SACRAMENTO, Calif. - The California Public Employees' Retirement System has expanded its feared yet respected corporate governance program. Now, it will examine the quality of individual company directors and monitor six times as many companies.
Trustees say a re-focus is needed to keep the program, which targets underperforming companies, effective.
The new focus will mean hundreds of new companies and thousands more top corporate executives will come under the watchful eye of the nation's leading shareholder activist.
Prior to the shift, the CalPERS program looked at independent corporate directors primarily as a group. Now, it will ask board members individually what value they bring to a board.
Also, the fund will be looking at the 1,200 largest companies in its equity index funds; it used to monitor the 200 largest.
The expanded focus could send a chill through boardrooms at companies that so far have thought themselves too small to be noticed by CalPERS.
Actions by CalPERS and others, including the Council of Institutional Investors, have helped bring about a boardroom revolution. In the early 1990s, directors threw out chief executive officers at American Express Co. Inc., Chrysler Corp., General Motors Corp., International Business Machines Corp., Eastman Kodak Inc. and Westinghouse Electric Corp.
The CEO changes were "widely attributed to shareholder activism, with emphasis on CalPERS' role as a catalyst," according to a CalPERS staff report.
Trustees of the giant California fund are more convinced than ever of the success of their corporate governance program. A study by Wilshire Associates, Santa Monica, Calif., found stock prices of companies targeted by the fund trailed the Standard & Poor's 500 Stock Index by 66% for the five years before CalPERS intervened. Afterwards, the companies did about 52.5% better than the index.
A full five years has not elapsed on the 42 companies specifically targeted by CalPERS.
While getting immense improvement in share prices, the staff of the California fund found the corporate governance program costs less than $400,000 a year to run.
CalPERS won't be alone in its new focus. "A large portion" of activist pension funds already have shifted their focus to smaller companies, said Elizabeth Machold, deputy director of the Council of Institutional Investors, Washington.
Under the expanded CalPERS program outlined in a staff report adopted by trustees, the pension fund is expected to urge some corporate directors to serve on fewer corporate boards and devote more time to the boards on which they serve. The fund also might ask independent board members of targeted companies to account for their individual performance on the board.
The pension fund also is expected to encourage some company boards to restructure to obtain optimum size, diversity and independence.
Diversity, the CalPERS staff report said, could include such issues as the number of women and minorities on boards and whether the boards have enough independent members to be truly free of company management.
The fund - when necessary to ensure director accountability for management oversight - also might engage in an assertive "vote no" campaign against incumbent directors and use more extensive proxy solicitation support for its shareholder proposals than it has in the past.
Richard H. Koppes, deputy executive officer and general counsel at CalPERS, anticipates that other pension funds will join CalPERS in the shift.
Mr. Koppes said the shift was needed because the largest companies have accepted CalPERS' corporate governance principles, but many slightly smaller ones have not.
In reshaping the corporate governance program, Mr. Koppes said the staff of the California fund talked to about two dozen people, a cross-section of people in corporations, academia, institutional investment, government and other fields, including Olena Berg, assistant deputy secretary of labor for pensions and welfare benefits.
The shift also dovetails with the pension fund's new relationship investing program, in which CalPERS will purchase large blocks of common or preferred stock in midsized companies and use outside talent to improve the companies' management practices.
While shifting the focus of its domestic corporate governance program, CalPERS officials said they are not yet ready to export it internationally.
Staff officials said they don't yet fully understand all of the foreign laws, customs and cultures that affect the corporate structure and the rights and responsibilities of shareholders. The pension staff plans to study those laws and mores further.