as required by the bill that the corporation
knows or should know is false or contains material
misrepresentations of fact may be subject to liability
for damages or equitable relief under applicable
provisions of law. "Applicable provisions of law" is not
defined, although staff assumes it refers to the state
laws regulating corporations, which are in the
Corporations Code.
SHOULD THERE BE A CROSS-REFERENCE TO THIS PROPOSED
GOVERNMENT CODE SECTION IN THE CORPORATIONS CODE, TO
ENSURE THAT CORPORATIONS KNOW ABOUT THIS LIABILITY?
It would seem that the only equitable relief available in
the event of a violation by a corporation is an
injunction ordering the corporation to comply with the
required filing and to do so with truthful and accurate
facts. Damages would be too speculative, unless the
investor (the public pension system) can show that its
investments were made and lost based on the false
information provided by the corporation or unless a civil
penalty for noncompliance is specified.
For example, there are provisions in the Corporations
Code, imposing civil penalties of up to $1 million on
corporations and limited liability companies for failure
to notify shareholders and proper authorities (such as
the Department of Corporations or the Attorney General)
when they acquire knowledge of materially false or
misleading statements made by the corporation, its
officers, directors or agents, that affect the public
perception of the financial condition of the corporation
and its financial markets. This civil action may be
brought only by the Attorney General or a district or
city attorney. (SB 523, Escutia, Chapter 477, Statutes of
2003.)
SHOULD THE PENALTY APPLICABLE TO THE SUBMISSION OF FALSE
OR MISLEADING INFORMATION TO THE PENSION FUND SYSTEM BE
SPECIFIED?
4. Explanation of references to standards used in SB 1632
CERES: Principles are a voluntary 10-point code of
corporate environmental conduct publicly endorsed by
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companies as an environmental mission or ethic. The
principles are: protection of the biosphere, sustainable
use of natural resources, reduction and disposal of
wastes, energy conservation, risk reduction, production
of safe products and services, restoration after
environmental harm, informing the public, management
commitment, and publication of annual environmental
audit. www.ceres.org
The Global Reporting Initiative (GRI) : Initiative
spawned by CERES in 1997, as businesses and
nongovernmental organization members identified the
critical need to establish a uniform reporting system for
their environmental and social practices. The GRI
disseminates Sustainability Reporting Guidelines, for
voluntary use by organizations for reporting on their
economic, environmental and social activities. The GRI
became independent from CERES in 2002, and is now an
official collaborating center of the United Nations
Environment Program. www.globalreporting.org
The International Labor Organization (ILO) is the United
Nations agency responsible for promoting labor rights and
decent working conditions.
Support: California Federation of Teachers; Earthjustice;
Sierra Club of California; Professor Richard
Buxbaum, Boalt School of Law; California Teamsters
Public Affairs Council; Planning and Conservation
League; Public Citizen; Friends of the Earth;
California School Employees Association; California
Teachers Association; Environment California
Opposition: None Known
HISTORY
Source: The California Right to Know Coalition and the
Natural Heritage Institute
Related Pending Legislation: None Known
Prior Legislation: SB 1245 (Hayden, Ch. 216, Stats. 1999)
required CalPERS and CalSTRS to monitor and
report on investment in companies doing
business in California that owe compensation
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to victims of slave labor from 1929 to 1945.
SB 105 (Burton, Ch. 341, Stats. 1999)
required CalPERS and CalSTRS to investigate
and report on extent of compliance of
companies investing in Northern Ireland, with
laws of Northern Ireland and related
principles of nondiscrimination in employment
and freedom of workplace opportunity.
Prior Vote: Com. on P. E. & R. (Ayes 3, Noes 2)
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