The Singular Role of Public Pension Funds in Corporate Governance

Introduction

U.S. public pension funds manage more than $6 trillion in assets.^[1] The law, policy, and public debates about how they should manage this money are based on a theoretical model that is descriptively inaccurate and yields policy proposals that render corporations less accountable to the public. This Article provides an alternative model that reflects the institutional design of public pension funds, recognizes their significant and distinctively public role in corporate governance, and provides them greater latitude to serve their constituents.

Public pension funds have had a paradigm-shifting impact on corporate governance. They led the push to make boards more accountable to shareholders and to incorporate environmental and social considerations into corporate decision-making.^[2] Their pathbreaking engagement led to the widely accepted proposition that it is desirable, and even obligatory, for institutional investors to engage actively in “stewardship” at their portfolio companies.^[3] From public pension funds, engagement spread to mutual funds, private pension funds, and other institutions. Countries and stock exchanges around the world adopted stewardship codes encouraging or mandating institutional investor stewardship.^[4] The United Kingdom led this effort, starting with its 2010 Stewardship Code.^[5] Similarly, the 2017 EU Shareholder Rights Directive requires institutional investors to explain how they carry out their stewardship obligations.^[6]

At the same time, commentators recognized a potential dark side to institutional investor activism. Some warned of potential conflicts of interest.^[7] A growing body of literature has raised antitrust issues related to institutions’ common ownership of multiple companies in the same industry.^[8] In other work, we have emphasized that institutional investors typically act as intermediaries, raising potential agency concerns in connection with their stewardship role.^[9]

The expansion of institutional engagement beyond traditional governance issues heightens these concerns. Today, institutional investors increasingly focus on political, social, and environmental topics. These topics raise a variety of challenges, including how corporations should weigh non-economic considerations,^[10] and determining what, if any, relationship exists between environmental, social, and governance (ESG)^[11] factors and long-term profits. For many institutions, engagement in such issues raises accountability problems because fund managers may act in ways that are inconsistent with the interests of their beneficiaries.^[12] Engagement can also raise legitimacy concerns, particularly when it is defended as a solution to perceived failures of the political system.^[13]

This commentary aggregates the actions of public pension funds with those of other institutional investors. Asset managers are uniformly conceptualized under what we term a “beneficiary primacy” view. Under this view, funds are understood as intermediaries; fund managers owe strict fiduciary duties to maximize fund economic value for the benefit of the funds’ beneficiaries—fund investors in the private context and government employees and retirees in the public context.^[14]

The beneficiary primacy view is appropriate for mutual funds and other private asset managers. In these cases, fund managers have been entrusted with responsibility for managing other people’s money, usually with the purpose of generating economic returns.^[15] Public pension funds, however, are different. A key distinction is that beneficiaries of mutual funds are residual claimants, meaning that they benefit from investment decisions that increase the value of the fund and suffer from decisions that sacrifice value. Because public pension funds typically operate under a defined benefit structure, their beneficiaries are, instead, fixed claimants whose retirement benefits do not fluctuate with the value of the pension fund.

Public pensions, unlike private pension funds and mutual funds, also have tools that significantly mitigate the risk that economic returns will be insufficient to provide the promised benefit. Unlike private actors, the obligations of public pension funds are ultimately backed by the fiscal authority of the state or local government that set up the plan, which can, among other things, require increased contributions from current employees or direct more tax revenue to the plan to ward off breach.^[16]

Unlike mutual funds, public pension funds are structured to serve public goals. Legislation and investment policies direct fund managers to back state and local programs and instruct them on the extent to which environmental and social considerations should affect portfolio selection and engagement.^[17] These sources of guidance are a result of the democratic process and as such reflect the public’s goals and values. Fund boards and staff inevitably exercise discretion in balancing the divergent views of the public, for which they are politically accountable. Voters can, if they disagree with a plan’s investment activities, remove both the elected officials who oversee public pension plans and the legislators who set or constrain the plan’s investment policies and make the budgetary decisions about how the plan is funded.

Whereas mutual funds are correctly viewed as soulless passthroughs, the distinctive features of public pension funds warrant treating them as principals^[18] imbued with public values informed by the state or local government that launched and oversees them. Under this view, fund managers, whether they be government employees or external advisers, are agents of the fund and, as such, owe fiduciary duties only to the fund.^[19] This view extinguishes beneficiary primacy and its problematic corollary—the legal obligation to focus exclusively on the economic interests of fund beneficiaries.

Recognizing the public pension fund as a principal carries important policy implications. Our theory frees fund managers to make investments in state and local initiatives (like low-income housing), divest from certain industries (like firearms, tobacco, or oil) or certain countries (like Sudan or Russia), engage with portfolio firms on ESG issues (like carbon neutrality), and more—decisions that under the current approach provide fodder for lawsuits alleging fiduciary breach. Instead, the choice about these issues would be guided by the public entity’s vision for the fund, mediated and legitimized through the political processes to which the fund is subject. Some government entities may view these issues as distractions; others may view them as central. Most importantly, the entity’s interests, rather than solely the economic interest of fund beneficiaries, would drive the objectives of the fund. Managers’ fiduciary duties to the fund would continue to serve as a backstop to ensure that they balance such interests in good faith and do not act selfishly, but, as with corporate fiduciaries, their decisions would receive great deference.^[20]

There are further policy payoffs. A longstanding and influential line of scholarship argues that public pensions are too political and that their actions should be constrained by the obligation to focus exclusively on fund economic value.^[21] This perspective is wrong. That public pension funds are embedded in the political structure is a feature, not a bug. The political structure is what holds public pension funds accountable for representing the public’s values—and their publicness makes them a crucial component of corporate governance. By giving voice to a wide range of constituents, many of whom would otherwise have no say in corporate affairs, public pension funds make corporate democracy more democratic.

Our approach also explains public pension funds’ leadership role in making executives more accountable and bringing ESG to the fore. Their activism reflects their concern for the public’s interest in these issues. Our model also explains why litigation challenges to ESG investing and engagement by public pension funds on the grounds that they depart from maximizing long-term value should, and usually do, fail. Historically, courts have viewed these suits skeptically but stopped short of rejecting the fiduciary principles on which they stand. Rejecting beneficiary primacy would render the law in this area more analytically coherent.

Finally, our approach highlights the role of principals in corporate governance. The startling rise and concentration of the mutual fund industry has rightly captured scholarly attention. Scholars have observed that, even though bound to do so, these intermediaries cannot fully represent their beneficiaries’ diverse interests, particularly with respect to ESG.^[22] This is where retail investors and institutional principals, like public pension funds, come in. They bring the public’s voice to corporate governance.

In Part I, we describe how public pension funds are organized and their history of activism and engagement. Part II considers the criticisms of public pension funds for investing and engagement decisions that potentially sacrifice beneficiary primacy in favor of public values, and how these criticisms underpin court challenges and restrictive legislation. In Part III, we show why beneficiary primacy is an inappropriate way to think about public pensions, and in Part IV, we explain that treating public pension funds as principals is more apt. Part V discusses the legal and policy implications of shifting paradigms, and Part VI considers and responds to potential counterarguments.

I. An Overview of Public Pension Funds

Public pension funds stand apart from other institutional investors in their structure, their long history of corporate engagement, and their support for state and local initiatives and businesses. In this part, we explain the distinctive aspects of public pension funds and describe their expansive investing and engagement activities.^[23]

A. Structure and Scope

The scale and diversity of public pension plans is incredible. Public pension funds are the retirement vehicle for public sector employees, including federal, state, and local workers. Our focus is on state and local plans.^[24] As of 2022, there were more than 4,000 such plans (Pennsylvania alone had over 1,500), covering over 34 million people, including both active employees and retirees.^[25] State and local pension plans account for 21% of U.S. retirement savings.^[26]

Public pension funds, typically organized as trusts, collect contributions from public employers and employees and invest these contributions.^[27] In 2021, 5.1% of states’ general expenditures went toward funding public pensions.^[28] Funds then pay pensions to retired public employees based on a formula that typically considers the employee’s average salary over a certain period and length of employment.^[29] State constitutions protect this promised benefit, meaning that the government is obligated to make up any potential shortfalls.^[30] Because public pension funds involve public employers, the employer contribution ultimately comes from taxpayers, and any shortfall is made up through taxpayer money.^[31]

As of June 30, 2025, public pension funds had $6.51 trillion in assets.^[32] They invest these assets in diversified portfolios, including traditional assets like equity and bonds, and alternative assets like private equity, hedge funds, real estate, and commodities.^[33] As further discussed in subpart I(D), public pension funds also invest locally in infrastructure, real estate, and startups within their state (so-called ETIs).^[34] Some states legislatively encourage such investments.^[35] While some, particularly larger pension funds, may internally manage a portion of their assets, the bulk of fund assets are typically externally managed by mutual funds, hedge funds, and other asset managers.^[36] On average, the largest state pension funds manage 44% of their assets internally.^[37] Pension funds tend to manage the indexed portion of their portfolios internally because it is the least complex.^[38]

State and local governments organize the management of pension funds in many ways.^[39] Some governments structurally separate the administrative and investment functions of their funds, while others combine them.^[40] In some funds, a board makes investment decisions; for others that responsibility is vested in an investment officer; and still other funds are run by an elected official with the assistance of an investment support staff.^[41] Where investment decisions are made by a board, the composition of that board varies as well, and may include elected officials, employee and public representatives, investment professionals and others.

A key feature of public pension funds is that legislation and legislators typically determine their fundamental attributes. Generally, policymakers determine or have final approval over plan design, the level of benefits, budgets, hiring and firing of staff, employee salaries, and most importantly, funding.^[42] Legislation also frequently provides guidance on appropriate investments.^[43] The fund’s board of trustees and investing staff manage the fund’s portfolio subject to these significant constraints.

Because public pension plans typically promise a fixed monthly amount to retirees, they are referred to as defined benefit plans.^[44] Defined benefit plans can be distinguished from two alternatives—pay-as-you-go systems and defined contribution plans. Social security is an example of a pay-as-you-go system; employees pay social security taxes and that money immediately flows back out to beneficiaries, who receive fixed monthly payments.^[45] In such a system, there is no investing or investment income. In defined contribution plans, which are typical of the private sector, employees have independent accounts into which they contribute a portion of their salary.^[46] Some employers also match a portion of employee contributions. Employees choose from the plan’s investment options and own the balance in their accounts at retirement. Defined contribution plans shift market and investment risk to employees. Employers bear no responsibility for shortfalls in employee contributions or investing returns.^[47]

For public pension fund managers, ensuring that there is enough money coming from employers, employees, and investment returns to pay current retirees is no easy feat. One problem is that the fund has promised fixed payments but the value of the fund’s portfolio depends on volatile markets. Another is that the fund cannot depend on steady contributions from its government sponsor. As noted above, the amount of funding it receives is allocated as part of the government’s annual budgeting process.^[48] When dividing resources, governments often shortchange their pensions. As a result, underfunding of public pension funds is a perennial issue.^[49] According to one report, “the average funded ratio for American pension plans was 78.1%,”^[50] but some are in far worse condition.^[51]

B. Examples of Large Public Pension Funds

A few examples illustrate how public pension funds operate and how they are structured. There are six major public pension funds in the state of New York.^[52] The largest is the New York State Common Retirement Fund (NYSCRF).^[53] The New York State Comptroller manages the investment and engagement decisions of NYSCRF, which handles the pensions for the over one million people who are members of the New York State and Local Retirement System.^[54] The fund is one of the nation’s largest with almost $268 billion in assets.^[55] As of March 2023, it was 90.3% funded.^[56] The N.Y. State Comptroller is an elected official, who is the state’s chief fiscal officer.^[57] The current comptroller, Thomas P. DiNapoli, does not have a background in finance.^[58] He was a member of the state assembly and was selected in 2007 to replace the former comptroller, who plead guilty to felony fraud and resigned.^[59] In November 2023, Mr. DiNapoli was elected to his fourth term.^[60]

The State Comptroller has sole discretion over NYSCRF’s investing and engagement decisions, with input from staff, including a chief investment officer, as well as advisory committees on investing, real estate, and actuarial matters, among others.^[61] The comptroller’s investing activities are formally constrained by a statutory “legal list” of approved investments, but the list provides the comptroller with significant discretion in how to allocate fund assets.^[62] As is typical, the fund invests in a wide range of public and private assets, including alternative investments.^[63] The comptroller also sets the fund’s engagement priorities, which can vary from year to year.^[64]

The other five New York pension funds fall under the umbrella of the New York City Public Pension Funds.^[65] As of July 2025, these funds collectively held $295 billion in assets.^[66] The city comptroller, an elected official who serves as the city’s chief financial officer, oversees and acts as trustee for each of the funds,^[67] each of which has its own board. The board at each of the funds makes investing decisions with advice from the comptroller.^[68] For example, the New York City’s Employees Retirement System (NYCERS) manages the pension fund for 430,000 municipal employees and retirees.^[69] Its eleven-member board consists of “the Mayor’s Representative, the City Comptroller, the Public Advocate, the heads of the three unions with the largest number of participating employees, and the five Borough Presidents.”^[70] Maintaining five separate funds is likely inefficient, but plans to consolidate the investment function have been scrapped in light of opposition from local unions that would lose clout.^[71]

The California Public Employees’ Retirement System (CalPERS) manages the largest public pension fund in the country with two million members^[72] and about $500 billion in assets under management.^[73] CalPERS is run by a 13-member board, four of whom are ex officio.^[74] The state controller, the state treasurer, a member of the department of human resources, and a representative of the state personnel board are all ex officio members of the board.^[75] Six board members are elected by plan members.^[76] For example, retiree members elect one board member.^[77] Finally, the governor appoints two board members (an insurance representative and a representative of a local government), and the Speaker of the Assembly and the State Senate Rules Committee jointly select a public representative.^[78] The size of this board belies the significant influence individual board members can wield. For example, during his tenure as California Treasurer from 1999 to 2007, Phil Angelides played a major role in directing CalPERS to pursue a labor-oriented agenda and to pursue social investing even though he was technically only an ex officio board member.^[79]

The State of California Department of Finance sets employer and employee contribution rates,^[80] subject to board approval and adjustment by the California legislature.^[81] The fund has a widely diversified portfolio, including an increasing allocation to private equity.^[82] CalPERS internally manages much of its portfolio.^[83] It posted returns of 5.8% in 2023, and was 72% funded.^[84]

The Employees Retirement System of Texas (ERS) manages the public pension fund for employees of Texas state agencies.^[85] Participation by enumerated state employees, including police officers, elected officials and judges, is mandatory.^[86] Created by the Texas State Constitution in 1946,^[87] the pension fund has been the subject of ongoing financing challenges and recent bipartisan efforts to improve its solvency.^[88]

A six-member Board of Trustees oversees the fund. Three trustees are appointed, one each by the Governor, the Speaker of the House of Representatives, and the Chief Justice of the Texas Supreme Court.^[89] The other three are elected by current and former ERS members.^[90] The Investment Advisory Committee, which consists of seven individuals with financial expertise, advises the board on investments.^[91] The board has the authority to set and to modify the ERS investment policy,^[92] which sets out permissible parameters for both investment and stewardship.^[93]

C. Public Pension Funds and Corporate Governance

Public pension funds have long received attention for their active involvement in corporate governance.^[94] They engage with portfolio companies through their voting and communications with corporate management, their participation in investor organizations, and through litigation.^[95] Public pension funds were also among the first socially responsible investors, screening investments based on social or political considerations and divesting from companies on such grounds.^[96]

As early as the 1970s, “several states passed laws to screen out ‘sin stocks’ such as tobacco, alcohol and gambling” from their pension funds.^[97] In the 1980s, many state and local legislatures adopted legislation prohibiting or restricting public pension fund investments in firms doing business with South Africa and Sudan.^[98] The New York City Public Pension Funds were at the forefront of this movement.^[99]

More recently, divestment efforts have focused on firearms and fossil fuels.^[100] The California State Teachers Retirement System (CalSTRS) divested from publicly traded gun manufacturers in 2013 in response to the mass shooting at Sandy Hook Elementary School.^[101] Three of the New York City Public Pension Funds completed divestment from fossil fuels in 2022.^[102] In 2021, Maine became the first state to require that its state pension fund do the same.^[103] More broadly, in April 2023, the New York City comptroller, together with the boards of the New York City Employees’ and Teachers’ Retirement Systems, announced that they had jointly agreed to adopt implementation plans to reach a goal of net zero emissions in their investment portfolios by 2040.^[104]

ESG screening complements fund divestment efforts. CalPERS, for instance, has carefully managed the environmental and social aspects of its portfolio. By 2011, CalPERS had amassed 111 policies and statements related to ESG investing.^[105] And CalPERS is not alone. According to a 2020 Boston College study, “public pensions applied ESG [criteria] to at least $3 trillion in assets,” over half of all assets at the time.^[106] Public pension funds have also actively participated in and, in some cases, founded investor organizations designed to promote good governance and responsible investing.^[107]

In addition, public pension funds pioneered active use of shareholder voting power. Regulatory pressure caused mutual funds and private pensions to increase their attention to voting the shares of their portfolio companies.^[108] Public pensions needed no such push. For example, CalPERS, the NYSCRF, and other public pensions were among the first institutional investors to use public “vote no” campaigns to indicate dissatisfaction with management.^[109] In one such campaign, in 2004, CalPERS withheld its vote for directors at hundreds of companies that were permitting auditors to perform non-audit services.^[110] That same year, the fund led an ultimately unsuccessful campaign to defeat Safeway’s CEO, Steven Burd, alleging a lack of board independence.^[111] More recently, NYSCRF signaled it would withhold votes on DEI grounds. Its 2022 voting guidelines indicated that the fund may vote against “[a]ll incumbent board nominees if there are no [board] directors identifying as an underrepresented minority.”^[112]

Public pension funds have also introduced and supported ESG-related shareholder proposals for many years. They were among the first to push for corporate governance reforms, including majority voting, separation of the CEO and board chairman positions, and proxy access, efforts that have successfully increased managerial accountability to shareholders.^[113]

Public pension funds also led the push for corporate managers to take environmental and social issues seriously. There are numerous well-known examples. The SEC’s controversial no-action letter to Cracker Barrel, which authorized the company to exclude a shareholder proposal seeking to have the company add sexual orientation to its non-discriminatory hiring policy and subsequently led to the SEC’s high-profile revision of its shareholder proposal policy, responded to a 1992 shareholder proposal submitted by NYCERS.^[114] More recently, in 2022, NYSCRF filed shareholder proposals at Tesla, Starbucks, and Activision/Blizzard related to the #MeToo movement.^[115] In 2023, the NYSCRF filed shareholder proposals related to DEI at nine companies.^[116]

Somewhat less known is the active role that public pension funds have taken, especially since the Citizens United decision,^[117] in sponsoring shareholder proposals seeking greater disclosure of corporate political spending and voting in support of such proposals sponsored by others.^[118] The NYSCRF has filed 185 political spending proposals since Citizens United and reports that it was able to persuade sixty-one companies to agree to adopt the requested disclosures.^[119]

Moreover, public pension funds have played a distinctive role as virtually the only type of institutional investor to respond to Congress’s call to serve as lead plaintiffs in securities class actions.^[120] Studies have documented that public pension fund engagement in securities litigation is correlated with improved returns to plaintiffs and, in some cases, lower attorneys’ fees.^[121]

Finally, although the allocation of public pension fund assets to private equity is controversial, some funds are using their power to bring ESG to this opaque part of financial markets. In July 2024, NYCERS, led by N.Y. City Comptroller Brad Lander, an elected official, adopted new rules that require the private equity funds in its portfolio to honor protections for tenants in residential real estate properties owned by the funds.^[122]

D. Public Pension Funds and ETIs

Another unique feature of public pension funds is their investments in ETIs. ETIs provide capital for local and state projects, including infrastructure development, low-income housing, small businesses, and entrepreneurs.^[123] In 1975, the New York City public pension funds played a critical role in helping the city to avoid bankruptcy by committing to buy $2.5 billion of city debt that was sufficiently risky that it could not be sold to the public.^[124]

Today, the large California and New York pension plans discussed above include ETIs in their portfolios. According to the NYSCRF website, “[w]henever possible, the Comptroller guides the Fund to invest in New York-based business ventures, companies and other programs that spur economic growth and create and retain jobs.”^[125] In addition, the fund provides credit financing to New York-based companies and funds affordable housing in New York.^[126] Similarly, according to the New York City Public Pension Funds’ website, the funds “have been successfully and prudently invested in many Economically Targeted Investments (ETIs), which are designed to benefit low-, moderate- and middle-income New Yorkers. These investments, in addition to financing the renovation or new construction of affordable housing, create thousands of construction jobs.”^[127]

CalPERS explains that “[t]o support our members, we also invest in the health and infrastructure of the Golden State itself—building portfolios that bolster local business and funding enterprises that directly influence and stimulate our economy.”^[128] Total investments in California projects and California-based companies totaled $53.7 billion in 2022.^[129] As part of these activities, CalPERS has a California Initiative, “a $1 billion private equity, economically targeted investment (ETI), [which] seeks to invest in companies located in traditionally underserved markets, primarily, but not exclusively, located in California.”^[130]

The above discussion highlights the defining features of public pension funds: they are public institutions, enmeshed in the state or local governments that formed them; they have been leaders in socially responsible investing and shareholder engagement, first focusing on management accountability to investors and later, on ESG; and they invest locally in projects that foster public objectives. Despite their significant accomplishments, they are widely condemned, usually for doing the very things that make them special.

