Divestment laws, fiduciary duty, and pension fund management: An empirical examination

Purpose: This paper aims to conduct an empirical analysis of subnational laws of the USA that require public pension funds to divest from companies that are in business with Cuba, Iran, Syria, and Sudan and explores whether public fund officials may be in violation of their fiduciary duty responsibilities toward pension system beneficiaries as they execute state-mandated divestment schemes. Design/methodology/approach: A database search was conducted for specific federal laws, presidential executive orders, and departments, offices, and terminology relevant to the topic of the research to explore the extent by which states employ public pension divestment regimes inspired by the federal governments designation of the four countries labeled as state sponsors of terrorism. Quantitative and financial calculations were used to conduct the cost analysis of divestment laws. Findings: Divestment laws are costly for the beneficiaries. In the majority of the states that have divestment laws, the public funds, rather than the states, must cover the losses associated with divestment, resulting in pension fund trustees and managers having to take action that are in violation of their fiduciary duty responsibilities. Research limitations/implications: The study recommends a major overhaul of the current divestment laws. Practical implications: Divestment legislations must be revised as they cause a divergence of interests between state-driven political gestures, the fiduciary responsibilities of pension system trustees, and the financial interests of the beneficiaries. Originality/value: This is the first study that recommends specific legislative action that would resolve the divergence of interests between state-driven political gestures, the fiduciary responsibilities of pension system trustees, and the financial interests of the beneficiaries.