These Democrats may not mean to do it, but this is the practical consequence of how they're saving for retirement. American teachers, civil servants, unionized workers, college professors and similar Democratic stalwarts are putting their savings into giant funds like TIAA-CREF, the $290-billion teachers' retirement system, and the $175-billion California Public Employees Retirement System, or CalPERS. The teachers and others want the highest returns they can get. So the large institutional investors are demanding that companies make big profits and boost their share prices.

In recent years, institutional investors have been active in ousting chief executives at IBM, AT&T, Sears, General Motors, Xerox, Coca-Cola, Aetna, Compaq Computer and other blue-chip American corporations that didn't boost share prices enough. TIAA-CREF has even ousted an entire board that failed to fire an under-performing CEO. While the huge severance packages for these departing executives makes it hard to feel sorry for them, they are even better compensated when they generate high returns.

Not surprisingly, these incentives have been pushing CEOs to do whatever is necessary within the law to boost their share prices, even if that means pandering to the carnal appetites of teenage movie-goers, messing up the environment, raising oil prices, marketing guns and cigarettes, using sweatshops in East Asia, laying off platoons of employees and treating patients like fast-food drive-in customers.

It's called cognitive dissonance when a part of your brain wants one thing and another part wants something different. While the frontal lobes of traditional Democrats are delighted by the populist campaign rhetoric that scolds corporations for being socially irresponsible, their hypothalami want hefty returns on the savings in their pension plans. The two aren't necessarily--or even probably--compatible.

The board of directors of CalPERS recently rejected a proposal from one board member to dump shares of tobacco companies and to refrain from investing in nations that didn't meet some minimally humane political and social criteria. The board's chairman feared a slippery slope. "Do we one day ban investments in alcohol, handguns and rap music?" he asked rhetorically. (CalPERS' investment staff noted that just the sale of the fund's tobacco stocks would cost it upward of $56 million in transaction costs alone.)

Mild-mannered folk like California's public retirees--tens of thousands of people who spent their careers working for the state and are improbably cast as rabid promoters of free-market capitalism--are also quietly undermining what remains of European social democracy. They are not alone in doing so, of course, but given the extensive holdings of their retirement funds in European-based companies, their influence should not be underestimated.

When Alcatel, a mostly French-owned telecommunications company, announced that its annual profit would be less than had been forecast, its management was driven to the distinctly un-French solution of restoring profits by laying off about 12,000 employees. CalPERS was not the sole instigator, although French President Jacques Chirac testily noted in his Bastille Day address last year that the layoff was triggered when "California retirees suddenly decided to sell Alcatel."

Europe's traditional "stakeholder" capitalism has made European companies responsive to employees and communities as well as shareholders, which is why it doesn't sit well with American institutional investors intent on making companies attentive only to them. Not long ago, CalPERS complained that a German utility gave the cities it served too much control over its board, thereby diminishing the value of the utility's shares owned by CalPERS. The utility executives explained that its system of city representation maintained a bond with the utility's customers, but when CalPERS threatened to dump its shares, the utility promptly scrapped the system. The problem here isn't with CalPERS, TIAA-CREF or other big institutional investors. They're only doing their job, which is to maximize the value of their investors' portfolios.

The real issue is that power is shifting away from governments to investors. This means that political speeches calling on companies to be more socially responsible are meaningless. If we want companies to be more socially responsible, we'll have to pass laws requiring them to be so, and those laws will have to be enforced. And not just national laws. National governments are weakening as highly mobile capital finds better deals elsewhere around the world, where profits are higher because laws are meeker. So, ultimately, many such laws will have to be international.

That's why a central question for the coming decade is what sorts of global agreements can be reached on the environment, energy and labor and on the production and marketing of dubious products like guns, cigarettes and smut.

Unless Democrats face head-on the cognitive dissonance in their brains, they'll continue to practice a politics that has little or nothing to do with the personal economic choices they're making. And they'll fail to insist that their candidates talk realistically about how to redress the balance between the desires of voters and the demands of investors.

Robert B. Reich, the former Secretary of Labor, is a professor at Brandeis University and national editor of American Prospect magazine.

Copyright 2000 Los Angeles Times

###