I attended the annual fall meeting of the Council of Institutional Investors over the past couple of days in San Diego. The council is a non-profit organization that exists to represent the interests of American pension funds with combined assets of more than $3 trillion (that's trillion with a "t"). The council's views on how our largest companies are run matter because, unlike many large institutional or mutual fund companies, these pension funds aren't afraid to rock the boat and speak up to corporate management. The pension fund world sits at an interesting crossroads between Wall Street and Main Street. The people who oversee these substantial assets in their plans have to be sophisticated enough to understand how Wall Street works and the games that Wall Street plays to benefit itself (and not always the shareholders). However, these investors also live in the same world as their pensioners. They are keenly aware of their responsibilities to their members and the real-world challenges that their members face each day. The keynote speaker for the conference was Neel Kashkari, the former Goldman Sachs banker, who worked in the Treasury Department under Hank Paulson and later oversaw the $700 billion Troubled Assets Relief Program. Now Kashkari works for Pimco creating a new active equities program for the global asset manager. Kashkari's talk was the standard Pimco "new normal" pitch, but it was enhanced with his views from three years spent on Capitol Hill. He said that he was amazed that both parties had come together to pass TARP. He confessed he didn't think that they would beforehand. He had believed -- based on his time in Washington -- that politicians could only respond after a crisis, not in anticipation of one. Although most of the pension fund audience told me they thought very highly of Kashkari's talk later, there was no shortage of people lined up to challenge him during the Q&A session of his talk. He gamely tried to answer the questions of why Treasury couldn't save Lehman Brothers but just two days later saved AIG ( AIG) . (His answer, which is a variation of Paulson's revisionist explanation, is that Lehman didn't have the collateral to pledge against a bailout while AIG did, giving Treasury the authority to act in one situation while not in the other). However, the big questions posed by this audience to Kashkari were: "How can Wall Street, so quickly, start repaying itself huge bonuses when the rest of America is hurting?" and "When and how are things going to start to get better for the rest of America?"
Kashkari acknowledged that he could understand why people were upset with 9.6% unemployment without really offering an explanation for Wall Street's tin ear to Main Street's plight. And, in terms of the question about when things were really going to get better for the lower and middle classes, Kashkari was stumped, saying: "I frankly don't know. I don't know any other answer except education, but it's hard to tell a construction worker who has lost his job to go get retrained to work in health care." The audience knew he had a point. The policy accomplishment for which this group of investors was most proud in the past year was the inclusion of "proxy access" in the Dodd-Frank legislation and the recent adoption by the Securities and Exchange Commission. This rule gives long-time investors the right to nominate directors to company boards. This should encourage bad boards to rid themselves of their lower quality directors and raise the quality of current and new directors. In other words, no more Broadway producers on the board of Lehman Brothers or demure Brown University presidents on the board of Goldman Sachs ( GS) trying to understand its counter-party risk to an AIG bankruptcy. During the conference's coffee breaks, I heard stories of the intense lobbying efforts made by the Business Roundtable and U.S. Chamber of Commerce to try and kill the proxy access provision. Perhaps because of these efforts, none of the Republican senators supported proxy access. There were also several "business-friendly" Democrats who were cold to the idea. I've never understood why the Republicans were so opposed to the idea that shareholders should get a voice on who is representing their interests on the board. I asked one CII member whether Republicans realize that, by not supporting proxy access they were supporting crony capitalism? That's exactly the opposite of the "free markets" that they keep saying they want? The pension person, who was clearly on my side of this argument, shrugged his shoulders and said, "At the end of the day, they get a lot of money from the business lobby and they're going to vote for the 'free markets' that those guys want." Unfortunately, there are two Americas today: the rich and educated getting richer, and the low and middle class who aren't. There aren't easy or quick answers to fix this problem. The real solutions will take lots of time to implement. However, the pension funds' understanding of the needs of Wall Street and Main Street is a perspective that we'd all be better off if politicians and the big banks understood.