II. Challenges to the Role of Public Pension Funds

Instead of celebrating public pensions for modeling engaged and effective stewardship, politicians, commentators, and litigants have criticized them for lack of focus on economic returns. They have challenged pension fund investment and engagement decisions that favor local priorities, protect public employment, or incorporate ESG considerations for deviating from beneficiary primacy’s returns mandate.^[131] Because these activities focus on “collateral benefits,”^[132] they have served as grounds for litigation and legislative pushback.

A. Litigation

Public pension funds always face the threat of litigation when they pursue collateral benefits.^[133] One of the earliest such challenges involved the decision by certain New York City funds, described above, to purchase billions of dollars in bonds “to stave off the City’s potential bankruptcy.”^[134] In Withers v. Teachers’ Retirement System of New York City, fund beneficiaries sued, arguing that the purchases violated the fund manager’s fiduciary obligations because the objective of the investment was “rescuing the City, rather than enhancing the soundness of the fund.”^[135] The court disagreed, holding that bolstering the City’s finances was in the best interests of the fund because the City was “a major contributor” to the fund’s assets and “the ultimate guarantor” of the fund’s obligations.^[136] It also warned, however, that “had the City’s potential bankruptcy not been a factor,” the investments “would have violated traditional notions of prudence as developed by the New York Court of Appeals.”^[137]

A similar but more limited challenge involved legislation directing the West Virginia public pension fund to invest in an ETI. In State ex rel. West Virginia Regional Jail & Correctional Facility Authority v. West Virginia Investment Management Board, the state pension board challenged a bill directing it to invest $150 million of the fund’s assets in jail authority bonds for “construction and renovation projects,” arguing that the instruction was inconsistent with its fiduciary duties.^[138] The court found that the mandate was lawful because state law gave the power to the legislature to establish “guidelines . . . for the prudent investment of such funds.”^[139] The direction to invest in jail bonds was just one such mandate.

Divestment has also spawned legal challenges. The leading case is Board of Trustees of Employee’s Retirement System v. Mayor of Baltimore.^[140] Because of concerns about apartheid, Baltimore enacted two city ordinances requiring its public pension plans to divest from companies doing business in or with South Africa. The trustees of the pension plans challenged the ordinances, claiming that they caused the trustees to violate their fiduciary duties of prudence and loyalty.^[141]

The trustees argued that the ordinances were problematic under the duty of prudence because they “radically reduc[ed] the universe of eligible investments.”^[142] The court disagreed, concluding that the trustees could still prudently manage the investment portfolio because “economically competitive, substitute investments remain[ed] available” and “the Ordinances permit the Trustees to construct an almost perfectly diversified portfolio.”^[143] For the same reason, the court dismissed the trustees’ argument that the “[o]rdinances alter[ed] the duty of prudence by mandating the consideration of social factors unrelated to investment performance.”^[144]

The trustees further argued that the ordinances contravened the duty of loyalty “by requiring them to consider the interests of persons other than the beneficiaries and by requiring them to manage the systems for purposes other than providing benefits.”^[145] The court rejected these arguments, reasoning that the costs of divestiture were small^[146] and that social investing was permissible in circumstances where trustees “may . . . believe that” such investments “will in the long run best serve the beneficiaries’ interests and most effectively secure the provision of future benefits.”^[147]

As with the ETI cases, Mayor of Baltimore applied beneficiary primacy but upheld a socially motived investment. Rather than overrule the doctrine, the court found limited space for non-economic considerations within it, acknowledging that “[t]he Mayor and City Council of Baltimore were motivated to enact the Ordinances, in part, because the Trustees’ prior investment practices offended a growing number of the systems’ beneficiaries and residents of the City,” and concluding that such motivations were lawful, at least where the economic cost of complying with the ordinances was de minimis.^[148]

Today, we are in the midst of a new wave of litigation.^[149] The recent high-profile case brought by beneficiaries challenging the decision by three New York City Pension Funds to divest from fossil fuels is illustrative.^[150] The suit alleged that the decision breached the funds’ fiduciary obligations and increased underfunding.^[151] In July 2024, the court dismissed the lawsuit, concluding that the plaintiffs had contractual claims that were not impaired by divestment, and that “plaintiffs’ allegations regarding their plans’ potential inability to meet their payment obligations are speculative.” ^[152] The court explicitly rejected plaintiffs’ effort to frame their claims under the law of trusts, stating that “plaintiffs’ circumstance is not analogous to that of a trust beneficiary.”^[153] This holding is in harmony with Thole v. U.S. Bank N.A., where the United States Supreme Court held, in 2020, that beneficiaries of private pensions lacked standing because they were promised fixed payments.^[154]

In Keenan v. Russ, an Oklahoma state district court reached a contrary result.^[155] A retired state employee challenged Oklahoma’s Energy Discrimination Elimination Act, which enabled the state Treasurer to blacklist firms that discriminate against the oil and gas industry.^[156] In addition to alleging that the Act would cost the pension system at least $10 million, Keenan argued that the Act violated the First Amendment and the “exclusive purpose” rule that state pension funds must not be “diverted to purposes other than the exclusive benefit of [pensioners].”^[157] The court agreed and granted a permanent injunction in July 2024.^[158] The attorney general is appealing.^[159]

Although our focus is U.S. public pensions, beneficiary primacy and the litigation risk it entails is an international issue. In 2020, the U.K. Supreme Court held that the Secretary of State for Housing, Communities and Local Government lacked the authority to issue guidelines to U.K. public pension funds with respect to investment policies that promoted boycotts, divestments, or sanctions against foreign countries.^[160] The guidelines were a response to the anti-Israel activity associated with the Boycott, Divestment, and Sanction (BDS) movement and were challenged on the basis that they interfered with fund trustees’ ability to adhere to their fiduciary duties.^[161]

The Court concluded that a portion of the guidelines were invalid. The Court explained that pension fund trustees owed their primary fiduciary duty to fund members.^[162] The guidelines permitted trustees to take non-financial considerations into account in determining their investment policy so long as doing so would not involve significant risk of financial detriment to the scheme and where the trustee had good reason to think that scheme members would support their decision.^[163] This section of the guidelines went unchallenged. The guidelines went too far, however, in dictating investment policy—a decision that could not be superseded by a government minister.^[164]

B. Legislation

The role and importance of collateral benefits in public pension fund decision-making have expanded substantially with the growth of ESG, as has the controversy over the legitimacy of using pension fund assets to such ends. In response, many states have adopted anti-ESG legislation, arguing that such investments violate the fund managers’ fiduciary duty because they compromise returns. Twenty states had adopted such legislation as of July 2024.^[165] A 2021 Texas statute, for example, “requires public pensions to divest from financial companies that have been labeled as ‘boycotting’ fossil fuels,” and some legislators have pushed for additional measures.^[166] A Kansas law “restricts the $24.3 billion Kansas Public Employees Retirement System, Topeka, from entering into any contracts with money managers that consider environmental, social and governance factors.”^[167] Other states require that fund managers only consider financial returns when making investing decisions. For instance, Florida’s legislation, HB 3, mandates that public pension funds make investment decisions “solely on the basis of pecuniary factors.”^[168] Legislation introduced in New Hampshire proposes to make it a felony to invest New Hampshire public pension fund assets “in investment funds that consider environmental, social, and governance criteria.”^[169]

These measures sometimes meet resistance from fund managers. Oklahoma’s Energy Discrimination Elimination Act, at issue in Keenan discussed above, required the Oklahoma Public Employees Retirement System (OPERS) cease doing business with firms perceived as hostile to the fossil fuel industry.^[170] The OPERS board voted 9–1 to ignore the law, taking advantage of the law’s “fiduciary exemption” that allows the board to do so if it finds compliance would violate its fiduciary duty.^[171] The Oklahoma state legislature is now considering legislation that would remove that exemption.^[172]

C. The Hollowness of the Beneficiary Primacy Debate

The debate about collateral benefits investing centers on the motivations of fund managers: critics of public pension funds argue that fund managers pursue collateral benefits at the expense of returns in violation of beneficiary primacy; public pensions counter that they pursue socially minded investment strategies to maximize economic value.^[173] This debate is irresolvable and disingenuous.

Because the internal motivations of fund managers are unknowable, their claims that they pursue socially minded investments to maximize returns are both unprovable and irrefutable. As Caleb Griffin has explained, a shareholder wealth maximand is inherently subjective.^[174] There are countless ways to operate a business, and any decision can be defended on value grounds. The empirics are also unsettled. Existing research has not even reached consensus that governance proposals or interventions increase shareholder wealth.^[175] The same is true for many socially responsible investment decisions. Empirical literature finds mixed results as to whether ESG investing, for example, underperforms or outperforms the market.^[176]

One reason for the empirical difficulty is that, as with any investment strategy, the impact of ESG criteria on economic performance is inevitably time and context specific.^[177] As a result, it is likely impossible for either fund trustees or courts to make a reliable determination that a strategy motivated by social or ethical considerations sacrifices economic value. For example, shortly after the New York City Pension Funds divested from fossil fuels, Russia invaded Ukraine, sending related stocks soaring.^[178] This does not mean that the funds intended to sacrifice economic value when they originally made their decision.

Moreover, framing this debate in terms of finances and fiduciary duties is disingenuous. This is not a dispute about the best way to maximize returns. The political affiliations of the two sides demonstrate that it is really about values and politics. Pension funds are often inclined toward liberal political views, explaining their support for issues like climate sustainability, racial justice, and international human rights.^[179] Conservative states, on the other hand, are enacting anti-ESG legislation to prevent public pension funds from investing and engaging on these topics.^[180]

State opposition to ESG investing may also reflect industry capture rather than a concern for beneficiary welfare. Phillip Morris appealed to beneficiary primacy in its lobbying campaign that sought to stop CalPERS from divesting from tobacco.^[181] Louisiana State Treasurer John Schroder defended his decision to stop investing state pension money with BlackRock as “necessary to protect Louisiana from actions and policies that would actively seek to hamstring our fossil fuel sector.”^[182]

Beneficiary primacy underpins litigation and legislation that seeks to constrain public pensions. Ostensibly about fiduciary compliance, these efforts are truly about politics and values. Better to bring this to the fore.

III. The Shortcomings of Beneficiary Primacy

As is evident from Part I, public pension funds are fundamentally distinct from other institutional investors. Their differences warrant reconsideration of the rationale for beneficiary primacy and the extent to which it should apply to public pension funds.

A. The Flawed Law and Logic of Beneficiary Primacy

Institutional investors are regulated based on their organizational form. ERISA regulates private pension funds and their managers; the Investment Company Act regulates mutual funds; and the Investment Advisors Act (IAA) regulates mutual fund managers.^[183] Beneficiary primacy runs through them all.

The IAA requires that fund managers act in the “best interests” of their beneficiaries,^[184] while ERISA enshrines beneficiary primacy in the so-called “sole benefit rule,” which requires that fund managers act “solely in the interests of the participants and beneficiaries.”^[185] Both are formulations of beneficiary primacy, demanding that fund managers focus solely on the interests of the fund’s beneficiaries and defining those interests solely in financial terms.^[186] Activities that promote collateral benefits are conceptualized as conflicts of interest.^[187]

Notably, although some commentators argue that public pension fund managers who favor social responsibility or other nonfinancial objectives may be motivated by self-dealing or an effort to engage in personal aggrandizement,^[188] under ERISA, a conflict of interest exists whenever their actions are motivated by collateral benefits even in situations in which fund managers are acting in good faith.^[189] The modern-day rationale for this strict obligation is to ensure sound investment practices on behalf of retired workers.^[190] But this was not the original intent of the rule. The exclusive benefit rule was a response to the risk of looting, self-dealing, and corruption by fund managers—not an effort to preclude publicly minded investing.^[191]

Nevertheless, while the Department of Labor (DOL), which oversees ERISA, has wavered on the precise contours of the relationship between collateral-benefits investing, ESG, and ERISA’s exclusive benefit rule,^[192] the agency has consistently maintained that the core job of a pension fund manager is to maximize economic returns.^[193] In its most recent rule, adopted in 2022, the DOL stated that, while investment decisions “must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis,” those factors may include ESG factors.^[194] Twenty-six states challenged the rule in court, claiming that it violated ERISA by improperly allowing fund managers to include nonfinancial considerations.^[195] In 2023, the Northern District of Texas rejected the challenge, reasoning that the rule still directed managers to focus exclusively on the economic risk and return of a potential investment.^[196] According to the court, the 2022 Rule “provides that where a fiduciary reasonably determines that an investment strategy will maximize risk-adjusted returns, a fiduciary may pursue the strategy, whether pro-ESG, anti-ESG, or entirely unrelated to ESG.”^[197]

In the mutual fund context, it makes sense to impose fiduciary obligations on fund managers to represent the best interests of fund investors. Most importantly, fund investors are residual claimants—their return is based on the fund manager’s expertise and the performance of the fund.^[198] Variable returns are the quintessential feature of a fiduciary relationship. Because investors look to mutual funds primarily for financial returns, it also makes sense that fund managers prioritize fund value, at least in the absence of clear direction by the beneficiaries to do otherwise.^[199]

Similarly, it is appropriate that ERISA applies beneficiary primacy to defined contribution plans, which constitute the bulk of private pensions. Beneficiaries of such plans are likewise residual claimants who contribute money to the fund while they are employed and, when retired, receive a payout based on those contributions.^[200] The amount received by beneficiaries depends on the investment performance of their defined contribution plan, which in turn depends on the investment options offered by the plan sponsor and the fees charged.

Neither ERISA nor the IAA directly applies to public pension plans, which are instead governed by a variety of state and local laws.^[201] Nonetheless, ERISA’s exclusive benefit rule is the de facto legal standard.^[202] This was not always the case. Prior to the 1950s, the investment discretion exercised by public pension fund managers was extremely limited. Rather than policing pension fund managers through fiduciary duties, state legislatures specified the types of securities in which managers were authorized to invest through “legal lists.”^[203] These lists typically limited investment to federal bonds and those issued by the local state or a political subdivision thereof. The result, termed “fiscal mutualism” by some commentators,^[204] led to a synergy between the funds and local governments.^[205]

In the 1950s and 1960s, state and local governments began to broaden the scope of managers’ investment authority to allow public funds to invest a larger proportion of their portfolios in equities so as to increase returns and funding levels.^[206] To facilitate this, public plans began to incorporate the prudent person rule from trust law, which demands careful portfolio oversight,^[207] and “emphasize[s] manager discretion in trust investments in order to maximize financial returns.”^[208] The lobbying efforts of professional asset managers, who saw liberalization as a tool that would enable them to provide their investment services to pension funds, accelerated this shift.^[209] After ERISA was adopted in 1974, public pension funds incorporated its likeminded fiduciary structure.^[210] Thus, history suggests that beneficiary primacy arose, not out of concern for beneficiary welfare, but as a side-effect of expanding pension fund investment discretion and lobbying by investment professionals.

This history helps explain why beneficiary primacy is such a poor fit. The doctrine is fundamentally at odds with public pensions because, as defined benefit plans, their beneficiaries are fixed rather than residual claimants. Beneficiaries have contractual claims to certain payments, and the size of those payments does not depend on the skill and effort of the fund manager but is instead based on formulas, which in public pensions are set by state and local rules. If a public pension plan outperforms, the surplus belongs not to the beneficiaries, but to the government,^[211] which allocates it as part of its regular budgeting process.

Another key distinction is that investors in both mutual funds and defined contribution plans can select investments that align with their economic and non-economic preferences.^[212] Investors choose what type of fund to invest in, and although fund managers exercise discretion, they must adhere to the investment and engagement mandate of that fund.^[213] Investors’ limited capacity to oversee whether fund manager decisions align with those expressed principles warrants the application of fiduciary principles.^[214] In contrast, participants in defined benefit plans choose to work for public employers, which enroll them in the employer’s plan. Participants do not choose plans that align with their preferences with respect to either value or values. Accordingly, their participation in the pension cannot be understood as a delegation of authority to the fund managers, and there is no role for fiduciary duties to police conformity with their interests.

Similarly, law and economics scholarship often conceptualizes fiduciary duties as gap-fillers.^[215] Under this view, the law distinguishes between parties to a contract that specifies the terms of performance, and those where parties exercise discretionary power or where the terms of the contract are incomplete. In the latter two contexts, we see fiduciary duties because satisfactory performance cannot be explicitly addressed in the contact or easily assessed.^[216] Fiduciary duties step in to address the uncertainty. Because defined benefit plans offer a contractually specified payout to each beneficiary, there is no such uncertainty and no need for fiduciary duties.

The institutional design of public pension funds is also in tension with beneficiary primacy. In this sense, public pension funds can be contrasted with corporations. Corporate law vests primary operational authority in the board of directors, but shareholders are the residual claimants. As a result, corporate shareholders have oversight powers over the corporation and its managers to ensure that corporate decisions are made in their interests. Shareholders exercise this oversight through their power to elect the board, to vote on certain fundamental matters, and to sell their stock, but because these powers are limited and imperfect, they are supplemented by fiduciary duties that reinforce shareholder primacy—the idea that furthering shareholder interests is the only legitimate goal for corporate managers—which is the dominate theory of corporate law.^[217]

In contrast, the structure of public pension fund governance demonstrates that they are not organized solely to serve the interests of fund beneficiaries. While beneficiaries may vote on a few board seats, legislators and elected officials are the key decisionmakers, and they are accountable to the public. Moreover, legislation in some states demands that funds serve social interests, either through ETIs or through ESG investing.^[218] In other states, legislation requires that funds refrain from ESG investing even in cases in which such investment policies might bolster performance.^[219] Such requirements flatly contradict beneficiary primacy.

Although many of our critiques of beneficiary primacy apply to both private and public defined benefit plans, we focus on the latter for two reasons. First, although their claim is contractual, beneficiaries of private defined benefit pension plans face greater risk.^[220] If a private pension plan is underfunded or mismanaged, and the company itself is financially distressed, pension fund beneficiaries may not receive their designated benefits. If a corporation goes bankrupt, pension fund beneficiaries are similar to other creditors, although some private pension benefits are insured by the Pension Benefit Guaranty Corporation.^[221]

Beneficiaries of public pensions have far greater protection. Most importantly, government entities can raise money from taxpayers to meet their pension obligations. This backstop was one reason Congress did not extend ERISA to public pensions.^[222] While it is true that insolvency or bankruptcy could technically provide states or municipalities grounds for avoiding pension obligations, this is exceedingly rare.^[223] Detroit’s financial crisis led to the largest municipal bankruptcy in U.S. history,^[224] but even then, beneficiaries were nearly made whole. As part of the “grand bargain” resolving Detroit’s liabilities, pensioners received 95% or more of their promised benefit.^[225]

Second, and more importantly, we focus on public pensions because of their publicness. Their deep ties to state and local government mean that they are imbued with values that private plans lack and make the imposition of a narrow fiduciary duty particularly troublesome. In other work, we have faulted mutual fund managers for making values-based decisions without reflecting the values of their beneficiaries.^[226] Outside the limited space of values-oriented mutual funds, mutual fund managers lack an authoritative basis for making values-based decisions on behalf of their investors, who likely have heterogeneous values-based preferences.^[227] In contrast, a variety of sources—ranging from state statutes, fund investment policies, and the fund’s internal governance structure, including the composition of its board of trustees—provide fund managers with guidance for making values-based decisions.

Our refutation of beneficiary primacy is a significant departure from the conventional wisdom. In a recent comprehensive article on public and private pension law, Professors Schanzenbach and Sitkoff defend the exclusive benefit rule and argue that it properly excludes ESG considerations “in light of the agency costs of managing other people’s money.”^[228] For the reasons articulated above, this conclusion is unsound as applied to public pensions. Because beneficiaries are contractual claimants, fund managers are not managing their money. Moreover, the broader investment mandates of many public pension funds and the institutional context in which they operate belie the claim that the funds’ sole objective is, or should be, to maximize fund economic value.

B. Judicial Treatment of Beneficiary Primacy

Judicial treatment of beneficiary primacy supports our thesis. Fiduciary law is typically prophylactic.^[229] A manager breaches the duty of loyalty by acting disloyally—by, for instance, engaging in a conflict-of-interest transaction—regardless of whether the act harms the beneficiaries.^[230] In contrast, courts have held that fund beneficiaries lack standing to challenge manager actions without a showing that such actions deprived them of their full benefits.^[231] Although purporting to apply fiduciary standards, these cases treat beneficiaries like contractual counterparties.

Another way that judicial treatment of beneficiary primacy supports our theory is that courts have treated public pensions as arms of the state. Accordingly, they have relied on sovereign immunity to block beneficiary litigation.^[232] This harmonizes with our view that public pensions should be viewed as state actors with obligations to the state rather than solely to payees.

