SAN FRANCISCO - The Council of Institutional Investors' Focus List of the 20 worst performing companies, released at its semiannual meeting last week here, includes two companies that are merging with others.
The two are Salomon Inc., New York, which since has agreed to be acquired by Travelers Group Inc., New York, and Amdahl Corp., Sunnyvale, Calif., which is to merge with Fujitsu America Inc., San Jose, Calif.
Half of the companies on the 1997 list appeared on previous ones. All underperformed their peer groups in the one-and five-year periods ended July 31.
Novell Inc., Navistar International Corp., Kmart Corp., Dillard Department Stores Inc. and Fleming Companies Inc. were on the 1996 list, and Apple Computer Inc., Digital Equipment Corp., Salomon and United States Surgical Corp., were on earlier lists.
Jon Lukomnik, deputy comptroller for pensions, New York City, said it was not surprising companies got bought out after being listed by the council.
"We have discovered that targeting companies identifies those with viable franchises but troubled management. The market, or in this case, merger and acquisition activity, often validates this."
Salomon Chairman and CEO Robert Denham criticized the council's choice of peer groups, noting that while Salomon is a global institutional investment bank with no retail business, it shouldn't be compared with discount brokerage Charles Schwab Corp. and Merrill Lynch & Co., because until May 1997, Salomon was also in the oil refining business, which hurt overall performance.
The council sent letters to the top executives of the listed companies, asking them to provide information to help shareholders assess the companies' past and current performance, according to Ann Yerger, director of research services.
Nine companies responded, with the shortest written response coming from Digital Equipment. Digital Vice President Patrick Spratt explained the company targeted its communications with investors through direct contact, conferences, disclosure material and an Internet home page.
Executives at Charming Shoppes Inc., Bensalem, Pa., and Mallinckrodt Group Inc., St. Louis, sent information packets about the companies without addressing the specific complaints.
Companies that didn't respond were Adobe Systems Inc., Apple, Dillard's, EG&G, Fleming, Wellesley, Ma., Golden West Financial Corp., Great Lakes Chemical Corp., Kmart, Loews Corp. and Pall Corp.
H. John Riley Jr., chairman and chief executive of Cooper Industries Inc., Houston, wrote that since 1992, the company has been divesting non-core businesses and underperforming assets. Eric Schmidt, Novell's new chairman and chief executive, attributed the company's poor performance to the uncertainty and risk following two difficult years of business divestitures and changes in executive leadership.
The focus list is used by council members in various ways, according to Ms. Yerger. Some might add companies on the list to their governance programs for the next year. Usually council members rely on "quiet diplomacy" efforts, such as writing the companies or scheduling meetings with management and outside directors to discuss performance and governance issues.
The council's Bill of Rights requires boards and the nominating and compensation committees to consist of a majority of independent directors.
Eight companies on this year's 1997 list did not meet the standard for board independence, including Countrywide Credit Industries Inc., which has the fewest independent directors. Dillard's and Loews each has five family members on the board. Those two, along with Adobe and Charming Shoppes, all lack nominating committees. Loews doesn't have a compensation committee, either.
Digital Equipment has been criticized for its board, because more than half of its directors are in their 70s.
One member has been a director for 40 years; another, 38. The situation is similar at Loews, where five of the 11 directors are at least 70 and nine have served as directors for 10 or more years. Six of Dillard's 15 directors are 70 or older and 10 have served on the board for at least 10 years.