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Trading  | January 8, 2018

Authored by Mark Glennon via,

Through a Freedom of Information Act request we’ve learned who owns those shares of stock on which Illinois Treasurer Michael Frerichs is playing activist shareholder: college savers in Illinois 529 accounts.

That’s not his mission and they aren’t his shares. It’s bad policy and a dangerous precedent.

First, some background:

Frerichs has been trying to use his investment clout to solve the problems of fake news, ads by Russian operatives and hate speech, as he sees them. He is using a position in Facebook shares to try to force Facebook to do what he sees fit on those issues. Frerichs’ press release on this is linked here, which includes links to three letters he sent to Facebook.

Frerichs also is using his position in pharmaceutical companies to push them to do what he wants on the opioid crisis. Do something about opioids, he told Cardinal Health and AmerisourceBergen, or we’ll punish your stock prices by selling your shares. He went into great detail about what he’d like AmerisourseBergen to do, linked here. Frerichs has been specific with one other company, weighing on on the separation of McKesson’s CEO and board chair positions as part of the opioid issue.

The response to the Freedom of Information Act request we filed shows all these shares are held in various funds, mostly broad index funds, all of which are in the 529 college savings programs run through the Treasurer’s office.

It’s wrong for the Treasurer to be asserting his personal views on various social issues , through those shares, for a number of reasons:

  • They’re just not his! The Treasurer is merely the administrator of the 529 programs and the shares are paid for entirely with college savers’ money. He doesn’t even manage the funds the shares are in. If shareholders want to use their position to influence social issues, fine, but that should be up to them.
  • It’s not his job .Under Article V Section 18 of the Illinois Constitution, the Treasure is “responsible for the safekeeping and investment of monies and securities deposited with him and for their disbursement upon order of the Comptroller.” That’s it. His sole focus should be on maximizing return and safety of investments. With his implicit and explicit threat to sell shares to punish companies he doesn’t like, he’s subordinating rate of return to other matters.
  • He’s accountable to and directed by nobody as to what issues he takes on or what action should be taken. Even if you think the Treasurer is acting appropriately, should his decisions be his alone?
  • He doesn’t have the resources to do it right. This isn’t about whether the particular actions Frerichs took are right as you or I see things. The fact is that issues like fake news and what pharma companies’ roles are in the opioid crisis are complicated, require expertise and are subject to reasonable differences of opinion. Even if the focus is just on how their conduct is impacting share price, that’s for professional fund managers and share owners to decide.
  • It’s a dangerous precedent. Would a different Treasurer with different politics seek to punish, for example, companies like Starbucks that is pro-gay marriage? Or Nordstrom because it dropped Ivanka Trump’s clothing line?

On a related topic, we earlier wrote about the Treasurer bragging about his purchase of a forest preserve district’s bonds saying, “we understand its value in providing immediate capital support to a local community.” No. That’s not the Treasurer’s job, either, which is only to hold taxpayer money safely and for maximum return. He either over-payed for the bonds or didn’t make any difference, as we explained earlier.

Illinois Treasurer Michael Frerichs


I asked the Treasurer’s office to comment on these matters and I am printing their entire answer below. Decide for yourself, but I say it’s unresponsive.

I also say the Treasurer has much better things to do, like formulating a better cash management strategy for the state. He sits permanently on $11.5 to $14 billion of cash and short term investments, even while the state pays exorbitant late fees on billions in unpaid bills. We’ve written about that repeatedly, most recently linked here.

*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.

Response from Treasurer Frerichs’ office:

Thanks for the opportunity.

Your premise that the state’s chief investment officer should not pursue carefully considered improvements to corporate board policies that would lead to higher profitability is curious, unproductive and would jeopardize shareholder value. Studies demonstrate that companies that consider environmental, social and governance factors are lower-risk investments that lead to better returns. As such, this work clearly is a critical part of our fiduciary duty.

Your contention that college savers who disagree with this investment approach will be harmed is misinformed. Diverse companies outperform their peers. Further, there are alternative investment options for college savers reluctant to embrace this proven strategy.  Finally, I note that Morningstar named Bright Start and Bright Directions among the best in the country.

Fake News is not a partisan issue. Facebook has acknowledged it needs to do more to prevent spoofing. Until more robust action is taken, there remains the risk that shareholder value will fall or not realize its full potential. Protecting shareholder value and increasing shareholder value are proper responsibilities for any investor.

There is an opioid crisis gripping our nation. It is a health epidemic. For investors, it also is a threat to shareholder value. Encouraging corporate boards to plan for the threats to shareholder value, including litigation, is a proper responsibility of any investor.

Further, the failure of Facebook and the opioid companies to self-police invites calls for government regulation which likely would lead to a decrease in shareholder value.

Encouraging boardroom action, including diversity, is done to maximize returns. The suggestion that the treasurer’s office would invest in under-performing companies because of some perceived world-view bias is untrue.

With regard to the Kane County Forest Preserve bond purchase, the market already was set before our decision to invest. That bond purchase was possible because voters overwhelmingly approved the bond sale that would fund forest preserve improvements and refinance more expensive debt so the forest preserve could cut its portion of the tax bill. This purchase allowed the treasurer’s office to a) earn a competitive investment market return, b) invest in Illinois, c) foster job creation and d) lead to a lower tax burden.

Mark, I think you offer a strong voice in addressing our state’s fiscal challenges. On this investment point, however, we disagree. It always is proper for an investor to protect their investments and maximize returns.

Be well,

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

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