Finally, the way courts treat cases that reach the merits suggests that they share our skepticism of beneficiary primacy. They nominally apply the doctrine, but typically find a way to support a challenged investment despite a tenuous tie to economic value.^[233] In the cases discussed in subpart II(A), the courts upheld investment decisions that were motivated by serving public or local interests even though it was unclear that the decisions were motivated by or even consistent with economic value maximization.^[234] That courts contort themselves to avoid the results of beneficiary primacy illustrates that it is a broken legal doctrine and bolsters our case for abandoning it.

C. Scholarly Treatment of Beneficiary Primacy

The orthodoxy is that beneficiary primacy is solid.^[235] For instance, in a foundational article over thirty years ago, Professor Romano characterized ETIs as politically motivated conflict-of-interest transactions that “do not meet prudential fiduciary standards.”^[236] As noted above, more recently Professors Schanzenbach and Sitkoff defend, if not celebrate, the doctrine.^[237]

But we are not the first to identify its shortcomings. Professors Fischel and Langbein, for example, argue that a problem with beneficiary primacy is that not all pension fund beneficiaries have the same interests.^[238] Current employees want funds to protect their employment; retirees oppose such efforts if they threaten to compromise their payouts. Fischel and Langbein propose, as a solution, that pension law incorporate the trust law “duty of impartiality.”^[239] When considering an investment that pits beneficiaries against each other, fund managers would have to be impartial among them.^[240]

Professor Webber, in contrast, criticizes public pension fund investments that harm the employment prospects of their beneficiaries.^[241] He is particularly concerned about the extent to which public pensions invest in private equity funds, a form of investing that is notorious for slashing jobs and pay. ^[242] Current law, as he sees it, prohibits public pension fund managers from taking job losses into account because doing so is unrelated to the fund’s long-term value. He argues instead for a “member-first” view of fiduciary duties, which would allow fund managers to consider the risk of job losses in their investment decisions.^[243]

As is typical in this area, both Fischel and Langbein and Webber accept the beneficiary primacy model as dogma. Rather than reject it, they would expand the group of beneficiaries. Professor Rose would go further, arguing that because taxpayers guarantee the obligations of public pension funds, fund managers should owe fiduciary duties, not to beneficiaries, but to “the public—the current and future citizens and residents—who will ultimately benefit or suffer from the investment choices of the public fund trustees.”^[244] His view is that this change in focus would enable public pension funds to engage more openly, and more extensively, in ESG investing.^[245]

While we are sympathetic to the foregoing approaches, they are impractical and overlook the institutional detail of public pensions. Fiduciary duties work best when there is a single principal. As with stakeholder governance, which has gained traction in corporate law,^[246] expanding the fiduciary analysis in the ways these commentators suggest does not provide a framework for determining how to weigh different values or beneficiary interests against each other or for when to depart from value maximization. In addition, public pension funds are political creatures and, as a result, they vary in their interests and demands. The job of the manager is to balance competing stakeholder preferences in a way that fits the values of the pension fund the manager serves. Unlike the corporate and mutual fund settings, moreover, the institutional design of public pensions offers ready principles to guide manager decision-making, which we detail in Part IV below.

IV. Public Pension Funds as Principals

As the prior section explains, it is counterproductive to understand public pension fund managers as bound to serve the sole interest of fund beneficiaries. Rather, public pension funds should be understood as principals and those who work for the funds as their agents. As a principal, the fund has its own goals and interests. Those who manage the fund’s assets—trustees, investment managers, and other employees—are hired to identify the fund’s interests and to exercise their discretion to run the fund in accordance with those interests.

Our approach resembles “entity” theory from corporate law. Under this view, the corporation is “an independent, artificially created entity.”^[247] Managers have the duty to represent the interests of that entity.^[248] The Canadian Supreme Court’s decision in BCE Inc. v. 1976 Debentureholders^[249] provides a helpful explanation of entity theory:

[T]he directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases . . . may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.^[250]

While we do not take a position on whether the BCE decision is an appropriate approach to corporate law,^[251] we contend that entity theory is the best way to understand the duties of public pension fund managers whom, we argue, should be obligated to serve the interest of the fund itself. The essence of their job is to ascertain and effectuate the goals of the fund as informed by the views of their constituents and as reflected in state constitutions, laws and regulations, the fund’s governance structure, and investment policies. Doing so requires them to balance the competing demands of taxpayers, current employees, retirees and more in accordance with such guidance.

Note that our theory does not ignore beneficiaries; it rather provides that theirs would no longer be the only interests that matter. Although beneficiaries are contractual claimants with guaranteed benefits, they still care how fund money is invested. Poor returns could result in increased employee contributions or decreased cost of living adjustments (COLAs), both of which indirectly reduce benefits.^[252] It would be up to the fund manager to take their interests into account and balance them against competing ones.

Our view of public pension fund managers aligns them with other public servants. For instance, the job of public agency leaders is to further the mission of the agency as informed by the values and goals of their constituents, which are reflected, at least in part, in legislation, regulations, and governing documents. Public pension fund managers are similarly situated. A public pension fund is a taxpayer-funded investment pool with a contractual obligation to make payments to beneficiaries. The fund manager’s job is to meet its contractual obligations while investing that money and engaging with portfolio firms in a manner consistent with the goals and values of the fund’s constituents as reflected in similar sources of authority.

Under our model, fund managers would not be under a fiduciary mandate to maximize the fund’s returns or economic value. A fund manager could decide to do so, but this decision would be based not on a fiduciary obligation but on the fund’s values and goals. A legitimate fund goal, for instance, might be to reduce government funding obligations during a state fiscal crunch. The fund manager could effectuate this goal by focusing on returns. It would be up to the fund manager whether to pursue this goal and sacrifice others.

Balancing competing interests may not be easy. Constituents likely have different visions about how to weigh economic and noneconomic considerations. But this is always the case with political decisions, and it is better to acknowledge that this is the fund manager’s job than cloak investment and engagement decisions in beneficiary primacy. Moreover, when exercising their discretion about the fund’s goals and values, the fund manager does not operate in a vacuum. Guidance comes from the electorate through its choice of government officials, who may rightfully view their election as a public endorsement of the goals and values they campaigned on. The institutional design of the fund, the fund’s governing documents, and legislation also provide guidance.

Legislative guidance on the fund’s objectives comes in different forms. Some states have legislation providing their public pensions with an approved list of investments.^[253] Others articulate how the government sponsor wants the fund manager to approach ESG matters or require ETIs.^[254] Connecticut law requires the State Treasurer, in making investment decisions for the Connecticut public retirement plans “to consider the implications of investments in relation to the foreign policy and national interests of the United States.”^[255] Such dictates are problematic under beneficiary primacy, but under our approach they are legitimate sources of authority that reflect the public will.

The institutional design of the fund also defines its goals. If the fund has an elected official at the head, that official is directly accountable to the electorate and, as such, those interests weigh heavily.^[256] For example, as noted above, the NYSCRF entrusts the fund to the state’s elected comptroller, who is also the state’s chief fiscal officer.^[257] This person’s job in running the fund is to represent the interests of the state’s voters. If discretion is vested in a board elected by various constituencies—as in California—then the board represents those constituencies’ interests.

The concept is analogous to the role of constituency or specialist directors in corporate governance.^[258] Some corporations have a director who represents the interests of constituencies other than the common stockholders, such as creditors or other share classes.^[259] The job of these directors is to represent the group that designated them.^[260] Similarly, under the German system of codetermination, the role of employee-appointed directors on the supervisory board of directors is to serve employee interests.^[261] Codetermination signals that corporations are to take employee interests seriously. In the same way, the institutional design of the fund guides how fund managers should represent the interests of different groups.

Guidance also comes from the fund’s investment policy and related documents, which may direct the fund to invest in certain types of assets, prioritize certain state objectives, or divest from asset classes that run contrary to particular policy objectives.^[262] These documents may instruct a fund to pursue goals such as funding low-income housing, promoting in-state employment, combating climate change or encouraging diversity. Individual states (and localities) can differ with respect to these objectives, and fund managers are accountable to those objectives. Within these general constraints, the fund delegates to the fund manager discretion in how to balance the complex and competing interests of the state and its constituents while meeting the fund’s contractual obligation to its beneficiaries.

The expectation that fund managers balance competing interests is reminiscent of stakeholder theory in corporate law, which would require that corporate boards of directors weigh the needs of the corporation’s stakeholders in making decisions. Our approach differs, however, in important respects. Stakeholder theory envisions that boards have direct obligations, even fiduciary duties, to the corporation’s stakeholders.^[263] As noted above, under our approach, fund managers would have no direct obligations to retirees, employees, taxpayers, or any other stakeholder. Their only obligation would be to represent the interests of the fund, and they would only owe fiduciary duties to the fund. More importantly, the chief criticisms of stakeholder theory are that it provides no guidance to corporate executives in their decision making and no way to hold them accountable.^[264] As detailed above, public pension fund managers have ample guidance in how to balance the preferences of their constituents. Their job would be to adhere to the laws, regulations, policies, and features of institutional design that inform the fund’s values and goals, and they would be held accountable through the political process for deviations.

We acknowledge that our approach conflicts with state constitutions, legislation, regulations, and caselaw that incorporate beneficiary primacy. We argue that these laws are flawed and should be changed. The status quo’s nominal adherence to beneficiary primacy contradicts many existing policies and practices, and its application requires fund managers and courts to make artificially constrained choices among legitimate and competing fund objectives. Treating public pension funds as principals and acknowledging the broad range of constituency interests that inform the funds’ objectives is more consistent with traditional fiduciary principles and the realities of fund structure. As we explain further in the next section, our approach has important implications for the role and power of public pension funds in corporate governance.

V. Implications for Law and Policy

Models matter. Discarding beneficiary primacy in favor of our approach enables public pension funds greater latitude to protect employee and local interests. It also frees them to invest, vote, and engage with respect to new challenges such as the environment, corporate political expenditures, and diversity. Our foregoing discussion has highlighted the importance of these efforts. At the same time, distinguishing between those institutional investors that, like public pension funds, should be understood as principals, and those like mutual funds, that are intermediaries, has important implications for the broader debate over institutional investor stewardship.

A. Public Pension Controversies Reimagined

As discussed in Part II, public pension fund investments that potentially sacrifice economic value have been criticized under the beneficiary primacy model as a breach of fiduciary duty. ETIs are a prominent example. Understanding public pension funds as principals extinguishes the critique. Since the fund managers would have no fiduciary duty to maximize fund value, their decision to invest in ETIs would be permitted. Supporting ETIs (or not) reflects state or local government policy. Some states explicitly require public pension funds to invest a portion of their assets in ETIs.^[265] These laws are directly in tension with beneficiary primacy, but they are policy decisions that should either be respected or revised through the political process.

Our analysis parts ways with Professor Romano and others who condemn ETIs and want to strip politics out of public pensions.^[266] Under our approach, ETIs are not politically compromised conflicts of interest; they are part of how public pensions are constructed. Romano proposes reforms to depoliticize public pensions and thereby align the actions of fund managers more closely with fiduciary duties to beneficiaries.^[267] But these fiduciary duties are inappropriate for this context. Better to drop this artificial fiduciary construct and allow pensions to function as they are intended.

A fund manager’s choice to invest in local infrastructure is a policy decision to favor the state’s prerogative to fund the project through the pension system rather than directly through taxes or other sources. One could argue, as Romano does, that this is an inefficient way to fund such projects.^[268] This may be true. But the answer is in the political process. Politicians who make poor capital allocation decisions risk voter blowback.

Romano theorizes that politicians fund projects through pension investments to hide their costs.^[269] Again, this may be right. But it is the beneficiary primacy model that allows for this legerdemain. The siloed nature of the model allows politicians to blame public pensions for underfunding and poor policy choices without confronting the political system that results in these choices. Our approach recognizes that public pensions are just an arm of the government, thereby increasing the accountability of public officials who deploy this tactic.

Understanding public pensions as principals also addresses the proclivity of pension funds to support workers’ rights. Our approach acknowledges that public pension funds have a legitimate interest in supporting workers’ rights both at the public employers that contribute to the funds and at their portfolio companies, including job protection, workplace safety, and anti-discrimination policies. As noted above, Professor Webber would expand fiduciary duties to include the employees contributing to the fund. But employees are only one of several groups whose interests may reasonably warrant consideration by public pension plans. Understanding public pensions as principals would not only eliminate the conflict of interest that beneficiary primacy imagines between employee interests and value maximization but also positions funds to balance the needs of all of their constituents.

At the same time, our analysis offers a powerful rebuttal to public pension fund managers who rely on fiduciary principles to defend their decision to refrain from engaging on employment-related policies. Both the Arizona and Florida state pension plans have defended their lack of involvement in labor practices on the basis that, as fiduciaries, their sole obligation is to maximize returns.^[270] We expose the hollowness of this fiduciary-based rationale. Theirs is a policy choice and should be acknowledged as such. Under our model, fund managers would be required to consider the interests of the fund, which may include social considerations.

The same analysis applies to private equity. Funds would be unable to dismiss critiques of such investments as necessitated by fiduciary duties.^[271] They would be obligated to consider the broader interests of the fund. Moreover, because public pension funds invest heavily in private equity,^[272] they can affect industry practices in the same ways that they have impacted public companies—through investment, divestment, and engagement—as illustrated by NYCERS’s demand for fair rental housing practices from the private equity funds it invests in.^[273]

In this way, our approach could have a transformative effect on private equity. Driven by beneficiary primacy and a hunger for returns, public pension funds are the largest backer of an industry many decry for deleterious local impacts—on jobs, on prices, and on quality.^[274] Under our approach, fund managers would no longer face the same pressure to maximize returns. Instead, they would be obligated to represent the interests of the fund and its constituents. This shift should cause fund managers to reevaluate the role of private equity in their portfolios and to insist on operational changes at the funds they back, potentially shrinking and reforming the industry.

More broadly, the paradigm shift would allow fund managers to address the issues their constituents value. The beneficiary primacy model poses difficulties for ESG investing and engagement by imagining a conflict of interest between pursuing ESG goals and fiduciary duties. To address such critiques, many public pension funds disingenuously attempt to defend ESG-oriented decisions in terms of economic value. Rejecting the premise that public pension fund managers have a fiduciary duty to maximize fund value allows them to drop the act and frees them to invest, divest, and engage on moral grounds consistent with the fund’s interests.

At the same time, our approach demands respect for legislation, because it is a key source of authority with respect to how managers determine these interests. If state law prohibits pension fund managers from taking ESG into account, or if states enact such legislation, these measures tie the hands of the fund managers. Similarly, if the law compels managers to adopt certain ESG investing policies, such as divesting from fossil fuels, managers cannot legitimately resist on the basis that divestment will reduce fund returns.

If adopted, our approach may increase legislative attention to the investment and engagement decisions of public pensions as lawmakers seek to provide clear guidance to fund managers. Our proposal demands that such efforts be explicit. Rules instructing the pension fund manager to act in the sole financial benefit of the fund’s beneficiaries do not clearly exclude ESG, because a fund manager can plausibly argue that ESG serves its beneficiaries’ financial interests. If states want their pension fund managers to reject or consider ESG, they should say so directly rather than obliquely referencing economic value. Explicit legislation is a more straightforward way of incorporating the state’s values into its pension fund investing decisions and providing efficient direction to those who manage the fund. It would also further public debate. If the legislature or a fund’s chief investment officer decides that the fund should divest from fossil fuels, for example, that decision should not be discussed and defended in purely economic terms but rather through identifying and describing the potential costs and benefits—both economic and non-economic—of the decision. Such transparency would allow ESG to be debated on its merits rather than through insincere appeals to fiduciary duties.

Reimagining these debates has significant ramifications for corporate governance. As noted above, public pension funds have been leaders in this arena—using their voting power and the shareholder proposal process to increase management accountability and shareholder rights and to further ESG goals like climate change mitigation and board diversity. Beneficiary primacy has no explanation for this, and poses an impediment to it, because such efforts must be justified in terms of economic value. As further described below, our analysis not only understands these efforts as a reflection of the fund’s values but also recognizes their contribution to the quality of corporate governance and allows fund managers to engage freely.

Moreover, our approach resolves the difficulties with public pension fund support for ESG by shifting the focus from beneficiary interests to the state and local government interests that inform the pension fund’s goals and values. This gives voice to the public. State policymakers that set ESG rules are accountable to the electorate, and the political process further renders fund managers accountable. By representing the views of state taxpayers, employees, and union members, public pension fund managers give clout to groups that would otherwise have little say on the fundamental policy questions at stake in the ESG debates.

B. The Role of Principals in Corporate Governance—Toward a More Nuanced Theory of Institutional Investors

Our analysis more broadly highlights the critical distinctions between those who invest as principals and those who invest as intermediaries. Public pension fund activism has led some commentators to demand similar engagement by other types of institutional investors, such as mutual funds. In a recent article, Professors Bebchuk and Hirst harangue mutual funds for their lack of corporate governance activism.^[275] Their critique is based largely on a comparison of mutual funds to public pension funds, observing that, in contrast to mutual funds, CalPERS and CalSTRS have filed many more comment letters on SEC rulemaking,^[276] have filed many more amicus briefs in securities litigation cases,^[277] and have served as lead plaintiffs in securities class actions.^[278]

This argument implicitly and incorrectly views public pension funds and mutual funds as similarly situated. The typical mutual fund rightly focuses on the economic value of the fund. It is not clear that engagement in corporate governance furthers that goal.^[279] The task becomes even more fraught with governance issues that implicate values because mutual funds, acting as intermediaries, cannot adequately reflect the diversity of views held by their investors. Economic value maximization serves as a rough proxy for addressing pluralistic and irreconcilable preferences along non-economic dimensions. Although investors can, in theory, select into funds that align with their non-economic preferences,^[280] market imperfections and information constraints limit their ability to do so efficiently.^[281] Thus, mutual funds are typically asked to vote and engage on values-based initiatives without knowing their beneficiaries’ values.

As a result, engagement, particularly on ESG, is an awkward fit for private asset managers. Critiquing them based on a comparison to public pensions obscures this analysis and results from wrongly viewing public pensions under the beneficiary primacy model. In fact, public pension fund activism is yet another indication that beneficiary primacy is inaccurate. If public pension fund managers were focused solely on maximizing value for their beneficiaries—as the beneficiary primacy model instructs—they would struggle with the same issues as mutual funds. To satisfy their beneficiaries, they would have to keep returns high and fees low, and stewardship is not a clear way to achieve these goals and may detract from them. The beneficiary primacy model thus fails to explain why public pension funds eagerly participate.

Viewing public pension funds as principals, however, explains their active engagement across a wide range of issues. Under this view, it is the public pension fund managers’ job to engage, consistent with their view of the fund’s values and goals, and the conception of those goals is a product of political and social forces, rather than purely economic considerations. Moreover, unlike mutual fund managers, managers of pension funds have numerous sources of authority as to the values they should represent. And, because fund managers are either elected officials or report to them, they are ultimately accountable to the public for doing so.

This accountability structure is bolstered by intrinsic motivations. Public pension fund managers may actively participate in corporate governance to further their political careers or because they share the values of their constituents. As Professor Romano points out, public pension funds may be run by “political entrepreneurs,” like “Elizabeth Holtzman, [a former] New York City comptroller and a trustee for the city’s pension funds, [who] publicized her active approach to corporate governance while campaigning for the Democratic party’s nomination for U.S. Senator.”^[282] Similarly, Phil Angelides, former California state treasurer and CalPERS board member, said he wanted to “mobilize the power of the capital markets for public purpose.”^[283] Critics view such motivations as problematic, but they are part of why public pension funds have been so influential.

Moreover, the inherent structural obstacles to meaningful engagement by institutional intermediaries increase the importance of institutional principals. Despite the conceptual and legal framework that has wrongly cast them as intermediaries, public pension funds have transformed corporate governance and operations. Our analysis frees public pension fund managers from misplaced critiques and potential liability for their valuable role in financial markets.

Recognizing the distinction between institutional principals and institutional intermediaries creates friction between the two because the latter manage assets for, and vote on behalf of, the former. Under beneficiary primacy, their interests were aligned, but if public pensions are recognized as having more wide-ranging interests, then institutional intermediaries cannot represent them by voting in a way that maximizes the value of portfolio firms. One solution is for pensions to put their money with intermediaries that represent their values. Public pensions may choose ESG funds, for instance, if they want more sustainably minded stewardship activities.

Another solution is to give principals more say in how intermediaries vote their shares. The Big 3 mutual fund complexes (Vanguard, State Street, and BlackRock) are already experimenting with pass-through voting and other methods to give pension funds and other investors greater ability to direct how their shares are voted.^[284] FinTech companies are further aiding this effort. Tumelo, for example, provides a platform for asset owners to vote their shares held through intermediaries.^[285] We anticipate that the market will continue to evolve in ways that expand the ability of public pensions to engage with portfolio firms.

