UC Study Puts Divestment Toll at $100 Million

The University of California could lose $100 million in the first year and would subject its pension and endowment funds to greater financial risk if it sells all of its South African-related investments, according to a university study released Monday.

The university also could have difficulty defending itself legally if it divests entirely of the $2.4 billion of its $5.5-billion portfolio invested in stocks and bonds of U.S. firms doing business in South Africa, the report added.

The report also offered six alternatives for action, including total divestment, four possibilities for limited divestment, and no action at all. However, it did not advocate any of the positions.

‘A Profound Impact’

Divestment by the nine-campus UC system to protest South Africa’s apartheid policies would be far greater than the estimated $1 billion sold by all other American colleges and public pension funds combined. Thus, the report said, “whatever action is taken could have a profound impact on the university for many years to come.”

The two-volume, nearly 1,000-page report, by UC Treasurer Herbert M. Gordon and general counsel Donald Reidhaar, is expected to form a major basis of discussion at a June 21 meeting of the Board of Regents in San Francisco, at which the 32-member board is scheduled to decide the divestment issue. Comments on the report will be heard next Monday at a public meeting at UCLA.

At their May 17 meeting, held amid massive student protests calling for divestment, the regents declared a monthlong moratorium against new investment in firms with South African ties, pending a final decision.

The report’s conclusions were immediately criticized by some pro-divestment regents and others, who said it could hurt their push for full divestment.

However, some regents said the report could bolster efforts for partial divestment, such as selling only the stocks of firms that don’t comply with the Sullivan Principles, a code of conduct developed by the Rev. Leon H. Sullivan of Philadelphia. It calls for firms in South Africa to promote equal opportunity for blacks.

“Regents asking for total divestment may be disappointed at the report,” said Regent Yori Wada of San Francisco, a retired social worker and divestment advocate. But, by suggesting some other less-harsh alternatives, the report shows that partial divestment “may be in order.”

‘Informative and Helpful’

Several regents, along with UC President David P. Gardner, are said to favor such a moderate approach. Gardner was not available for comment but said in a statement that the report was “very informative and helpful.”

The report said full divestment would cost the university, in the first year, $21 million in brokerage commissions, more than 10 times the normal annual commissions paid by the regents because money would have to be reinvested in more companies that trade in smaller volume.

Another $79 million in costs might result from the impact on the prices of the stock sold, the report said. However, the report added, those costs “are more difficult to measure since they depend on the size of the portfolio, the types of securities owned and the turnover rate of the portfolio.”

The companies involved include Coca-Cola, International Business Machines, General Electric and 30 others, out of an estimated 300 U.S. firms with operations in South Africa.

Greater Risk Cited

However, the $100-million potential cost is small when compared with the total annual return of the school’s investments, UC Associate Treasurer Patricia Small said in an interview. The university pension and endowment funds yielded 21.44% and 25.31%, respectively, between June 30, 1984, and March 31, 1985, increasing their market value by about $1.1 billion, she said.

A more significant factor than the cost, Small said, would be that under total divestment, the university would be unable to buy the stocks of 43 of the nation’s largest 100 firms, as well as 80% of firms in the auto, chemical, hospital supply and computer equipment industries, and all of the drug industry.

That would bring greater risk to the portfolio because stocks of smaller, less-established firms would have to be purchased, the report said. They are not only more volatile in price but are also somewhat harder to sell without depressing the stock price.

The report did not attempt to estimate the impact on the university after the first year of divestment. Such an estimate would be impossible because no one yet knows what the alternative investments would be, nor how they would perform.

Reidhaar said in the report that the university would have a difficult time defending full divestment in any lawsuit. He said such a broad divestment “would be found to constitute a breach of fiduciary obligations if challenged by litigation.” However, he added, “the law is somewhat ambiguous” on the issue.

Regent Sheldon W. Andelson, a Los Angeles attorney and advocate of partial divestment, questioned the fiduciary issue. “There are many alternative investments with returns that are just as good, if not better,” than those of the stocks in question, Andelson said, citing examples of several other public pension funds and universities that have divested and maintained similar if not better returns on their investments.

Speaker Brown’s View

Assembly Speaker Willie Brown (D-San Francisco), a regent and leading advocate of full divestment, said the report “does not include how the university ought to watch the possibility of instability in a particular government. That same treasurer would have said it’s OK to invest in the shah’s regime in Iran.”

Brown said the report “was clearly skewed” to reflect the concerns of those opposed to divestment.

6 OPTIONS FOR INVESTMENT

The University of California office of the treasurer has offered six options for the UC Board of Regents in developing an investment policy related to companies doing business in South Africa.

1. Retain the current investment policy that stresses execution of fiduciary responsibility in maximizing return and preserving principal.

2. Make no new investments in companies doing business in South Africa for a specified period of time, after which an evaluation of the prevailing situation in South Africa would determine whether such restriction should be discontinued, extended, made permanent or otherwise altered.

3.Implement a divestment/reinvestment program based on the retention of companies that have signed the Sullivan Principles or a similar code of conduct aimed at fostering equality in South Africa and were judged to be satisfactorily working toward those goals.

4. Implement a progressive five-year timed divestment program that eliminates companies from the portfolio based on a schedule requiring them to be signatories of the Sullivan Principles or a similar code of conduct and building to a requirement that they “significantly support efforts to abolish apartheid” or be dropped from the portfolio.

5. Evaluate the activities of each company doing business in South Africa and determine appropriate investment/divestment action on a case-by-case basis.

6. Implement a program of full and immediate liquidation of holdings in companies doing business in South Africa.