During the last two years, pension fund officials in 20 U.S. states and cities have sold more than $200 million worth of stock in blue chip companies such as IBM, Exxon, General Electric and General Motors in the name of divestment, a form of economic protest that calls for severing ties with U.S. firms that do business in South Africa.
These officials have taken a gamble by shifting pension fund holdings to more volatile investments in a period when the funds face enormous liabilities and must rely increasingly on investment income to pay retirement benefits owed to millions of American workers.
The movement is spreading. With the news of racial violence inflaming American public opinion against the South African policy of apartheid, at least 20 more states and cities, including California and Los Angeles, are seriously considering proposed divestment legislation.
Even proponents of divestment acknowledge that it can be a risky strategy, both legally and financially, and that it could prove to be more damaging to public retirement systems in this country than it is to South Africa, where American business accounts for only about 3% of all investments.
The question is whether divested public pension funds can meet their legal obligations to beneficiaries while satisfying the concerns of apartheid foes: Can they generate the income they need if they are prohibited from investing in the more than 30% of America's blue chip corporate giants that do business in South Africa? (Those firms represent nearly 50% of the market value of America's major corporations.)
Critics argue that elected officials who call for divestment are putting politics before prudence and abdicating their fiduciary responsibility to the approximately 14 million present and future beneficiaries of public retirement systems.
Backbone of Portfolios
"The South African policy hits hardest the very largest stocks that are the backbone of billion-dollar portfolios," said Boston investment analyst Stanford Calderwood in a reference to the size of pension fund accounts commonly held by states and large cities.
In addition, the impact of divestment on South Africa is not easily measured.
Both supporters and critics of divestment agree that the movement has had some impact on American firms with ties to South Africa. In three cities where divestment laws have been passed--Boston, New York and Washington--nine banks have stopped lending money to South Africa. And since October, 25 more American companies have signed a voluntary code of fair employment practices now subscribed to by 147 of the 300 American firms in South Africa.
But there are other indications that divestment has not slowed the pace of overall American investment in South Africa. In fact, loans from U.S. banks to the private sector in South Africa rose from $608 million in 1981 to $939 million by the end of 1984, according to the Federal Reserve Bank.
In South Africa, black leaders disagree among themselves over the wisdom of divestment as a device for bringing about social change. For example, Nobel Peace laureate Bishop Desmond Tutu has praised demonstrations by American students in behalf of divestiture. But Gatsha Buthelezi, hereditary leader of the Zulu people, has urged American investors not to drop their stake in U.S. businesses in South Africa because he thinks those businesses are an important force for change in his country.
In this country too, skeptics say that public pension funds, which control less than 5% of the stock in all American companies, do not wield enough economic power to make a difference in South Africa.
One response to all the political and economic uncertainties surrounding the divestment movement has been partial divestiture by some states and cities, such as Connecticut and New York City. They have adopted policies allowing them to retain investments in companies in South Africa that follow a voluntary code, known as the Sullivan Principles, that calls on them to practice fair employment and work for an end to racial discrimination.
Pushing for Change
The Sullivan Principles were drawn up in 1977 by the Rev. Leon Sullivan, a Philadelphia Baptist minister, civil rights activist and the first black member of the board of directors of General Motors Corp., to pressure companies to push for social change.
Sullivan himself has said he prefers partial divestment that targets firms believed to be the least responsive to the campaign against apartheid. But he does not criticize those officials who have authorized blanket divestment.
"Divestment has been a great help to me," said Sullivan, who estimates that 50% of the firms that have signed the Sullivan Principles would not have done so without the threat of divestment.
Partial divestment has found acceptance among investment analysts because it does not drastically narrow the available range of investment choices.