While we focus on public pensions, other principals can also play an important role in corporate governance. Long dismissed as diffuse and apathetic, retail investors have received relatively limited scholarly attention.^[286] But they are becoming more involved, and technological developments offer promising tools for reducing the cost of their participation and aggregating their preferences.^[287] Similarly, Professor Amelia Miazad’s work on faith investors—those who invest according to religious values—reveals that other institutional investors can function as principals and demonstrates the influence of such investors in corporate governance.^[288]

Legal scholarship has understandably focused on the role of institutional intermediaries in corporate governance, but in doing so, it has failed to appreciate the essential role that principals play, particularly as values have come to the fore. Public pension funds have had the biggest impact, but other principals, including individuals^[289] and values-based institutional investors,^[290] have the potential to become important players as well, particularly as technology reduces the frictions of participating in corporate democracy.

VI. Counterarguments

We acknowledge that the shift away from beneficiary primacy raises important concerns. Critics may worry that relaxing the mandate to maximize returns will exacerbate public pension underfunding, reduce accountability, or lead to unwanted social consequences. Others might question whether the change is legally or practically meaningful given the difficulties associated with fiduciary litigation. In this section, we respond to these counterarguments.

A. Underfunding

Public pension fund underfunding is a significant concern,^[291] with estimates of underfunding ranging from $1 to $4 trillion. ^[292] At the state level, funding levels vary from 105% (Tennessee) to 51% (Illinois).^[293] The beneficiary primacy model views the persistence of underfunding as an indictment of public pension fund management and, in particular, collateral-benefits investing. As one article critically observes, “many public plans face both affirmative investment requirements as well as investment restrictions that have little to do with retirees’ best interests.”^[294] These mandates, including to invest in local or socially responsible projects or to refrain from investing in businesses deemed “undesirable[,] . . . may lead to suboptimal investment decisions.”^[295] A provision in the Ensuring Sound Guidance Act, introduced by U.S. Representative Andy Barr in 2023 reflects this perspective, suggesting that favoring ESG considerations over beneficiary interests contributes to public pension underfunding.^[296]

The tie between collateral benefits and underfunding, however, is tenuous. While returns generate 60–65% of public pension funding,^[297] how collateral-benefits investing affects returns is empirically indeterminate, with some studies supporting pension funds’ claims of improved performance.^[298] Moreover, state investment mandates do not appear correlated with the degree to which their pension plans are underfunded. For example, Texas has adopted a variety of anti-ESG provisions for its public pension funds and has one of the highest levels of unfunded liabilities in the United States.^[299] Maine, which has adopted pro-ESG policies, including a required divestment from fossil fuel, has one of the least underfunded.^[300]

Rather than being attributable to socially oriented investing, the biggest contributor to underfunding is a failure by states and cities to allocate enough money to their public pensions.^[301] The match between obligations and assets is also influenced by a raft of administrative choices, including eligibility standards and vesting periods, pension payouts, and contribution levels. A plan could, for example, reduce underfunding by foregoing COLAs for current beneficiaries, even though that choice would have nothing to do with the fund’s investment policy.

Underfunding is related to asset allocation decisions, but not in the way ESG critics contend. Instead, underfunding likely leads pension fund managers to seek higher returns with higher risks, and may explain their growing appetite for private equity.^[302] One of the drawbacks of beneficiary primacy is that it does nothing to police such risk-taking, and if anything, encourages it.

Our approach would diminish this incentive but is unlikely to contribute to underfunding. Because pension underfunding has received substantial public attention, government officials are under considerable pressure to address funding deficits by focusing on fund returns. As one commentator explains, “[w]hile it is unrealistic to expect that asset performance alone will stave off the crisis in underfunded pension funds, there is strong pressure for the asset portfolio to perform as well as possible to prevent the gap from becoming even wider and to minimize the amount of capital the states have to raise to bridge the gap.”^[303] Public officials are also unlikely to be willing to face the political fallout associated with raising taxes or cutting other programs to meet funding deficits.^[304] Finally, both fund managers and the funds themselves are evaluated on their performance relative to their peers. Individual fund managers can often obtain more prestigious positions or bonuses if their fund outperforms, and they can lose their jobs if it underperforms.^[305] These measures provide meaningful checks on the willingness of fund managers to make values-based decisions that substantially sacrifice economic performance. They also serve as a limiting force on the role to which social or public values are likely to play in investment policies.

B. Lack of Accountability

Some may argue that our model gives public pension fund managers excessive discretion to pursue social or political goals. Beneficiary primacy creates liability risk and serves an expressive function that steers the focus of public pensions toward long-term economic value. Removing this dictate could weaken accountability and increase the risk of mismanagement and abuse.

The existing system, however, provides significant constraints on such behavior. Most importantly, public pension fund managers are accountable for their investment policies through the political process. Those who fail to reflect the public’s values will be replaced.

One might worry that democratic accountability is an unreliable check on managerial conduct. Perhaps the electorate is unequipped to police for pension fund mismanagement or for activities that do not align with their values. While there is undoubtedly some truth to this critique,^[306] treating public pension funds as principals is an improvement on the status quo. The beneficiary primacy model imposes an abstract legal concept that obstructs the will of the people. Our approach clears this impediment and aligns fund management more closely with constituent preferences. It further precludes fund managers from resisting political policy choices on the basis that such choices reduce fund returns.

Moreover, pension fund investing and engagement are more politically salient than ever. As noted above, over the last few years, states have introduced a spate of reforms aimed at implementing or restricting socially responsible investment decisions by fund managers,^[307] including the New Hampshire bill noted earlier that would make it a felony for them to invest based on ESG criteria.^[308] Moreover, state attorneys general have publicly weighed in, expressing their view that ESG considerations violate fund fiduciary duties.^[309] Even before the current wave of attention, the president of the CalPERS board, Priya Mathur, was voted out over concerns that she was prioritizing ESG issues over investment returns.^[310]

Finally, governments concerned about public oversight could take steps to increase transparency and include the public in its decision-making. Fund boards could, for example, hold open meetings and invite the submission of public comments.^[311] On important topics like divestiture from fossil fuels, fund could engage the public with town halls and open forums. Our model creates space for inclusive measures that are arguably illegitimate under beneficiary primacy.

Pension fund managers are also accountable to the employment market. As one commentator explains, “[p]ension plans are employee magnets that help keep public employees in jobs for their career, which strengthens public services and lowers workforce costs for cities and states.”^[312] If such plans become less attractive, workers will flee the public sector in search of alternatives.

The legal system provides further accountability. Importantly, our proposal does not eliminate fund manager fiduciary duties; it simply provides that those duties are owed to the fund, not to its beneficiaries. Those duties could be enforced by the fund through its trustees, the governing board, or state attorneys general. Although the duty of care would afford great deference to the exercise of fund manager discretion, akin to the business judgment rule in corporate law, fund managers could be liable for actions such as inadequate diversification.^[313] While the duty of loyalty would no longer require economic value maximization, it would still mandate that managers act in the fund’s interest; they would not be permitted to use their discretion over fund assets to settle political scores, reward friends, or personally profit.

Additional legal guardrails remain in place for self-dealing and gross misconduct. For example, fund managers who engage in egregious malfeasance face the prospect of criminal liability. Former heads of both CalPERS and the New York state pension funds were found guilty of fraud.^[314] Our approach relies on these well-established accountability tools.^[315]

C. Ideology

Some might be concerned about the social impact of our proposal. Those against the progressive values that public pensions typically support, or who argue these issues should be regulatory matters, might criticize our proposal for giving fund managers excess discretion to engage in socially oriented investing. Others may have the opposite concern and fear that state entities might use their discretion to curtail ESG investing and engagement. Indeed, as discussed above, many states are seeking to do just that. Our answer to these concerns is to concede that the determination of a public pension fund’s investment and engagement priorities involve political questions. If adopting an anti-ESG policy is a state’s prerogative, so be it.

Notably, we acknowledge that the impact of our proposal on the ESG landscape is unclear. Progressive-leaning states would no longer be inhibited from pursuing a social agenda; conservative states could eliminate ESG investing and engagement from their pension funds. How everything would ultimately play out is anyone’s guess. Our proposal is not linked to ideology. Its aim is to describe more accurately how public pensions work and to match the legal framework to that description.

A related objection is that, since the state and local statutes and regulations that incorporate beneficiary primacy are themselves a reflection of the public’s will, our model collapses into beneficiary primacy. Our answer is that the prevalence of beneficiary primacy, in many cases, likely reflects unthinking and outdated obedience to a flawed legal theory that is so well ingrained that policymakers see no alternative. We introduce that alternative. We suggest that states and localities look at such rules with fresh eyes and consider amending them. If such efforts fail after informed debate, then beneficiary primacy would legitimately converge with the public’s will.

D. Practical Significance

Some might accept our theoretical point but argue that it lacks practical relevance because fiduciary-duty claims are rarely successful. The shift we envision, however, carries significant normative implications. Even though fiduciary duties are difficult to enforce, the threat of litigation and potential liability persistently hovers over fund decision-making.^[316] More importantly, beneficiary primacy is the industry’s lodestar. If fund managers instead understood their role as public servants, there is good reason to believe they would act far differently. They would approach public policy concerns directly without having to defend their positions based on long-term value.

Embracing our approach exposes that the debate over, for example, ESG investing is properly focused on public values and would legitimize disagreements among state and local governments about the prioritization of those values. While fund managers would be politically accountable to the system in which they operate, it would be for how they reflect the public’s values, not for adherence to an artificial legal framework. A false and sterile debate becomes a genuine contest over values. Our approach also has implications for reform. It stands apart from all previous scholarship on the issue—it refutes arguments to depoliticize public pensions, on the one hand, or to make fund managers responsible to all, or certain groups of, stakeholders, on the other.

Conclusion

Current laws and policies treat public pension funds like other institutional investors, as intermediaries whose leaders are bound by strict fiduciary duties to maximize returns on behalf of fund beneficiaries. This approach, however, fails to map onto the history and structure of public pensions, which show a commitment to public values. Nor does this approach reflect the economic realities of the relationship between public pension fund beneficiaries and the fund.

Imposing a legal duty to maximize returns that does not match the realities of public pension funds invents artificial conflicts of interest. Under this legal model, local investing, employee-conscious investing, ESG investing, and ESG stewardship all present thorny conflicts that have caused confusion and consternation among pension fund managers, state and local governments, courts, and scholars for decades. So far, however, would-be reformers have mostly made piecemeal critiques and suggestions aimed at narrowly reframing fund manager fiduciary obligations. This is the wrong approach.

The current conceptual framework ignores the public nature of public pension funds. They should be viewed as public entities with their own distinct interests and objectives. Under this alternative model, what were legally fraught conflicts are now unencumbered choices informed by public values. This reconceptualization enables public pension fund managers to embrace their unique role in markets and corporate governance.

Our approach frees public pension funds to pursue investment and engagement objectives that further the interests of their varied constituents. This freedom is particularly important as investing has become a political arena. Fittingly, the institutional design of public pensions as political bodies means that the source of their investing values would be a group that traditionally has limited say on Wall Street—the public.

1. . Public Pension Assets, NASRA, https://www.nasra.org/content.asp?admin=Y&contentid
   =200 [https://perma.cc/ZL88-T5KG] (data as of June 30, 2025). ↑
2. . See infra subpart I(C); Roberta Romano, Public Pension Fund Activism in Corporate Governance Reconsidered, 93 Colum. L. Rev. 795, 797 (1993) (“Public funds have . . . been more active than other institutional investors in corporate governance over the past few years, offering shareholder proposals and engaging in other highly publicized activities to influence management actions.”). ↑
3. . See, e.g., Lucian Bebchuk & Scott Hirst, Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy, 119 Colum. L. Rev. 2029, 2139 (2019) (criticizing “the Big Three’s failure to use certain potentially-valuable stewardship tools”). ↑
4. . Dionysia Katelouzou & Dan W. Puchniak, Complexities, Challenges and Possibilities, in Global Shareholder Stewardship 3, 3–4 (Dionysia Katelouzou & Dan W. Puchniak eds., 2022). ↑
5. . Id. at 3; see The UK Stewardship Code 2020, Fin. Reporting Council 8 (Oct. 23, 2019), https://media.frc.org.uk/documents/The_UK_Stewardship_Code_2020.pdf [https://perma.cc/

   46YB-NRHG] (advocating “stewardship that creates long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society”). ↑

6. . See Shareholders’ Rights Directive Q&A, Eur. Comm’n (March 14, 2017), https://ec.europa.eu/commission/presscorner/detail/en/MEMO_17_592 [https://perma.cc/7X6J-X89R] (explaining that “institutional investors and asset managers” will be “required to disclose an engagement policy and how it has been implemented”). ↑
7. . See, e.g., Sean J. Griffith & Dorothy S. Lund, Conflicted Mutual Fund Voting in Corporate Law, 99 B.U. L. Rev. 1151, 1157 (2019) (developing a “typology of three basic forms of conflicted institutional voting”); Romano, supra note 2, at 796 (“[P]ublic pension funds face distinctive investment conflicts that limit the benefits of their activism.”). ↑
8. . See, e.g., José Azar, Martin C. Schmalz & Isabel Tecu, Anticompetitive Effects of Common Ownership, 73 J. Fin. 1513, 1513–14 (2018) (exploring the effects of common ownership in the airline industry); José Azar, Sahil Raina & Martin Schmalz, Ultimate Ownership and Bank Competition, 51 Fin. Mgmt. 227, 233–34 (2021) (analyzing the effects of common ownership in the banking industry). ↑
9. . See generally Jill E. Fisch & Jeff Schwartz, Corporate Democracy and the Intermediary Voting Dilemma, 102 Texas L. Rev. 1 (2023) (identifying the challenges associated with the fact that pension and mutual funds act as intermediaries). ↑
10. . See Robert G. Eccles & Jill E. Fisch, The Politics of Values-Based Investing, Harv. L. Sch. F. on Corp. Gov. (Sep. 7, 2022), https://corpgov.law.harvard.edu/2022/09/07/the-politics-of-values-based-investing/ [https://perma.cc/L4XU-95AZ] (distinguishing between values-based and value-based motivations). ↑
11. . The term ESG is fraught, and we use it here with caution. See Elizabeth Pollman, The Making and Meaning of ESG, 14 Harv. Bus. L. Rev. 403, 407 (2024) (reporting that “[i]n a survey of institutional investors, three-quarters of respondents said there is a lack of clarity around ESG terminology”). ↑
12. . Fisch & Schwartz, supra note 9, at 5. ↑
13. . See, e.g., id. at 28 (“It is undemocratic to rely on unelected, largely unaccountable, financial institutions to set public policy without any input from the public.”). ↑
14. . As discussed infra subpart III(A), the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. (ERISA) is the key regulation in this area. It imposes a fiduciary duty to maximize fund value for the benefit of “participants” and “beneficiaries,” terms that encompass both employees and retirees. Id. § 1002(6)–(8). ↑
15. . A mutual fund may identify an investment policy that, in some cases, proposes to sacrifice economic value in favor of other objectives. See, e.g., CATH Factsheet, Global X, https://assets.globalxetfs.com/funds/documents/cath/Fact-Sheet_CATH.pdf [https://perma.cc/

    2QUD-SWVB]. The Factsheet notes that:

    CATH’s consideration of the Guidelines in its investment process may result in choices not to purchase, or sell, otherwise profitable investments in companies that have been identified as being in conflict with the Guidelines. This means that the Fund may underperform other similar funds that do not consider the Guidelines when making investment decisions.)

    Id. ↑

16. . See Amy Monahan, When a Promise Is Not a Promise: Chicago-Style Pensions, 64 UCLA L. Rev. 356, 360 (2017) (explaining that in fiscally distressed jurisdictions, state and local governments resort to measures such as tax increases to address pension debts). ↑
17. . See infra note 218 and accompanying text; Kevin E. McCarthy, Targeting State Fund Investments, Conn. Gen. Assembly (Jan. 5, 2005), https://www.cga.ct.gov/2005/rpt/2005-R-0028.htm [https://perma.cc/VZ6A-W8CV] (providing examples of state legislation mandating investment in state initiatives); Romano, supra note 2, at 809 tbl. 1 (identifying states with “public pension fund social investment policies”). ↑
18. . We recognize that in the mutual fund context, the fund is technically considered the principal. See Goldstein v. SEC, 451 F.3d 873, 881 (D.C. Cir. 2006) (“The adviser owes fiduciary duties only to the fund, not to the fund’s investors.”). Regardless, the adviser’s duties have been understood to require that fund managers maximize the fund’s economic value for the benefit of its beneficiaries. See Fisch & Schwartz, supra note 9, at 8 (“The primary mission of fund managers is typically to maximize the value of their portfolios through sound investment decisions.”). As discussed infra note 249 and accompanying text, our view recognizes that the fund has goals distinct from any individual fund constituency and, as such, is similar to the “entity” theory of the corporation. ↑
19. . We include as a public pension “fund manager” anyone who exercises authority over the fund’s investment and engagement policy, including its board of trustees, appointed or elected investment officials and staff, and any external managers to which such authority is delegated. ↑
20. . Such deference may be analogized to the application of the business judgment rule in corporate law. See, e.g., Julian Velasco, Structural Bias and the Need for Substantive Review, 82 Wash. U. L.Q. 821, 830 (2004) (“[T]he business judgment rule universally is acknowledged to demonstrate great deference to directors’ business decisions and to provide a strong shield from liability for those decisions.”). On this point, we disagree with T. Leigh Anenson, who maintains that “[c]ourts (or legislatures) should refrain from adopting the deferential business judgment rule found in the law of corporate governance” for public pensions. T. Leigh Anenson, Public Pensions and Fiduciary Law: A View from Equity, 50 U. Mich. J.L. Reform 251, 281 (2017). ↑
21. . See, e.g., Romano, supra note 2, at 797, 799 (arguing that public funds should be bound to focus on value maximization). ↑
22. . See, e.g., Fisch & Schwartz, supra note 9, at 20. ↑
23. . Public pension funds also engage in a variety of advocacy activities, including taking positions on proposed legislation and participating in administrative agency rulemaking. See, e.g., Advocacy Activities, Nat’l Conf. on Pub. Emp. Ret. Sys., https://www.ncpers.org/advocacy-activities [https://perma.cc/J7VL-736Z] (collecting several examples of NCPERS advocacy activities including letters to the legislature, comments on regulations, and testimony before legislative bodies). ↑
24. . We do not include the Federal Employees Retirement System in our analysis, nor do we include the investment activities of foreign sovereigns, though some of our discussion can reasonably be extended to foreign pension and sovereign wealth funds. See, e.g., Paul Rose, What Responsibilities Do Sovereign Wealth Funds Have to Other Investors?, 52 Wake Forest L. Rev. 889 (2017) (applying fiduciary principles to analyze sovereign wealth funds’ responsibilities to co-investors); Bruce E. Aronson, A Japanese CalPERS or a New Model for Institutional Investor Activism? Japan’s Pension Fund Association and the Emergence of Shareholder Activism in Japan, 7 N.Y.U. J. L. & Bus. 571 (2011) (discussing the activism of the Pension Fund Association in Japan). ↑
25. . State and Local Backgrounders: State and Local Government Pensions, Urb. Inst., https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/

    projects/state-and-local-backgrounders/state-and-local-government-pensions [https://perma.cc/

