Governance Of Public Pension Funds: Lessons From Corporate Governance And International Evidence direct financial health of the system (Walsh 2002). Such actions nonetheless may be widely supported by the public.

Romano (1993 and 1995) has argued that public pension funds with trustees who are susceptible to political pressure will perform significantly worse than those boards with politically independent trustees. United States Federal Reserve Chairman Alan Greenspan likewise has argued against the investment of social security funds in equities: "In sum, because I do not believe that it is politically feasible to insulate such huge funds from governmental influence, investing social security trust fund assets in equities compromises the efficient allocation of our capital." Given that politically motivated decisions may have broad popular support, as is arguable in the case of CalPERS, there remains much debate concerning the significance of agency problems founded in political motivations. Recognition of the need to control selfinterest-based agency problems in contrast may be assumed to be universal. In a survey conducted for this paper of pension funds in various countries, two of the 26 respondents answered "yes" to the following question: "Has there been any serious case of fraud or other scandal that resulted in formal investigation in the last five years?" Their responses indicate that this is a problem that deserves serious consideration when structuring the governance of public pension plans. The next section considers the extent of the second type of agency problem.

# **_Il.C Political Involvement: Government Restrictions and Social Mandates_**

That there is political involvement in the investment choices of public pension funds is well known. This involvement can come in the form of legislation passed on the initiative of trustees or can involve mandates to make certain investments or prohibitions on other investments.

In the United States, the use of economically targeted investments (ETIs) was in the 1990s one of the most controversial issues facing public and private pension fund management. ETIs are investments in which the fund managers take into consideration not only the investment return but also the economic benefits to the local community (GAO 1995; Watson 1994). Examples of ETIs include California's investment of US$ 375 million in single-family homes to help increase affordable housing and create jobs, Connecticut's investment of US$ 25 million in a local company to save 1,000 jobs, and Pennsylvania's decision to provide favorable interest rates for home mortgages (Stevenson 1992). Another common ETI practice involves using pension funds to provide venture capital to in-state companies that may not be able to attract the attention of other venture capitalists (GAO 1995). Until recently, the National Pension Fund (NPF) of the Republic of Korea met a requirement to contribute to economic and social development by lending to the government at nonmarket rates and purchasing nontradable government bonds.

The Singaporean Central Provident Fund (CPF) similarly has many objectives in addition to its core objective of ensuring sufficient retirement benefits. It administers schemes covering housing, medical savings accounts, and education; it also permits extensive preretirement withdrawals for investment in real estate, financial assets, and even gold and

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