    P44V-D7RB]. ↑

26. . Id. ↑
27. . From 1994 to 2023, employer contributions constituted more than double employee contributions, but the majority of public pension fund revenue came from earnings on fund investments. NASRA, NASRA Issue Brief: Employee Contributions to Public Pension Plans 1 (Nov. 2024), https://www.nasra.org/files/Issue%20Briefs/NASRAContribBrief.pdf [https://perma.cc/Y2X5-3ZDS]. ↑
28. . State and Local Backgrounders, supra note 25. ↑
29. . Pension Basics: How Pension Benefits Are Calculated, Equable (Aug. 15, 2019), https://equable.org/pension-basics-how-pension-benefits-are-calculated/ [https://perma.cc/EK5H-W6WJ]. Public pension funds may also have vesting requirements, meaning that an employee must work for a minimum number of years to be eligible for any benefit. These vesting requirements, which are often longer than those in the private sector, mean that a substantial percentage of public employees do not receive any pension benefits. Jen Sidorova, New York Shifts More Public Pension Costs to Taxpayers, Reason Found. (Aug. 31, 2022), https://reason.org/commentary/new-york-shifts-more-public-pension-costs-to-taxpayers/ [https://perma.cc/7A67-CF8G]. ↑
30. . See Sidorova, supra note 29 (“Public pension benefits are typically constitutionally protected, meaning the government—and taxpayers—must ultimately be the backstop if projected contributions to a pension system are not enough to cover the benefits promised to workers.”); Rod Crane, Examining the Control State and Local Governments Have over Public Pension Plans, Reason Found. (Sep. 12, 2023), https://reason.org/commentary/examining-the-control-state-and-local-governments-have-over-public-pension-plans/ [https://perma.cc/ VH9Z-CQHB] (“[A]ccrued public pension benefits are almost always ubiquitously protected from diminishment by federal and state constitutional protections”); Alicia H. Munnell & Laura Quinby, Legal Constraints on Changes in State and Local Pensions, 25 Ctr. Ret. & Rsch. Bos. Coll. 1 (Aug. 2012), https://crr.bc.edu/wp-content/uploads/2012/08/slp_25.pdf [https://perma.cc/N5CR-7GYV] (surveying the types of legal protections for public pension plan beneficiaries). ↑
31. . Sidorva, supra note 29; Crane, supra note 30. ↑
32. . Public Pension Assets, supra note 1. The roughly 5,300 state and local retirement systems had 15.3 million active (working) members and 12.4 million retirees. National Data, Pub. Plans Data, https://publicplansdata.org/quick-facts/national/ [https://perma.cc/XX2R-6VKH]. ↑
33. . National Data, supra note 32. ↑
34. . See Alvin D. Lurie, ETIs: A Scheme for the Rescue of City and Country with Pension Funds, 5 Corn. J.L. & Pub. Pol’y 315, 315 (1996) (“ETI is basically a scheme for using the funds of both public and private pensions to invest in, say, community projects like building bridges.”); Brian R. Talcott, Comment, Economically Targeted Investments: Using Public Pension Fund Dollars to Close Capital Gaps in Oregon, 74 Or. L. Rev. 1031, 1033 (1995) (“Such programs cover a wide range of investments, including backing real estate mortgages, developing affordable housing, and providing venture capital for in-state businesses.”). ↑
35. . See Romano, supra note 2, at 808, 809 tbl. 1 (“The most prevalent legislation recommends that investments be made to enhance the economic climate or general welfare of the state or to increase local employment.”). ↑
36. . Jean-Pierre Aubry & Kevin Wandrei, Internal vs. External Management for State and Local Pension Plans, 75 Ctr. Ret. & Rsch. Bos. Coll. 2 (Nov. 2020), https://live-crr1.pantheonsite.io/
    wp-content/uploads/2020/11/SLP75_.pdf [https://perma.cc/26E2-5EPH]. ↑
37. . Randy Miller & Rick Funston, Funston Advisory Serv. Public Pension Governance That Works 10 (Mar. 2014), https://www.nasra.org/Files/Topical%20Reports/
    Governance%20and%20Legislation/FunstonGovernance1403.pdf [https://perma.cc/N9UR-E92D]. ↑
38. . Aubry & Wandrei, supra note 36, at 2. ↑
39. . See, e.g., Miller & Funston, supra note 37, at 3 (describing four basic models of fund governance); Alexander Dyck, Paulo Manoel & Adair Morse, Outraged by Compensation: Implications for Public Pension Performance, 53 Rev. Fin. Stud. 2928, 2933 (2022) (describing fund governance structures). ↑
40. . Keith Brainard & Alex Brown, NASRA, State Retirement System Governing Authority Arrangements, 1 (July 2024), https://www.nasra.org/files/Topical%20Reports/
    Governance%20and%20Legislation/NASRA%20governing%20entities%20final.pdf [https://perma.cc/PNP3-AQME]. ↑
41. . Id. at 1, 3–4. ↑
42. . Keith Brainard & Alex Brown, NASRA, Overview of Public Pension Plan Governance, 3–4 (Nov. 2019), https://www.nasra.org/files/Topical%20Reports/Governance
    %20and%20Legislation/NASRA%20governance%20overview.pdf [https://perma.cc/N8FK-PPL5]. ↑
43. . See, e.g., Danilo Risteski, Note, Politics Before Pensions: How New ESG Rules Expose Public Pension System Vulnerabilities, 95 U. Colo. L. Rev. 805, 822–23 (2024) (describing Maine’s adoption of legislation “requiring state pension funds to divest from fossil fuel investments”). ↑
44. . Plan Design, NASRA, https://www.nasra.org/plandesign [https://perma.cc/6KCS-CBPE] (“According to the U.S. Bureau of Labor Statistics, approximately 85 percent of employees of state and local government participate in a [defined benefit] plan.”). ↑
45. . What Is Social Security?, Nat’l Acad. Soc. Ins., https://www.nasi.org/learn/social-security/what-is-social-security/ [https://perma.cc/QG73-AY5K]. ↑
46. . At one time, defined benefit plans were the dominant form of pension plan offered by both public and private employers. See Ian Ayres & Quinn Curtis, Beyond Diversification: The Pervasive Problem of Excessive Fees and “Dominated Funds” in 401(k) Plans, 124 Yale L.J. 1476, 1484 (2015) (“The last three decades have seen a marked shift from pension plans, which guarantee a defined retirement benefit for life, to defined-contribution plans, in which employees save for retirement through contributions to tax-advantaged retirement accounts.”). Today most public pension funds are structured as defined benefit plans, although some have shifted to defined contribution plans, largely in response to concerns about underfunding. See Natalya Shnitser, Trusts No More: Rethinking the Regulation of Retirement Savings in the United States, 2 BYU L. Rev.629, 636 (2016) (observing that “public-sector pension plans [mostly] still take the traditional defined-benefit form”). Our analysis is limited to defined benefit plans in which beneficiaries are fixed claimants. ↑
47. . See Jeff Schwartz, Rethinking 401(k)s, 49 Harv. J. Leg. 53, 55, 57 (2012) (critiquing this structure). ↑
48. . Amy Monahan, State Fiscal Constitutions and the Law and Politics of Public Pensions, 1 Ill. L. Rev. 117, 128 (2014). ↑
49. . See, e.g., Angela Cai, U.S. Public Pension Fund Diversity Initiatives: Practices, Rationales, and Constitutionality, 13 DePaul Bus. & Comm. L.J. 107, 123–24 (2014) (describing the underfunding problem). A “[funding] ratio measures the extent to which a plan’s required payouts are covered by what is currently held as assets.” Grace Harrison, Unfunded Pension Liabilities: The Growing Cost of Retirement, Council of State Gov’ts (May 3, 2023), https://www.csg.org/
    2023/05/03/unfunded-pension-liabilities-the-growing-cost-of-retirement/ [https://perma.cc/P72S-CGGN]. A plan is considered underfunding if its assets are insufficient to meet those payments. Id. ↑
50. . Matt Toledo, Most US Public Pension Funds Are Distressed, per Equable Report, Chief Inv. Officer (Jan. 10, 2024), https://www.ai-cio.com/news/most-us-public-pension-funds-are-distressed-per-equable-report/ [https://perma.cc/4A97-HN8T]. ↑
51. . The Chicago Teachers’ Pension Fund, for example, reported a funded ratio of 47.2% as of June 30, 2023. Chicago Teachers’ Pension Fund Releases 2023 Annual Comprehensive Financial Report, Chi. Tchr.’s Pension Fund (Jan. 31, 2024), https://ctpf.org/news/chicago-teachers-pension-fund-releases-2023-annual-comprehensive-financial-report [https://perma.cc/4YQ4-36WB]. ↑
52. . State and Local Backgrounders, supra note 25. ↑
53. . E.J. McMahon, NY’s Biggest Public Pension Fund Gained Nearly 12% in FY 2024, Empire Ctr. Blog (June 28, 2024), https://www.empirecenter.org/publications/nys-biggest-public-pension-fund-gained-nearly-12-in-fy-2024/ [https://perma.cc/TD7B-ZUTE]. The New York State Teachers’ Retirement System is also a statewide plan, with $145.8 billion in net assets as of June 30, 2024. NYSTRS by the Numbers, NYTRS, https://www.nystrs.org/about-us/press-room/nystrs-by-the-numbers/ [https://perma.cc/9YT3-ZS7H]. ↑
54. . New York State Common Retirement Fund, Off. N.Y. State Comptroller, https://www.osc.state.ny.us/common-retirement-fund [https://perma.cc/VPR6-V7AH]; Comptroller’s NYS Common Retirement Fund Responsibilities, Off. N.Y. State Comptroller, https://www.osc.ny.gov/common-retirement-fund/responsibilities [https://perma.cc/L7NH-F85P]. ↑
55. . McMahon, supra note 53. ↑
56. . NYSLRS Announces Employer Contribution Rates for 2024-25, Off. N.Y. State Comptroller (Aug. 31, 2023), https://www.osc.ny.gov/press/releases/2023/08/nyslrs-announces-employer-contribution-rates-2024-25 [https://perma.cc/4VVG-PRXD]. ↑
57. . About the New York State Comptroller’s Office, Off. N.Y. State Comptroller, https://www.osc.state.ny.us/about/about-comptrollers-office [https://perma.cc/L3V6-6MRF]. ↑
58. . See New York State Comptroller Thomas P. DiNapoli, Off. N.Y. State Comptroller, https://www.osc.state.ny.us/about/comptroller-biography [https://perma.cc/5E2H-T3VW] (explaining DiNapoli’s background); Lauren Stanforth, DiNapoli Challenged by Previous Opponent’s Protege, Times Union (Oct. 26, 2018, 1:30 PM), https://www.timesunion.com/news/
    article/Former-Wilson-protege-challenges-entrenched-13327158.php [https://perma.cc/X5TV-B4N2] (observing that when DiNapoli first became Comptroller in 2006 he was “a Long Island assemblyman with no private-sector financial experience”). ↑
59. . Michael Cooper, Hevesi Resigns, Pleading Guilty to Fraud Count, N.Y. Times (Dec. 22, 2006), https://www.nytimes.com/2006/12/22/nyregion/22cnd-hevesi.html [https://perma.cc/
    5NBE-WBBG]. ↑
60. . Jospeh Konig, State Comptroller DiNapoli Secures Fourth Term, Spectrum News (Nov. 9, 2022, 4:00 AM), https://ny1.com/nyc/all-boroughs/politics/2022/11/07/state-comptroller-dinapoli-secures-fourth-term [https://perma.cc/68W5-4W5X]. ↑
61. . Off. N.Y. State Comptroller, General Investment Policy Statement for the New York State Common Retirement Fund (Mar. 19, 2025), https://www.osc.ny.gov/files/
    common-retirement-fund/pdf/general-investment-policies.pdf [https://perma.cc/5M9V-7VFR]. ↑
62. . Id. (explaining that “[t]he Comptroller is expressly permitted to invest the assets of the CRF [Common Retirement Fund] in specific types of investments enumerated in section 235 of the New York State Banking Law and several sections of the RSSL [Retirement and Social Security Law], including sections 13, 313, and 177 . . . the so-called ‘legal list’ investments”). ↑
63. . See Robert Steyer, New York Public Pension Funds Can Add More Alternative Investments Under New Law, Pensions & Invs. (Jan. 3, 2023, 3:45 PM), https://www.pionline.com/pension-funds/new-york-public-pension-funds-can-add-more-alternative-investments-under-new-law [https://perma.cc/SFP2-RCN8] (describing adoption of legislation authorizing New York pension funds to increase their alternative investment allocations from 25% to 35%). ↑
64. . See, e.g., Palash Ghosh, New York State Comptroller Spells Out Stewardship Guidelines, Pensions & Invs. (Apr. 4, 2024, 2:20 PM), https://www.pionline.com/esg/new-york-state-comptroller-spells-out-stewardship-guidelines [https://perma.cc/9LPM-MM63] (describing the fund’s “stewardship priorities for 2024, which include establishing expectations related to climate risks; diversity, equity and inclusion; workforce management; governance issues; board diversity; executive compensation; and political spending disclosure, among other matters”). ↑
65. . Pension/Investment Management: Overview, N.Y.C. Comptroller Brad Lander, https://comptroller.nyc.gov/services/financial-matters/pension/overview/ [https://perma.cc/MFH3-ZY7S]. ↑
66. . Id. ↑
67. . Id. ↑
68. . Id.; Pension/Investment Management: Asset Performance, N.Y. City Comptroller Brad Lander, https://comptroller.nyc.gov/services/financial-matters/pension/asset-performance/ [https://perma.cc/7S4G-UAMG]. ↑
69. . About NYCERS, NYCERS, https://www.nycers.org/about [https://perma.cc/CK3M-ZX8X]. ↑
70. . Board of Trustees, NYCERS, https://www.nycers.org/board-trustees [https://perma.cc/
    N86E-LCCC]. ↑
71. . See Martin Z. Braun, New York City’s Pension-Fund System Plagued by Inefficiencies, Bloomberg (Mar. 10, 2023, 12:31 PM), https://www.bloomberg.com/news/articles/2023-03-09/nyc-pension-fund-system-inefficiencies-create-growing-costs [https://perma.cc/PYJ7-54HK] (noting that redundancy in the pension system caused ballooning costs, but a proposal to consolidate was pulled due to union desires to control investment decisions). ↑
72. . CalPERS Story, CalPERS, https://www.calpers.ca.gov/page/about/organization/calpers-story [https://perma.cc/6B4N-M4AJ] (Apr. 21, 2023). ↑
73. . Investments, CalPERS, https://www.calpers.ca.gov/page/investments [https://perma.cc/
    P8GA-5QWD] (July 21, 2025). ↑
74. . Board Members, CalPERS, https://www.calpers.ca.gov/page/about/board/board-members [https://perma.cc/3AD7-CE9T] (Sep. 11, 2025). ↑
75. . Id. ↑
76. . Ed Mendel, CalPERS President Loses Board Seat to Policeman, Calpensions
    (Oct. 5, 2018, 12:06 AM), https://calpensions.com/2018/10/05/calpers-president-loses-board-seat-to-policeman/ [https://perma.cc/2LFV-V4MZ] (describing composition of CalPERS board). ↑
77. . Board Members, supra note 74. ↑
78. . Id. ↑
79. . Steven Malanga, A Grandstanding Politician Investigates Wall Street, Manhattan Inst. (Sep. 23, 2009), https://manhattan.institute/article/a-grandstanding-politician-investigates-wall-street [https://perma.cc/N6R9-F3KQ]; Douglas Curley, Where Is Phil Angelides Now?, Comostock’s Mag. (July 3, 2014), https://www.comstocksmag.com/blog-entry/where-phil-angelides-now [https://perma.cc/LL59-MFZS]; Phyllis Plitch, Calpers Approves Plan to Target Auditors on Independence, Wall St. J. (Mar. 14, 2005, 5:52 PM), https://www.wsj.com/articles/
    SB111083942843179125 [https://perma.cc/JJF6-TEUC]. ↑
80. . 2023-24 State Employer and Employee Contribution Rates, CalPERS (Apr. 19, 2023), https://www.calpers.ca.gov/page/employers/policies-and-procedures/circular-letters/200-020-23 [https://perma.cc/VR8P-UFTT]. ↑
81. . See id. (noting that the California Legislature can adopt higher contribution rates than the actuarially determined rate and has done so “every year since FY 2013-14”). ↑
82. . See, e.g., CalPERS Will Increase Private Markets Investments, CalPERS (Mar. 19, 2024), https://www.calpers.ca.gov/page/newsroom/calpers-news/2024/calpers-will-increase-private-markets-investments [https://perma.cc/JNU6-HEL5] (describing CalPERS’ board’s approval of proposal to increase fund’s allocations in private equity and private debt). ↑
83. . In 2019, for example, CalPERS fired “almost all its external and emerging equity managers,” moving the money “into several different internally run equity index strategies.” Randy Diamond, Almost $14 Billion Pulled from CalPERS Equity Managers, Chief Inv. Officer
    (Dec. 16, 2019), https://www.ai-cio.com/news/almost-14-billion-pulled-calpers-equity-managers/ [https://perma.cc/7HLK-F6UY]. ↑
84. . CalPERS Facts at a Glance, CalPERS (Mar. 31, 2024), https://www.calpers.ca.gov/
    documents/facts-investments/download?inline [https://perma.cc/457Z-RRJ4]; Arleen Jacobius, CalPERS Funded Status Inches Up from 2022 Plunge, Pensions & Invs. (Nov. 17, 2023, 8:30 AM), https://www.pionline.com/pension-funds/calpers-funded-status-inches-2022-plunge [https://perma.cc/XJ4L-MHPB]. ↑
85. . About ERS, ERS, https://www.ers.texas.gov/about-ers [https://perma.cc/V26HJ6PL]. Texas has a separate retirement system for its teachers, the Teacher Retirement System of Texas (TRS). The TRS is the largest public retirement system in Texas, serving 2 million people. About TRS, TRS, https://www.trs.texas.gov/Pages/about_trs.aspx [https://perma.cc/4VLK-BB7E]. ↑
86. . State of Texas Retirement for Active Employees, ERS, https://www.ers.texas.gov/Active-Employees/Retirement/State-of-Texas-Retirement [https://perma.cc/4NB7-SB3V]. ↑
87. . Emps. Ret. Sys. of Tex., Employees Retirement System of Texas Investment Policy Statement 1 (2025). ↑
88. . See Steven Gassenberger, Texas Legislature Continues Bipartisan Push to Modernize Public Retirement Benefits, Reason Found. (Sep. 11, 2023), https://reason.org/commentary/texas-legislature-continues-bipartisan-push-to-modernize-public-retirement-benefits/ [https://perma.cc/
    5TCA-R6W3] (discussing actions taken by the Texas legislature to address the $14.7 billion in public pension debt). ↑
89. . ERS Trustees, ERS, https://www.ers.texas.gov/about-ers/ers-board-of-trustees/members [https://perma.cc/EW7V-856C]. ↑
90. . Id. ↑
91. . Investment Advisory Committee, ERS, https://www.ers.texas.gov/about-ers/ers-board-of-trustees/Investment-Advisory-Committee [https://perma.cc/TEG5-EYWE]. ↑
92. . Emps. Ret. Sys. of Tex., supra note 87, at 3. The Texas Government Code requires the development of a written investment policy but does not specify the types of permissible investments. Investment Policies, Tex. Pension Rev. Bd., https://www.prb.texas.gov/investments/
    investment-policies/ [https://perma.cc/QJ6N-N33T]. ↑
93. . Emps. Ret. Sys. of Tex., supra note 87, at 7. ↑
94. . See, e.g., Stephen J. Choi & Jill E. Fisch, On Beyond CalPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance, 61 Vand. L. Rev. 315, 316 (2008) (“Academics, regulators, and policymakers have looked to the examples of CalPERS and several other public pension funds to support the claims that institutional investors can use their substantial equity stakes and sophistication effectively to . . . improve corporate performance.”). ↑
95. . Id. ↑
96. . As Maria O’Brien Hylton explains, public pension funds were the initial drivers of what was termed “socially responsible investing.” Maria O’Brien Hylton, Socially Responsible Investing in an Inefficient Market: Doing Good Versus Doing Well, 42 Am. U. L. Rev. 1, 5, 7 (1992). But see Amelia Miazad, Faith Investors 4–6 (Nov. 2024), https://papers.ssrn.com/sol3/
    papers.cfm?abstract_id=5152567 [https://perma.cc/ZGQ4-N6QX] (describing faith investors who have long engaged in similar investing strategies). ↑
97. . Jean-Pierre Aubry, Anqi Chen, Patrick M. Hubbard & Alicia H. Munnell, ESG Investing and Public Pensions: An Update, 74 Ctr. Ret. & Rsch. Bos. Coll. 1 (Oct. 2020), https://crr.bc.edu/wp-content/uploads/2020/10/SLP74.pdf [https://perma.cc/Z5AC-NHGU]. ↑
98. . See Kevin P. Lewis, Dealing with South Africa: The Constitutionality of State and Local Divestment Legislation, 61 Tul. L. Rev. 469, 471–72 (1987) (describing passage of divestment bills during the mid-1980s). ↑
99. . See, e.g., David W. Dunlap, Pension System to Drop Stocks Over Apartheid, N.Y. Times (Aug. 4, 1984), https://www.nytimes.com/1984/08/04/nyregion/pension-system-to-drop-stocks-over-apartheid.html [https://perma.cc/RQH5-T6DW] (reporting on the New York City Employees’ Retirement System’s vote to withdraw investments “in companies doing business in South Africa, making it the largest public pension fund in the nation to send such a protest against apartheid”). ↑
100. . See, e.g., Connecticut to Stop Investing Pension Money in Gun Manufacturers, CBS News (Dec. 3, 2019, 4:00 PM), https://www.cbsnews.com/news/connecticut-pension-fund-to-divest-30-million-from-gun-companies/ [https://perma.cc/EY7K-8L34] (describing decision by Connecticut’s treasurer, who oversees the state’s public pension funds, “to divest $30 million worth of shares in civilian firearm manufacturers while banning similar future investments and creating incentives for banks and financial institutions to enact gun-related policies when lending to companies”); Liz Moyer, New York City Pension Fund to Divest Itself of Gun Retailer Stock, N.Y. Times (July 14, 2016), https://www.nytimes.com/2016/07/15/business/dealbook/new-york-city-pension-fund-to-divest-itself-of-gun-retailer-stock.html [https://perma.cc/KU72-K3KK] (reporting announcement by New York City Employees’ Retirement System to sell its holdings of three retail companies because they sell guns). ↑
101. . Yuki Noguchi, Pension Funds Under Pressure to Sell Investments in Gun-Makers, NPR (Feb. 26, 2018, 5:34 PM), https://www.npr.org/2018/02/26/588810413/pension-funds-under-pressure-to-sell-off-investments-in-gun-makers [https://perma.cc/82J6-WDF7]. CalSTRS has also divested from coal. Id. ↑
102. . Press Release, N.Y.C. Comptroller Brad Lander, NYC Comptroller Lander Proposes Excluding Future Private Markets Investments in Midstream and Downstream Fossil Fuel Infrastructure by the New York City Retirement Systems (Oct. 22, 2024), https://comptroller.nyc.gov/newsroom/nyc-comptroller-lander-proposes-excluding-future-private-markets-investments-in-midstream-and-downstream-fossil-fuel-infrastructure-by-the-new-york-city-retirement-systems/ [https://perma.cc/AH5L-F9YE]. ↑
103. . Joshua Lichtenstein, Michael Littenberg & Reagan Haas, ESG and Public Pension Investing in 2023: A Year-to-Date Recap and Analysis, Harv. L. Sch. F. on Corp. Gov. (Nov. 22, 2023), https://corpgov.law.harvard.edu/2023/11/22/esg-and-public-pension-investing-in-2023-a-year-to-date-recap-and-analysis/ [https://perma.cc/MFM9-D873]. ↑
104. . Press Release, N.Y.C. Comptroller Brad Lander, New York City Pension Funds Adopt Implementation Plan to Achieve Net Zero Investment Portfolio by 2040 (Apr. 5, 2023), https://comptroller.nyc.gov/newsroom/new-york-city-pension-funds-adopt-implementation-plan-to-achieve-net-zero-investment-portfolio-by-2040/ [https://perma.cc/HPT8-Y8QT]. ↑
105. . Ed Mendel, CalPERS: A 112th Green, Social, Corporate Policy, Calpensions (Sep. 6, 2011, 9:14 AM), https://calpensions.com/2011/09/06/calpers-a-112th-green-corporate-social-policy/ [https://perma.cc/5XUW-5EE4]. ↑
106. . Aubry et al., supra note 97, at 3. ↑
107. . For example, CalPERS co-founded Climate Action 100+, an organization of more than 700 institutional investors focused on addressing climate change. Commc’ns & Stakeholder Rels. Off. Pub. Affs., CalPERS to Lead Committee Governing Climate Action 100+, CalPERS (Apr. 16, 2024), https://www.calpers.ca.gov/page/newsroom/calpers-news/2024/calpers-to-lead-committee-governing-climate-action-100-plus [https://perma.cc/FF6Z-XGCV]. A number of public pension funds are part of the Investor Stewardship Group, which is “a sustained initiative to establish a framework of basic investment stewardship and corporate governance standards for U.S. institutional investor and boardroom conduct.” Katherine Heires, Stewardship and Governance Principles Gain Broad Backing, Glob. Ass’n of Risk Pros. (Sep. 6, 2019), https://www.garp.org/
     risk-intelligence/culture-governance/stewardship-and-governance-principles-gain-broad-backing [https://perma.cc/7WWR-XKKH]. ↑
108. . In 1988, the DOL promulgated its “Avon letter” advising private pension fund managers that “the decision[s] as to how proxies should be voted . . . are fiduciary acts of plan asset management.” U.S. Dep’t of Lab., Pension & Welfare Benefit Programs, Opinion Letter Re: Avon Products, Inc. Employee’s Retirement Plan (Feb. 23, 1988). In 2003, the SEC adopted a rule requiring mutual funds to develop voting policies and to vote the shares of their portfolio companies in the best interests of their beneficiaries. 17 C.F.R. § 275.206(4)–(6) (2003). ↑
109. . Joseph A. Grundfest, Just Vote No: A Minimalist Strategy for Dealing with Barbarians Inside the Gates, 45 Stan. L. Rev. 857, 866–67 (1993). ↑
110. . Heather Gillers, CalPERS Plans to Vote to Replace Warren Buffett as Berkshire Hathaway’s Chairman, Wall St. J. (Apr. 20, 2022, 5:04 PM), https://www.wsj.com/articles/
     calpers-plans-to-vote-to-replace-warren-buffett-as-berkshire-hathaways-chair-11650468931 [https://perma.cc/ANV5-874X]. The fund has also frequently aligned with activist challenges to incumbent boards. Randall Smith, Some Big Public Pension Funds Are Behaving Like Activist Investors, N.Y. Times (Nov. 28, 2013, 8:48 PM), https://archive.nytimes.com/dealbook
     .nytimes.com/2013/11/28/some-big-public-pension-funds-are-behaving-like-activist-investors/ [https://perma.cc/WDK9-TFKG]. ↑
111. . James F. Peltz, CalPERS Blasts Safeway Decision to Retain Burd, L.A. Times (May 4, 2004, 12:00 AM), https://www.latimes.com/archives/la-xpm-2004-may-04-fi-safeway4-story.html [https://perma.cc/LQP3-LZV4]. ↑
112. . N.Y. State Common Ret. Fund, New York State Common Retirement Fund Proxy Voting Guidelines 9–10 (2022), https://www.osc.ny.gov/files/common-retirement-fund/
     corporate-governance/pdf/proxy-voting-guidelines-2022.pdf [https://perma.cc/2BCC-38MV]. ↑
113. . See, e.g., Gillers, supra note 110 (describing CalPERS’s support for a proposal that would separate the CEO and board chair positions at Berkshire Hathaway); Smith, supra note 110 (noting that the “big public funds” have campaigned for majority voting in director elections); Holly J. Gregory, Rebecca Grapsas & Claire Holland, Proxy Access: A Five-Year Review, Harv. L. Sch. F. on Corp. Gov. (Feb. 4, 2020), https://corpgov.law.harvard.edu/2020/02/04/proxy-access-a-five-year-review/ [https://perma.cc/53CT-EB3R] (describing the New York City Public Pension Funds’ campaign for proxy access). ↑
114. . Phillip R. Stanton, SEC Reverses Cracker Barrel No-Action Letter, 77 WASH. U. L.Q. 979, 987–88 (1999). ↑
115. . Michael Katz, NY Pension Calls on Firms to Report Abuse, Harassment, Discrimination, Chief Inv. Officer (Feb. 22, 2022), https://www.ai-cio.com/news/new-york-demands-political-disclosure-from-twitter-six-other-companies-2/ [https://perma.cc/ZBB6-BV33]. ↑
116. . Michael Katz, New York State Comptroller Files Diversity Proposals, Chief Inv. Officer (Feb. 21, 2023), https://www.ai-cio.com/news/new-york-state-comptroller-files-

     diversity-proposals/ [https://perma.cc/C2ZZ-U5MP]. ↑

117. . Citizens United v. FEC, 558 U.S. 310 (2009). ↑
118. . See, e.g., Jill Fisch & Adriana Z. Robertson, Proxies for Politics (Dec. 21, 2025), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5894542 [https://perma.cc/G84N-T4FP] (identifying sponsors of political disclosure proposals). ↑
119. . Press Release, Off. N.Y. State Comptroller Thomas P. DiNapoli, DiNapoli Files Shareholder Proposals with Six Companies on Political Spending (Jan. 23, 2024), https://www.osc.ny.gov/press/releases/2024/01/dinapoli-files-shareholder-proposals-six-companies-political-spending [https://perma.cc/X6HY-MS97]. ↑
120. . David Webber, Is Pay-to-Play Driving Public Pension Fund Activism in Securities Class Actions – An Empirical Study, 90 B.U. L. Rev. 2031, 2039 (2010). ↑
121. . E.g., Michael Perino, Institutional Activism Through Litigation: An Empirical Analysis of Public Pension Fund Participation in Securities Class Actions, 9 J. Empir. Legal Stud. 368, 390 (2012); Stephen J. Choi, Jill E. Fisch & A. C. Pritchard, Do Institutions Matter? The Impact of the Lead Plaintiff Provision of the Private Securities Litigation Reform Act, 83 Wash. Univ. L.Q. 869, 872 (2005). ↑
122. . H. Claire Brown, A New York City Pension Makes Renters’ Rights an Investment Priority, Wall St. J. (July 17, 2024, 5:30 AM), https://www.wsj.com/articles/a-new-york-city-pension-makes-renters-rights-an-investment-priority-26534abd [https://perma.cc/5865-SDTX]. ↑
123. . James P. Hawley, Political Voice, Fiduciary Activism, and the Institutional Ownership of U.S. Corporations: The Role of Public and Noncorporate Pension Funds, 38 Socio. Persps. 415, 426 (1995); see Jayne Elizabeth Zanglein, Protecting Retirees While Encouraging Economically Targeted Investments, Kan. J.L. & Pub. Pol’y (Winter 1996), at 47 (describing “the ongoing debate over economically targeted investments”). ↑
124. . Donna E. Shalala & Carol Bellamy, A State Saves a City: The New York Case, 1976 Duke L.J. 1119, 1129 (1976). ↑
125. . Investing in New York, Off. N.Y. State Comptroller, https://www.osc.state.ny.us/
     common-retirement-fund/investing-new-york [https://perma.cc/ED3R-FH34]. ↑
126. . Id. ↑
127. . Pension/Investment Management: FAQs, N.Y. City Comptroller Brad Lander, https://comptroller.nyc.gov/services/financial-matters/pension/faqs/ [https://perma.cc/7E25-886J]. ↑
128. . CalPERS Story, supra note 72. For more on CalPERS’ infrastructure investments, see generally CalPERS Infrastructure Investment Outreach Review: Laying the Groundwork for Collaboration, CalPERS (Oct. 15, 2012), https://www.calpers.ca.gov/documents/infrastructure-investment-outreach/download [https://perma.cc/GY6D-2HWW]. ↑
129. . CalPERS, CalPERS for California Report 2 (2022), https://www.calpers.ca.gov/
     docs/board-agendas/202311/invest/item04i-01_a.pdf [https://perma.cc/MBD4-YWFV]. ↑
130. . California Initiative 2016 Report, Pac. Cmty. Ventures (June 19, 2017), https://www.pacificcommunityventures.org/2017/06/19/california-initiative-2016-report/ [https://perma.cc/5GUE-ZTBS]. ↑
131. . See, e.g., Romano, supra note 2, at 803, 808 (discussing pressure on public pension funds to favor local priorities); Max M. Schanzenbach & Robert H. Sitkoff, Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee, 72 Stan. L. Rev. 381, 384–85 (2020) (noting the pressure on pension funds to invest according to ESG factors); Polly Bindman, US Public Pension Funds Caught in the Crossfire of the War on “Woke” Investing, Energy Monitor (Oct. 16, 2023), https://www.energymonitor.ai/regulation-policy/us-public-pension-funds-caught-in-the-crossfire-of-anti-esg-laws/?cf-view [https://perma.cc/JF5X-JP5U] (quoting West Virginia State Treasurer Riley Moore as stating that “states must collectively stand up against ESG proxy voting activism with our public retirement funds”); Matt Cole, Fiduciary Duties of Public Pension Systems and Registered Investment Advisors, Harv. L. Sch. F. on Corp. Gov. (Mar. 1, 2023), https://corpgov.law.harvard.edu/2023/03/01/fiduciary-duties-of-public-pension-systems-and-registered-investment-advisors [https://perma.cc/9BV8-9S34]

     (“Accordingly, public pension system fiduciaries are prohibited from choosing investments, adopting investment strategies, or exercising appurtenant voting rights based on ESG considerations.”) (emphasis added). ↑

132. . See Schanzenbach & Sitkoff, supra note 131, at 397 (distinguishing between “collateral benefits” investing and “risk-return” investing). The term “collateral benefits” has been in use in this area since at least the 1990s. See, e.g., Interpretive Bulletin Relating to the Employee Retirement Income Security Act of 1974, 59 Fed. Reg. 32606, 32607 (June 23, 1994) (to be codified at 29 C.F.R. 2509) (explaining that the Department of Labor has stated that while “a plan fiduciary may consider collateral benefits in choosing between investments that have comparable risks and rates of return, . . . fiduciaries who are willing to accept expected reduced returns or greater risks to secure collateral benefits are in violation of ERISA.”). ↑
133. . See, e.g., Lizzy Lees, What’s Next for Public Pensions and ESG?, Nat’l Conf. on Public Emp. Ret. Sys. (Jan. 1, 2024, 7:43 PM), https://www.ncpers.org/blog_home.asp?display
     =310 [https://perma.cc/DBG6-UE29] (explaining that public pension funds’ “pro- and anti-ESG policies have resulted in several key lawsuits—the results of which will likely have lasting implications for public pensions across the country.”) ↑
134. . Withers v. Tchrs.’ Ret. Sys. of New York City, 447 F. Supp. 1248, 1250 (S.D.N.Y. 1978). ↑
135. . Id. at 1254. ↑
136. . Id. at 1256. ↑
137. . Id. at 1255. ↑
138. . State ex rel. W. Va. Reg’l Jail & Corr. Facility Auth. v. W. Va. Inv. Mgmt. Bd., 508 S.E.2d 130, 133 (W. Va. 1998). ↑
139. . Id. at 135. ↑
140. . Bd. of Trs. of Emps.’ Ret. Sys. v. Mayor of Balt. City, 562 A.2d 720 (Md. 1989). ↑
141. . Id. at 733–34. ↑
142. . Id. at 735. ↑
143. . Id. ↑
144. . Id. at 736. ↑
145. . Id. at 738. ↑
146. . Id. at 737 n.36 (“[T]he costs [of divestiture] are de minimis when viewed in relation to the systems’ total assets.”). ↑
147. . Id. at 738. ↑
148. . Id. at 737. ↑
149. . See Joshua Lichtenstein, Amy Roy & Robert Skinner, The New Battleground in the Fight over ESG’s Role in Public Pension Investments: The Courtroom, Harv. L. Sch. F. on Corp. Gov. (Dec. 17, 2024), https://corpgov.law.harvard.edu/2024/12/17/the-new-battleground-in-the-fight-over-esgs-role-in-public-pension-investments-the-courtroom/ [https://perma.cc/V5P9-XMVN] (discussing the rise and current state of ESG litigation). Although we focus on challenges based on beneficiary primacy, public pension fund activism, especially as it relates to ESG proposals, could also be challenged as representing compelled speech on behalf of the fund’s beneficiaries. See, e.g., Paul S. Miller, A Right for Retirement: Unconscionable Contracts, the Right (Not) to Associate, and Citizens United, 71 Am. U. L. Rev. 177 (2021) (arguing that participation by retirement plans in political activity violates the First Amendment rights of plan participants not to associate). The First Amendment issues reflected in this argument are beyond the scope of this Article, but they similarly result from a beneficiary primacy model. To the extent that a public pension fund is a principal, it does not speak on behalf of its beneficiaries. See infra Part IV. ↑
150. . Complaint at 24, Wong v. New York City Emps.’ Ret. Sys., No. 652297/2023 (N.Y. Sup. Ct. July 3, 2024); see also Saijel Kishan, Martin Z. Braun & Bloomberg, Three New York City Pension Funds Are Being Sued for Divesting from Fossil Fuels as Republican Politicians Take Aim at Anti-ESG Investing, Fortune (May 12, 2023, 8:36 PM), https://fortune.com/2023/05/12/new-york-pension-fund-lawsuit-anti-esg/ [https://perma.cc/ASJ5-3992] (describing lawsuit); The Editorial Board, Opinion, A Lawsuit to Protect Pensions from Climate Politics, Wall. St. J. (May 23, 2023, 6:39 PM), https://www.wsj.com/articles/new-york-city-workers-lawsuit-pension-fund-investment-climate-politics-bill-de-blasio-ae9ba435 [https://perma.cc/ZBR9-JJGR] (same). ↑
151. . Wong v. New York City Emps.’ Ret. Sys., No. 652297/2023, at 1–3 (N.Y. Sup. Ct. July 2, 2024). ↑
152. . Id. at 2, 3. ↑
153. . Id. at 3–4. ↑
154. . Thole v. U.S. Bank N.A., 140 S. Ct. 1615, 1619 (2020). ↑
155. . Keenan v. Russ, No. CV-2023-3021, 2024 WL 3022942, at *6–7 (Okl. Dist. May 7, 2024) (order granting preliminary injunction); see also Amanda Albright, Oklahoma Sued over Anti-ESG Law Targeting BlackRock, Bloomberg (Nov. 21, 2023, 9:06 PM), https://www.bloomberg.com/
     news/articles/2023-11-21/oklahoma-sued-over-anti-esg-law-targeting-blackrock-jpmorgan [https://perma.cc/7N4X-R8VC] (describing litigation). ↑
156. . Keenan, 2024 WL 3022942, at *1–2; Margarida Correia, Oklahoma Hit with Suit over Anti-ESG Blacklist Barring Blackrock, Others, Pensions & Invs. (Nov. 21, 2023, 5:01 PM), https://www.pionline.com/esg/oklahoma-hit-suit-over-anti-esg-blacklist-barring-blackrock-others [https://perma.cc/83P5-ZC9V]. ↑
157. . Plaintiff’s Motion for Temporary Restraining Order at 4–5, 12, Keenan v. Russ, CV-2023-3021, 2024 WL 3022942 (Okla. Dist. Dec. 21, 2023). ↑
158. . Lamar Johnson, Oklahoma Judge Permanently Blocks State’s Anti-ESG Law, ESG Dive (July 23, 2024), https://www.esgdive.com/news/oklahoma-anti-esg-law-permanently-blocked-keenan-russ/722148/ [https://perma.cc/D52Y-Z4QQ]. ↑
159. . Press Release, Gentner Drummond, Drummond Appeals Permanent Injunction Against State’s Anti-ESG Law (Dec. 3, 2024), https://oklahoma.gov/oag/news/newsroom/2024/december/
     drummond-appeals-permanent-injunction-against-states-anti-esg-law.html [https://perma.cc/

     TM2H-BQHJ]. ↑

160. . R (on Application of Palestine Solidarity Campaign Ltd.) v. Sec’y of State for Cmtys. & Loc. Gov’t, [2020] UKSC 16, [16], [31] (appeal taken from Eng. & Wales). ↑
161. . עמיר ליכט [Amir Licht], חרמי וקונמי – התחשבות בשיקולים חברתיים ובמדיניות ממשלתית על ידי משקיע מוסדי [Bans and Divestment: Considering Social Factors and Government Policy in Institutional Investments], נקודה בסוף משפט הערות על דיני אמונאות וממשל תאגידי [A Point at the End of a Sentence: Notes on Trust Law and Corporate Governance] (May 3, 2020), https://amirlicht
     .wordpress.com/2020/05/03/174/ [https://perma.cc/A4KD-RFK5]. ↑
162. . R (on Application of Palestine Solidarity Campaign Ltd.) v. Sec’y of State for Cmtys. & Loc. Gov’t, [2020] UKSC 16, [30] (appeal taken from Eng. & Wales) (“The fund represents [the money of public employees;] it is not public money.”). ↑
163. . Jana Blahova & Imtiyaz Chowdhury, Case Comment: R (on the application of Palestine Solidarity Campaign Ltd and another) v. Secretary of State for Housing, Communities and Local Government [2020] UKSC 16, UKSC Blog: UK Supreme Court Blog (Sep. 2, 2020), https://ukscblog.com/case-comment-r-on-the-application-of-palestine-solidarity-campaign-ltd-and-another-v-secretary-of-state-for-housing-communities-and-local-government-2020-uksc-16/ [https://perma.cc/6Q82-EJK3]. ↑
164. . Id. ↑
165. . Avani Kalra, Red State Anti-ESG Laws Seen as Continuing Obstacle by Companies, Bloomberg L. (July 10, 2024, 3:19 PM), https://news.bloomberglaw.com/esg/red-state-anti-esg-laws-seen-as-continuing-obstacle-by-companies [https://perma.cc/TZC6-AJ6D]. ↑
166. . Shelly Hagan & Nic Querolo, Texas Anti-ESG Push Is Coming for Insurers and Pensions in New Bills, Bloomberg (Mar. 3, 2023, 9:30 AM), https://www.bloomberg.com/news/
     articles/2023-03-03/texas-anti-esg-bill-targets-public-pensions-insurers?embedded-checkout=true [https://perma.cc/K277-S86V]. As this Article went to press, a court ruled that the Texas statute was unconstitutional. Ayden Runnels, Texas Law Barring State Investment in Firms

     Boycotting Fossil Fuels Declared Unconstitutional, Texas Trib. (Feb. 4, 2026). ↑

167. . Rob Kozlowski, Kansas Anti-ESG Bill to Become Law After Governor Declines to Veto, Pensions & Invs. (Apr. 28, 2023, 4:13 PM), https://www.pionline.com/esg/kansas-anti-esg-bill-become-law-after-governor-declines-veto [https://perma.cc/EN3E-8676]. ↑
168. . Joshua A. Lichtenstein, Michael R. Littenberg, Reagan Haas, Jonathan M. Reinstein & Alexa Voskerichian, “Where Woke Goes to Die”? – New Florida Restrictions on ESG to Create Challenges and Additional Requirements for Asset Managers and Other Financial Institutions, Ropes & Gray (Apr. 27, 2023), https://www.ropesgray.com/-/media/files/publications/2023/04/
     20230427_state_esg_alert.pdf?rev=a2c2423037be424788afab41382b571b [https://perma.cc/UGV6-APFK]. ↑
169. . Robert Steyer, It’s a Felony: N.H. Bill Would Make It a Crime to Knowingly Use ESG Criteria in Investing Taxpayer Dollars, Pensions & Invs. (Jan. 16, 2024, 12:13 PM), https://www.pionline.com/esg/new-hampshire-bill-would-make-it-felony-knowingly-use-esg-criteria-investing-taxpayer-dollars/ [https://perma.cc/WA8Y-9UTC]. ↑
170. . Margarida Correia, Oklahoma PERS Weighs Next Move in Tussle over ESG-Blacklist Law, Pensions & Invs. (Oct. 20, 2023, 11:58 AM), https://www.pionline.com/esg/esg-blacklist-fight-between-oklahoma-treasurer-pension-fund-reaches-new-stage [https://perma.cc/6NPB-BQ8Z]. ↑
171. . Id. ↑
172. . Id. ↑
173. . For example, CalSTRS chief investment officer Christopher Ailman defended the fund’s decision to divest from tobacco and other industries as financial rather than moral. Noguchi, supra note 99. Similarly, CalPERS, which divested from tobacco in 2001, claimed that it did so because the industry had poor financial prospects. Paul Verney, Tide May Be Turning for Tobacco as CalPERS Reveals Its 2001 Divestment Is Finally Making Money, Responsible Inv. (Nov. 30, 2020), https://www.responsible-investor.com/tide-may-be-turning-for-tobacco-as-calpers-reveals-its-2001-divestment-is-finally-making-it-money/ [https://perma.cc/9L6P-7JUT]. ↑
174. . Caleb N. Griffin, Mass Corporate Governance, 103 Wash. Univ. L. Rev. (forthcoming 2026) (manuscript at 7–8), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5227132 [https://perma.cc/7JFK-ADGH]. ↑
175. . Id. (manuscript at 20). ↑
176. . Compare, e.g., Madison Sargis & Patrick Wang, How Does Investing in ESG Companies Affect Returns? Morningstar (Oct. 2, 2019), https://www.morningstar.com/views/blog/esg/esg-portfolios-returns [https://perma.cc/B7FJ-A2BG] (finding slight cost to ESG investing in U.S. markets), with Sustainable Funds Outperformed Peers in 2023, Morgan Stanley (Feb. 29, 2024), https://www.morganstanley.com/ideas/sustainable-funds-performance-2023-full-year [https://perma.cc/4GWX-C8LB] (reporting that “sustainable funds generated median returns of 12.6%, almost 50% ahead of the 8.6% returns of traditional funds”). ↑
177. . See, e.g., Quinn Curtis, Jill Fisch & Adriana Robertson, Do ESG Funds Deliver on Their Promises?, 120 Mich. L. Rev. 393, 442 n.186 (2021) (noting that analysis of the economic performance of ESG funds occurred during a time in which the oil and gas sector experienced poor performance). ↑
178. . See Kishan et al., supra note 150. ↑
179. . See, e.g., Aysha Gilmore, New York Pension Fund Highlights Climate Risk as Top Voting Engagement Priority, Net Zero Inv. (Aug. 4, 2024), https://www.netzeroinvestor.net/news-and-views/briefs/new-york-pension-fund-highlights-climate-risk-as-top-voting-engagement-priority [https://perma.cc/6CDK-CPN5] (identifying climate risks and diversity, equity and inclusion as among the New York State Common Retirement Fund’s top voting and engagement priorities). ↑
180. . Some may argue that they oppose consideration of ESG by public pension funds because these issues should be addressed through the political process. See Risteski, supra note 43, at 837 (“To the extent that ESG considerations are irrelevant to the pecuniary interests of pension fund beneficiaries, they properly belong to the policy sphere.”). We argue that public pension fund investment decisions are properly understood as part of the political process. ↑
181. . N. Wander & R. E. Malone, Fiscal Versus Social Responsibility: How Philip Morris Shaped the Public Funds Divestment Debate, 15 Tobacco Control 231, 235 (2006). ↑
182. . Letter from John Schroder, La. State Treasurer, to Larry Fink, BlackRock CEO (Oct. 5, 2022), https://a4de8bd9-8c02-4b69-8f48-7792cfcaf8fd.usrfiles.com/ugd/a4de8b_38fdc8b7e3c04
     c9490bf332ce14f8d2f.pdf [https://perma.cc/9PVG-JA3T]; Michael Katz, Louisiana Divests Nearly $800 Million from BlackRock to Protect Fossil Fuel Industry, Chief Inv. Officer (Oct. 10, 2022), https://www.ai-cio.com/news/louisiana-divests-nearly-800-million-from-blackrock-to-protect-fossil-fuel-industry/ [https://perma.cc/HS6Z-ZPSK]. ↑
183. . Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, 88 Stat. 832; Investment Company Act of 1940, ch. 686, 54 Stat. 789 (codified as amended at 15 U.S.C. §§ 80a-1–80a-64); Investment Advisers Act of 1940, ch. 686, 54 Stat. 847 (codified as amended at 15 U.S.C. §§ 80b-1–80b-2). ↑
184. . See SEC v. Tambone, 550 F.3d 106, 146 (1st Cir. 2008) (“Section 206 imposes a fiduciary duty on investment advisers to act at all times in the best interest of the fund . . . .”); SEC v. Moran, 944 F. Supp. 286, 297 (S.D.N.Y. 1996) (“Investment advisers are entrusted with the responsibility and duty to act in the best interest of their clients.”); Commission Interpretation Regarding Standard of Conduct for Inv. Adv., 84 Fed. Reg. 33669, 33671 (July 12, 2019) (to be codified at 17 C.F.R. pt. 276) (“[T]he advisor must, at all times, serve the best interest of its client . . . .”). Technically, fiduciary duties are owed to the fund, but the investors are the ultimate beneficiaries of those fiduciary duties. See supra note 18. ↑
185. . Letter from Robert J. Doyle, Dir. of the Off. of Regul. & Interpretations, to Senior Vice President and Gen. Couns., Calvert Grp. Ltd. (May 28, 1998), reprinted in 25 Pensions & Benefits Rep. (BNA) 1328 (June 8, 1998); Schanzenbach & Sitkoff., supra note 131, at 403. ↑
186. . Schanzenbach & Sitkoff, supra note 131, at 403–04. In the context of private pension funds that are subject to ERISA, the Supreme Court has grounded this obligation in the text of the statute. See Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 419 (2014) (citing statutory basis for ESOP’s fiduciary duties). ↑
187. . Schanzenbach & Sitkoff, supra note 131, at 405 (explaining that “total divestment from South Africa out of consideration for the oppressed South African black majority would breach the trust law duty of loyalty”); Romano, supra note 2, at 799, 803 (describing political pressure on pension funds to engage in social investing as “conflicts of interest”). ↑
188. . See, e.g., John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor as Corporate Monitor, 91 Colum. L. Rev. 1277, 1335 (1991) (explaining that “the public pension fund offers an attractive vehicle by which political leaders, or would-be candidates, can present themselves to the public”). ↑
189. . See Schanzenbach & Sitkoff, supra note 131, at 405 (“Even if the trustee’s motive is mixed, seeking both to benefit the beneficiary financially and to obtain a collateral benefit, the trustee violates the sole interest rule.”). ↑
190. . Id. at 404. ↑
191. . See Daniel Fischel & John H. Langbein, ERISA’s Fundamental Contradiction: The Exclusive Benefit Rule, 55 U. Chi. L. Rev. 1105, 1108–09 (1988) (explaining that the section of ERISA that implements the exclusive benefit rule does so by “proscribing various types of self-dealing”). ↑
192. . See Curtis, et al., supra note 177, at 414–18 (describing shifts in DOL’s ESG investing policies between 1994 and 2021). ↑
193. . Dana M. Muir, Sustainable Investing and Fiduciary Obligations in Pension Funds: The Need for Sustainable Regulation, 59 Am. Bus. L.J. 621, 662 (2022). ↑
194. . 29 C.F.R. § 2550.404a-1 (2024). ↑
195. . Utah v. Walsh, No. 2:23-CV-016-Z, 2023 U.S. Dist. LEXIS 168696, at *6–7 (N.D. Tex. Sep. 21, 2023). ↑
196. . Id. at *17. ↑
197. . Id. ↑
198. . Paul Rose, Public Wealth Maximization: A New Framework for Fiduciary Duties in Public Funds, 2018 U. Ill. L. Rev. 891, 894, 907 (“Under this logic, plan participants are owed fiduciary duties because they are the primary beneficiaries when the fund is managed well and the primary victims when it is managed poorly.”). ↑
199. . Some funds explicitly disclose to potential investors their intention to invest in accordance with nonfinancial objectives that may result in the sacrifice of financial returns. Investment in such funds should be understood as an agreement to sacrifice maximization of fund economic value in accordance with those objectives. See, e.g., CATH Factsheet, supra note 15 (discussing CATH ETF). ↑
200. . By 2021, only 11% of private sector workers participated in a defined benefit plan. John J. Topoleski & Elizabeth A. Myers, Cong. Rsch. Serv., R47152, Private-Sector Defined Contribution Pension Plans: An Introduction, at i (2022), https://www.congress.gov/
     crs_external_products/R/PDF/R47152/R47152.2.pdf [https://perma.cc/8G64-6UK2]. ↑
201. . Shnitser, supra note 44, at 647 (“ERISA explicitly does not cover public pension plans, but the trust form is statutorily mandated by most state and local governments, who both make the pension promises and are also in charge of putting aside the money to fund such long-term obligations.”). Some states have also codified the Uniform Management of Public Employee Retirement Systems Act of 1997. See Basic Legal Protections Vary Widely for Participants in Public Retirement Plans, Pew Charitable Trs. (Nov. 21, 2017), https://www.pewtrusts.org/en/
     research-and-analysis/issue-briefs/2017/11/basic-legal-protections-vary-widely-for-participants-in-public-retirement-plans [https://perma.cc/2C8R-2VWP] (reviewing state codification of fiduciary standards for public pension funds). ↑
202. . See David Webber, The Use and Abuse of Labor’s Capital, 89 N.Y.U. L. Rev. 2106, 2188–89 (2014) (showing that the vast majority of states either copy ERISA’s exclusive benefit rule or have very similar language). In addition, the tax status of public pension funds requires them to comply with the IRS version of the exclusive benefit rule. See James V. Cole II, The Demisay Dilemma, 2 Geo. Mason L. Rev. 377, 410 n.141 (1995). According to N.Y. State Investment Policies, the exclusive benefit rule is driven by taxes. Id. States have also replicated ERISA’s duty of prudence. See, e.g., Rose, supra note 198, at 900 (“In many cases, states apply ERISA’s prudent-man standard to state-managed funds.”). ↑
203. . See Sean H. Vanatta, The Financialization of US Public Pension Funds, 1945–1974, 82 Rev. Soc. Econ. 261, 270 (2024) (stating that, “[u]ntil the 1930s,” most states used some version of a “legal list” of permitted investments); Nat’l Conf. on Pub. Emp. Ret. Sys., The Evolution of Public Pension Plans, Past, Present and Future 4 (2008), https://www.ncpers.org/files/
     ncpers-research-the-evolution-of-public-sector-pension-plans.pdf [https://perma.cc/LW94-KH9N] (“Before the 1980s, many plans restricted plan investments using ‘legal lists’ specifying the portion of plan assets that could be invested in various securities.”); Pew Charitable Trs. & Laura & John Arnold Found., State Public Pension Fund Investments Shift over Past 30 Years 2 (2014), https://www.pewtrusts.org/~/media/assets/2014/06/state_public_pension_investments
     _shift_over_past_30_years.pdf [https://perma.cc/LV9S-BYTW] (“States, for example, were previously limited in their investment options by restrictive ‘legal lists’ that were also used to regulate insurance and savings banks, for which safety was the principal concern.”). ↑
204. . Michael Glass & Sean H. Vanatta, The Frail Bonds of Liberalism: Pensions, Schools and the Unraveling of Fiscal Mutualism in Postwar New York, 2 Capitalism: J. Hist. & Econ., 427, 428 (2021). ↑
205. . See Vanatta, supra note 203, at 268 (“Under fiscal mutualism, pension trustees balanced the interests of pensioners, who wanted safe, guaranteed returns and of local governments, that wanted low-cost finance.”). ↑
206. . Id. at 281. The trend accelerated in the 1980s. Pew Charitable Trs. & Laura & John Arnold Found., supra note 203, at 1. ↑
207. . NCPERS, supra note 203, at 4. The trust law standard is to invest as “men of prudence, discretion and intelligence manage their own affairs.” Harvard Coll. v. Amory, 26 Mass. (9 Pick.) 446, 461 (Mass. 1830). ↑
208. . Vanatta, supra note 203, at 263. ↑
209. . See, e.g., id. at 274 (“Drawing on experience managing private pension plans, commercial bankers, investment bankers, and other asset managers increasingly positioned themselves as experts on public pension investment.”). ↑
210. . Id. at 282. ↑
211. . This is consistent with the court’s reasoning in Wong v. New York City Emps.’ Ret. Sys., No. 652297/2023 (N.Y. Sup. Ct. July 2, 2024), and Thole v. U.S. Bank N.A., 140 S. Ct. 1615 (2020). See supra note 152 and accompanying text. ↑
212. . See, e.g., Jill E. Fisch, Annamaria Lusardi & Andrea Hasler, Defined Contribution Plans and the Challenge of Financial Literacy, 105 Corn. L. Rev. 741, 749–50 (2020) (explaining that, under ERISA, employers in a defined contribution plan are protected by a safe harbor from liability for participant losses if they comply with section 404(c) of ERISA, which requires employers to offer a broad range of investment options). In addition, as noted supra note 199, some mutual funds offer investors the opportunity to choose an investment policy that potentially sacrifices economic value in favor of values. Oliver Hart and Luigi Zingales propose that funds similarly allow investors to choose their preferred voting policy. See Oliver Hart & Luigi Zingales, The New Corporate Governance, 1 U. Chi. Bus. L. Rev. 195, 213 (2022) (“The third strategy is for mutual funds companies to offer investors funds with a very clear and predetermined voting strategy and let investors choose among them.”). ↑
213. . Peter Molk & Adriana Z. Robertson, Discretionary Investing by ‘Passive’ S&P 500 Funds, 41 Yale J. on Reg. 248, 250 (2024). Even in passively managed funds, fund managers have a substantial degree of investment discretion, and empirical research has demonstrated that the exercise of this discretion leads to significant differences among funds tracking the same index. Id. at 250, 253. Investor returns may also vary depending on fund fees and tracking error, both of which are within the control of the fund manager. Id. at 266, 268. ↑
214. . Fiduciary duties are often justified as a response to the limitations on a principal’s ability to monitor its agent. See Frank H. Easterbrook & Daniel R. Fischel, Contract and Fiduciary Duty, 36 J.L. & Econ. 425, 427 (1993) (arguing that “a ‘fiduciary’ relation is a contractual one characterized by unusually high costs of specification and monitoring”); D. Gordon Smith, The Critical Resource Theory of Fiduciary Duty, 55 Vand. L. Rev. 1399, 1424–25 (2002) (discussing the need for fiduciary duties to prevent abuse by fund managers); Daniel Fischel & John H. Langbein, ERISA’s Fundamental Contradiction: The Exclusive Benefit Rule, 55 U. Chi. L. Rev. 1105, 1114 (1988) (“The strict fiduciary duties of trust law act as substitutes for monitoring by the directly interested parties.”). ↑
215. . See, e.g., Kelli A. Alces, The Fiduciary Gap, 40 J. Corp. L. 351, 353 (2015) (“Some scholars argue that fiduciary duties are gap-fillers in some kinds of incomplete contracts.”). ↑
216. . Jonathan R. Macey, An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties, 21 Stetson L. Rev. 23, 25 (1991). ↑
217. . See, e.g., Jill E. Fisch, Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy, 31 J. Corp. L. 637, 637 (2006) (defining the objective of shareholder primacy as the maximization of shareholder wealth); cf. Hart & Zingales, supra note 212, at 197 (arguing that corporate managers should maximize shareholder welfare, not market value). ↑
218. . Lance C. Dial, Daniel F. Crowley, Jennifer R. McCoy & Brenden R. Chainey, 2023 ESG State Legislation Wrap Up, K&L Gates (July 25, 2023), https://www.klgates.com/2023-ESG-State-Legislation-Wrap-Up-7-19-2023 [https://perma.cc/9LWK-G3BJ]. ↑
219. . Dial et al., supra note 219. ↑
220. . See Munnell & Quinby, supra note 30, at 1 (explaining that legal “constraints . . . accord public employees greater protection than their private sector counterparts”). ↑
221. . See Fiona Stewart, Benefit Protection: Priority Creditor Rights for Pension Funds 2 (OECD, Working Paper No. 6, 2007), https://www.oecd.org/content/dam/oecd/en/publications/
     reports/2007/01/benefit-protection_g17a1944/267415864801.pdf [https://perma.cc/UX7Y-7WES] (“Underfunded pension funds are in the same position as other creditors when their sponsoring firm becomes insolvent, having to join the queue claiming the remaining assets of the firm.”); Understanding Your Pension and PBGC Coverage, Pub. Benefit Guar. Corp., https://www.pbgc.gov/about/faq/pg/general-faqs-about-pbgc [https://perma.cc/F4RK-B6TC] (Aug. 5, 2025) (explaining “what happens to your pension plan in the event of employer bankruptcy . . . .”). The PBGC is perpetually underfunded, however. Rose, supra note 198, at 908–09. ↑
222. . Monahan, supra note 16, at 365. ↑
223. . See Sean Myers, Public Employee Pensions and Municipal Insolvency (June 2001) (unpublished research paper, Wharton School), https://rodneywhitecenter.wharton.upenn.edu/wp-content/uploads/2021/10/Myers-Public-Employee-Pensions-and-Municipal-Insolvency.pdf [https://perma.cc/78Y3-QNSN] (“[P]ension liabilities . . . are not substantially cut even in bankruptcy.”). ↑
224. . Monica Davey & Mary Williams Walsh, Billions in Debt, Detroit Tumbles Into Insolvency, N.Y. Times (June 18, 2013), https://www.nytimes.com/2013/07/19/us/detroit-files-for-bankruptcy.html [https://perma.cc/86NU-VMVZ]. ↑
225. . Rose, supra note 198, at 911. ↑
226. . See generally Fisch & Schwartz, supra note 9; Jill E. Fisch, Mutual Fund Stewardship and the Empty Voting Problem, Brook. J. of Corp. Fin. & Com. L., Fall 2021, at 71. ↑
227. . Fisch & Schwartz, supra note 9, at 23–24. It is reasonable to assume that investors in ESG mutual funds and faith-based funds agree with values-based investment and engagement decisions by those funds, at least within the scope of the fund’s articulated mandate. ↑
228. . Schanzenbach & Sitkoff, supra note 131, at 453–54. ↑
229. . Fischel & Langbein, supra note 214, at 1114–15. ↑
230. . See id. at 1115 (noting that managers cannot defend against a charge of wrongdoing for dealing with trust property for their own account, even if the beneficiaries are not harmed by their actions). ↑
231. . E.g., Ramon v. Tchr. Ret. Sys. of Tex., No. 01-09-00684-CV, 2010 WL 1241293, at *1 (Tex. App.—Houston [1st Dist.] Apr. 1, 2010, pet. denied); Wong v. New York City Emps.’ Ret. Sys., No. 652297/2023, at 1 (N.Y. Sup. Ct. July 2, 2024). But see Keenan v. Russ, No. CV-2023-3021, 2024 WL 3022942 at *6 (Okl. Dist. May 7, 2024). After Thole, private pension plan beneficiaries also face standing challenges, although there the DOL retains enforcement authority. See Thole v. U.S. Bank N.A., 140 S. Ct. 1615, 1621–22 (2020) (holding that beneficiaries in a defined pension plan lacked standing to bring a breach of loyalty suit but noting that ERISA authorizes the Department of Labor to enforce ERISA’s fiduciary obligations). ↑
232. . Ernst v. Rising, 427 F.3d 351, 355, 363 (6th Cir. 2005) (holding that state retirement system is an arm of the state). ↑
233. . E.g., Withers v. Tchr.’s Ret. Sys. of N.Y.C., 447 F. Supp. 1248, 1259 (S.D.N.Y. 1978); State ex rel. W. Va. Reg’l Jail & Corr. Facility Auth. v. W. Va. Inv. Mgmt. Bd., 508 S.E.2d 130, 134–36, 140 (W. Va. 1998); Bd. of Trs. v. Mayor of Balt., 562 A.2d 720, 728–29 (Md. App. Ct. 1989). ↑
234. . The one case we identified where beneficiary primacy prevailed, Keenan v. Russ, did not involve collateral benefits investing. Rather, it was a challenge to a rule forbidding the use of investment managers perceived as ESG friendly. Keenan, 2024 WL 3022942, at *4. ↑
235. . See, e.g., Thomas J. Fitzpatrick IV & Amy B. Monahan, Who’s Afraid of Good Governance? State Fiscal Crises, Public Pension Underfunding, and the Resistance to Governance Reform, 66 Fla. L. Rev. 1317, 1361 (2014) (“[C]onsideration of collateral benefits goes to the heart of one of the main criticisms of public plans—that they may invest money in a manner that is not in the best interest of plan participants and beneficiaries in order to secure political gain.”). ↑
236. . Romano, supra note 2, at 804. As a result, Romano recommends reforms to remove the political influence on pension funds. See id. at 852–53 (describing various reform proposals including subjecting state pension funds to ERISA). ↑
237. . Schanzenbach & Sitkoff, supra note 131, at 454. ↑
238. . Fischel & Langbein, supra note 214, at 1146 (“By incorrectly characterizing the trustees’ decision as being in the interests of all beneficiaries, the court failed to appreciate the conflict between classes of beneficiaries and thus made the case seem easier than it actually was.”). ↑
239. . Id. at 1121. ↑
240. . Id. ↑
241. . Webber, supra note 202, at 2164; see also David Webber, The Rise of the Working-Class Shareholder: Labor’s Last Best Weapon 183 (2018) (“It is an errant view of fiduciary duty that locks labor into using its investment power to undermine its worker interests and overall economic interests.”). ↑
242. . Webber, supra note 202, at 2113. Public pension fund investments in private equity also indirectly contribute to rising rents. See Andrew Khouri & Ben Poston, The Hidden Role of Public Pensions in Raising Rents in California, L.A. Times (Aug. 1, 2024, 3:00 AM), https://www.latimes
     .com/california/story/2024-08-01/to-help-the-middle-class-retire-public-pensions-are-driving-gentrification-critics-say [https://perma.cc/3NWF-8SVJ] (critiquing investments by CalSTRS, the pension for California public school teachers, in private equity funds that raise rents on local tenants). ↑
243. . Webber, supra note 202, at 2186. ↑
244. . Rose, supra note 198, at 894. ↑
245. . Id. at 895. ↑
246. . See, e.g., Lenore Palladino & Kristina Karlsson, Towards Accountable Capitalism: Remaking Corporate Law Through Stakeholder Governance, Harv. L. Sch. F. on Corp. Gov. (Feb. 11, 2019), https://corpgov.law.harvard.edu/2019/02/11/towards-accountable-capitalism-remaking-corporate-law-through-stakeholder-governance/ [https://perma.cc/7RQU-Q843] (describing a theory of stakeholder governance in which “board ‘fiduciary duty’ run[s] to all stakeholders”); see also Abbye Atkinson, Commodifying Marginalization, 71 Duke L.J. 773, 830–31 (2022) (arguing that public pension funds should be managed to address the broader societal or stakeholder harms that stem from their investment choices). ↑
247. . Emily Winston, Benefit Corporations and the Separation of Benefit and Control, 39 Cardozo L. Rev. 1783, 1807 n.140 (2018). ↑
248. . This approach is consistent with state constituency statutes, which authorize corporate directors to consider the interests of a wide range of stakeholders but do not impose fiduciary obligations with respect to those stakeholders. See Lucian A. Bebchuk, Kobi Kastiel & Roberto Tallarita, For Whom Corporate Leaders Bargain, 94 S. Cal. L. Rev. 1467, 1471 (2021) (describing constituency statutes and evaluating their impact on corporate decisions). ↑
249. . [2008] 3 S.C.R. 560 (Can.). ↑
250. . Id. at 563. ↑
251. . The BCE decision has been criticized. E.g., Edward Iacobucci, Indeterminacy and the Canadian Supreme Court’s Approach to Corporate Fiduciary Duties, 48 Can. Bus. L.J. 232 (2009). ↑
252. . Jean-Pierre Aubry & Caroline V. Crawford, State and Local Pension Reform Since the Financial Crisis, Ctr. Ret. & Rsch. Bos. Coll. 1, 3 (Jan. 2017), https://crr.bc.edu/wp-content/uploads/2016/12/slp_54.pdf [https://perma.cc/3Y73-6CRQ]. Some public pension funds also have so-called “investment-based COLAs,” which “increase annuitants’ benefits when the pension fund’s investment performance surpasses a designated benchmark.” NASRA, Cost-of-Living Adjustments, https://www.nasra.org/cola [https://perma.cc/YKD4-VMU9]. ↑
253. . See supra note 62 and accompanying text. ↑
254. . See McCarthy, supra note 17 (noting that California, Missouri, and Connecticut, among others, have legislative guidance regarding ESG matter); Romano, supra note 2, at 808 (“[N]umerous states have enacted statutes to encourage local investment by public pension funds.”). ↑
255. . Overview–Corporate Governance, Off. of Treasurer Erick Russell, https://portal.ct.gov/ott/about-the-treasury/corporate-governance [https://perma.cc/M2EP-GDRF]. ↑
256. . That public officials believe the investment and engagement decisions they make on behalf of their pension funds are subject to political accountability is reflected by their decisions to publicize those decisions. See, e.g., Press Release, Off. N.Y. State Comptroller Thomas P. DiNapoli, State Comptroller DiNapoli Details Progress on Corporate Political Spending Disclosure (Aug. 12, 2024), https://www.osc.ny.gov/press/releases/2024/08/state-comptroller-dinapoli-details-progress-corporate-political-spending-disclosure [https://perma.cc/WH7H-LGRL] (reporting on efforts by the New York State Common Retirement Fund to seek disclosure of corporate political spending through the shareholder proposal process). ↑
257. . Id.; About the New York State Comptroller’s Office, supra note 57. ↑
258. . E.g., Roy Shapira & Yaron Nili, Specialist Directors, 41 Yale J. on Reg. 652 (2024). ↑
259. . See Simone M. Sepe, Intruders in the Boardroom: The Case of Constituency Directors, 91 Wash. U. L. Rev. 309, 312 (2013) (defining “constituency director”). ↑
260. . Id. ↑
261. . See Jens Dammann & Horst Eidenmuller, Codetermination: A Poor Fit for US Corporations, 2020 Colum. Bus. L. Rev. 870, 884, 889 (2020) (“German codetermination law . . . requires that one of the two boards, namely the supervisory board, includes employee representatives.”). ↑
262. . See, e.g., CalPERS, California Public Employees’ Retirement System Total Fund Investment Policy (2024), https://www.calpers.ca.gov/docs/total-fund-investment-policy.pdf [https://perma.cc/M2QS-KLFP] (explaining that the policies “outline objectives, benchmarks, restrictions and responsibilities . . . of the CalPERS investment program.”). ↑
263. . Ann Lipton, Will the Real Shareholder Primacy Please Stand Up, 137 Harv. L. Rev. 1584, 1590 (2024). ↑
264. . See id. at 1591 (noting that stakeholder theory is criticized for its indeterminacy); Robert T. Miller, How Would Directors Make Business Decisions Under a Stakeholder Model?, 77 Bus. Law. 773, 777 (2022) (describing “business decisions made under a stakeholder model [as] not just unacceptably indeterminate but radically indeterminate”) (emphasis in original). ↑
265. . Romano, supra note 2, at 809 tbl. 1. See generally Kendra Strauss, Gordon L. Clark, Tessa Hebb & Lisa Hagerman, U.S. Public Sector Pension Funds and Urban Revitalization: An Overview of Policy and Programs (2004). ↑
266. . A variety of scholars, including Romano, have found that public pension funds that are subject to greater political pressure have inferior economic performance compared to funds that are more insulated. See Romano, supra note 2, at 825 (finding that “[t]he higher proportion of beneficiary-elected board members [and] [t]he smaller the proportion of board members who are appointees and ex officio members, the higher a fund’s returns”); David Hess, Protecting and Politicizing Public Pension Fund Assets: Empirical Evidence on the Effects of Governance Structures and Practices, 39 U.C. Davis L. Rev. 187, 216–17 (2005) (“Member-elected trustees’ dedication to their duties also appears to be beneficial to plan financial performance.”); Aleksandar Andonov, Yael V. Hochberg & Joshua D. Rauh, Political Representation and Governance: Evidence from the Investment Decisions of Public Pension Funds, 73 J. Fin. 2041, 2043 (2018) (reporting that representation by state officials on public pension plan boards is negatively related to plan performance); Simon C.Y. Wong, Public Pension Funds Perform Better When They Keep Politics at Bay, Harv. Bus. Rev. (July 19, 2016), https://hbr.org/2016/07/public-pension-funds-perform-better-when-they-keep-politics-at-bay [https://perma.cc/R22P-23Q5] (“Interference by elected officials . . . has contributed to poor investment choices, higher total costs, diminished organizations, and disappointing performance.”). While these scholars view such findings as an indictment of fund managers, we see them as the natural result of a policy-driven tradeoff between value and values. ↑
267. . See Romano, supra note 2, at 852–53 (proposing shift from defined benefit to defined contribution plans to “depoliciz[e] board decisions”). ↑
268. . Id. at 812. ↑
269. . Id. ↑
270. . Rachel Phua, Workers Funding Other Workers’ Misery, Am. Prospect (Oct. 4, 2023), https://prospect.org/labor/2023-10-04-workers-funding-misery-private-equity-pension-funds/ [https://perma.cc/6WCN-4T52]. ↑
271. . This argument is also empirically dubious. See, e.g., id. (“[S]tudies have shown that private equity doesn’t outperform public markets.”); Jean-Pierre Aubry & Yimeng Yin, How Do Public Pension Plan Returns Compare to Simple Index Investing?, Ctr. Ret. & Rsch. Bos. Coll. (June 18, 2024), https://crr.bc.edu/how-do-public-pension-plan-returns-compare-to-simple-index-investing/ [https://perma.cc/Y7UN-TX6S] (finding that despite increased allocations to private equity and other alternative assets, “pension funds’ annualized aggregate returns since 2000 have been virtually identical to a simple 60-40 index portfolio”). ↑
272. . See William W. Clayton, How Public Pension Plans Have Shaped Private Equity, 81 Md. L. Rev. 840, 842 (2022) (“Historically, public pension plans invested nearly all their capital in traditional stocks and bonds, but they have collectively become the largest investors in the modern private equity fund industry.”). ↑
273. . See supra note 122 and accompanying text. ↑
274. . See Clayton, supra note 272, at 842–43. ↑
275. . Bebchuk & Hirst, supra note 3, at 2113. ↑
276. . Id. at 2107, 2144–45. ↑
277. . Id. at 2109–10. ↑
278. . Id. at 2114. ↑
279. . See Fisch & Schwartz, supra note 9, at 21 (“Stewardship, it turns out, is relatively hard, potentially costly, and generates little—if any—profit for fund managers.”); see also Jeff Schwartz, Stewardship Theater, 100 Wash. U. L. Rev. 393, 410–12 (2022) (considering costs and benefits of mutual fund stewardship). ↑
280. . See Oliver Hart & Luigi Zingales, The New Corporate Governance, 1 U. Chi. Bus. L. Rev. 195, 213–14 (2022) (describing possible mechanisms through which investors could select voting policies with which they agree). See generally Curtis et al., supra note 177 (documenting differences in investment and voting policies between funds that brand themselves as “ESG” and other mutual funds). ↑
281. . See Fisch & Schwartz, supra note 9, 42–43; Jill E. Fisch & Adriana Robertson, What’s in a Name? ESG Mutual Funds and the SEC’s Names Rule, 96 S. Cal. L. Rev. 1417, 1444 (2024) (discussing “the limitations of fund names in conveying the extent of information necessary to ensure that a fund meets the expectations of its investors”). ↑
282. . Romano, supra note 2, at 822. ↑
283. . Mary Williams Walsh, Calpers Wears a Party, or Union, Label, N.Y. Times (Oct. 13, 2002), https://www.nytimes.com/2002/10/13/business/calpers-wears-a-party-or-union-label.html [https://perma.cc/3PMJ-4KU7]. ↑
284. . In other work, we have argued that mutual funds, as intermediaries, should generally align their votes with the values of their beneficiaries—and adopt mechanisms to ascertain beneficiary preferences to that end—but for the reasons articulated in this Article, we specifically excluded public pension funds from the analysis. Fisch & Schwartz, supra note 9, at 8 n.32. ↑
285. . Global Specialists in Pass-Through Voting, Tumelo, https://www.tumelo.com/ [https://perma.cc/DZ6G-DZNE]. ↑
286. . Cf. Jill E. Fisch, GameStop and the Resurgence of the Retail Investor, 102 B.U. L. Rev. 1799, 1800–05 (2022) (describing the reemergence of the retail investor and analyzing its potential impact on corporate governance). ↑
287. . Sergio Alberto Gramitto Ricci & Christina M. Sautter, Corporate Governance Gaming: The Collective Power of Retail Investors, 22 Nev. L.J. 51, 54 (2021) (arguing that technology and social media can enable retail investors to act collectively and influence governance). ↑
288. . See generally Miazad, supra note 96. ↑
289. . E.g., Fisch, supra note 286, at 1814. ↑
290. . See generally Miazad, supra note 96. ↑
291. . See Hess, supra note 266, at 193 (“[P]ension funds are consistently underfunded.”). ↑
292. . State and Local Backgrounders, supra note 25. ↑
293. . Unfunded Liabilities for State Pension Plans in 2023, Equable (Aug. 24, 2023), https://equable.org/unfunded-liabilities-for-state-pension-plans-in-2023/ [https://perma.cc/8X23-C2UD] (stating “some states carry a larger share of pension unfunded liabilities (or pension debt) than others”). ↑
294. . Fitzpatrick IV & Monahan, supra note 235, at 1329. ↑
295. . Id. ↑
296. . See Ensuring Sound Guidance Act, H.R. 4237, 118th Cong. § 4 (2023), https://www
     .congress.gov/bill/118th-congress/house-bill/4237/text?s=1&r=2 [https://perma.cc/6TAY-LXGB] (requiring U.S. Comptroller General to conduct a study on the extent to which underfunded public pension funds “subordinate the pecuniary interests of participants and beneficiaries to environmental, social, governance, or other objectives”); see also Paul Mulholland, New House Bill Suggests ESG Is to Blame for Underfunded Pensions, Plan Sponsor (June 21, 2023), https://www.plansponsor.com/new-house-bill-suggests-esg-is-to-blame-for-underfunded-pensions/ [https://perma.cc/HB58-FAMY] (describing proposed legislation implying “that some pension plans could be underfunded in part due to their consideration of ESG factors”). ↑
297. . Keith Brainard & Alex Brown, Public Fund Survey, NASRA (Nov. 2024), https://www
     .nasra.org/publicfundsurvey [https://perma.cc/9SEN-4JHQ]. ↑
298. . See, e.g., Steven Rothstein, Anti-ESG Legislation Harms Fiduciary Duty, Dirs. & Bds. (Feb. 1, 2024), https://www.directorsandboards.com/board-issues/esg/anti-esg-legislation-harms-fiduciary-duty/ [https://perma.cc/2X74-CEF5] (“In state after state, economic and revenue analyses have found that bills that ban the consideration of climate and other responsible investing risks will have negative impacts.”); Hazel Bradford, Pension Funds Would Have $21 Billion More Without Fossil Fuel Holdings–Study, Pensions & Invs. (June 28, 2023, 3:43 PM), https://www.pionline
     .com/esg/pension-funds-would-have-21-billion-more-without-fossil-fuels [https://perma.cc/E99L-HUQJ] (reporting results of study finding that the value of six public pension funds “would have been 13 percentage points higher on average if they had divested from the energy sector 10 years ago.”); cf. Curtis et al., supra note 177, at 441 (finding that ESG oriented mutual funds, over a specific time period, outperformed traditional mutual funds). ↑
299. . Danilo Risteski, Note, Politics Before Pensions: How New ESG Rules Expose Public Pension System Vulnerabilities, 95 U. Colo. L. Rev. 805, 818 (2024) (describing Texas’s anti-ESG laws); see Unfunded Liabilities for State Pension Plans in 2023, Equable (Aug. 24, 2023), https://equable.org/unfunded-liabilities-for-state-pension-plans-in-2023/ [https://perma.cc/6RCC-GCAM] (describing Texas plans as having $96,163,034,496 in unfunded liabilities as of June 30, 2023). ↑
300. . Risteski, supra note 299, at 822 (describing Maine’s pro-ESG laws); see Unfunded Liabilities for State Pension Plans in 2023, supra note 294 (reporting that Maine pension funds have a funding ratio of 90% as of June 30, 2023). ↑
301. . Monahan, supra note 16, at 368. ↑
302. . See, e.g., Aaron Brown, Pension Funds Are Hooked on Private Equity, No Matter the Risks, Bloomberg (July 31, 2024, 4:00 AM), https://www.bloomberg.com/opinion/articles/2024-07-31/pension-funds-are-hooked-on-private-equity-no-matter-the-risks [https://perma.cc/RUR8-HUV4] (warning that underfunded pension funds are likely to continue to invest in private equity despite its substantial risks). ↑
303. . Cai, supra note 49, at 123–24. ↑
304. . See id. at 124 (noting “taxpayers balk at having to make up shortfalls in pension funding”). ↑
305. . See id. (noting “the pension industry as a whole is concerned by performance peer risk”). ↑
306. . Turnout for CalPERS elections, for instance, are low. See Mendel, supra note 76 (“In a typical low-turnout CalPERS board election, only 16,364 votes were cast by the roughly 400,000 eligible local government members . . . .The turnout of about 4 percent was below the 6.8 percent in the last election four years ago.”). ↑
307. . Joshua Lichtenstein, Michael Littenberg & Reagan Haas, ESG and Public Pension Investing in 2023: A Year-To-Date Recap and Analysis, Harv. L. Sch. F. on Corp. Gov. (Nov. 22, 2023), https://corpgov.law.harvard.edu/2023/11/22/esg-and-public-pension-investing-in-2023-a-year-to-date-recap-and-analysis/ [https://perma.cc/W4SA-5P4M]. ↑
308. . See supra note 169 and accompanying text. ↑
309. . See Cole, supra note 131 (describing opinions by various state attorneys general that public pension funds violate their fiduciary duties by investing based on ESG considerations). ↑
310. . Mendel, supra note 76. Some might be concerned that political accountability becomes more tenuous at the local level. The opposite, however, may be true. Smaller plans may have greater engagement because people feel like their voice matters. ↑
311. . CalPERS board meetings, for example, are open to the general public and broadcast via webcast. In addition, members can submit public comments to the CalPERS board. Board Meetings, CalPERS, https://www.calpers.ca.gov/page/about/board/board-meetings [https://perma.cc/MJK2-VLHY]. NYCERS meetings are also webcast. About NYCERS, NYCERS, https://www.nycers.org/
     about [https://perma.cc/CK3M-ZX8X]. ↑
312. . Press Release, Nat’l Inst. on Ret. Sec., New Research Finds Americans Supportive of Pension Benefits for Public Employees (Oct. 29, 2024), https://www.nirsonline.org/2024/10/new-research-finds-americans-supportive-of-pension-benefits-for-public-employees [https://perma.cc/
     S5AV-RKC8] (quoting Dan Doonan, NIRS executive director). ↑
313. . See supra note 20. ↑
314. . See Press Release, U.S. Att’ys Off. N. Dist. Cal., Former CalPERS CEO Sentenced to 54 Months’ Imprisonment for Role in Corruption Conspiracy (May 31, 2016), https://www.justice
     .gov/usao-ndca/pr/former-calpers-ceo-sentenced-54-months-imprisonment-role-corruption-conspiracy [https://perma.cc/H75N-QBZR] (reporting that Fred Buenrostro, former Chief Executive Officer of CalPERS, was found guilty of fraud); Danny Hakim & William K. Rashbaum, Hevesi Pleads Guilty in Pension Case, N.Y. Times (Oct. 7, 2010), https://www.nytimes.com/2010/
     10/08/nyregion/08hevesi.html [https://perma.cc/PY7N-7WKZ] (reporting that former state comptroller Alan G. Hevesi pleaded guilty to participation in a “corruption scheme involving New York State’s 125 billion pension fund”). ↑
315. . Legislatures could implement additional formal oversight structures as well. For example, legislation introduced in California proposes creating an inspector general’s office for CalPERS. Arleen Jacobius, California Bill Would Create CalPERS Inspector General, Pensions & Invs. (Feb. 21, 2024, 4:05 PM), https://www.pionline.com/pension-funds/california-bill-would-create-calpers-inspector-general [https://perma.cc/3KF5-CSUV]. ↑
316. . See, e.g., David J. Berger, David H. Webber & Beth Young, The Liability Trap: Why the ALEC Anti-ESG Bills Create a Legal Quagmire for Fiduciaries Connected with Public Pensions 3 (S&P Glob. Mkt. Intel. Working Paper, February 15, 2023), https://ssrn.com/abstract=4360119 [https://perma.cc/BR6X-PNTN] (warning that, among other things, pending legislation imposes on fund managers the need to draw an “unworkable distinction between so-called pecuniary and non-pecuniary” interests). ↑