Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Print
October 27, 1997 12:00 AM

CALPERS ADDS TO ARSENAL: NEW EVALUATION PROCESS HELPS IDENTIFY POOR MANAGERS

Steve Hemmerick
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    SACRAMENTO, Calif. - The $124 billion California Public Employees' Retirement System will be searching out corporate managers who aren't adding real economic value to the businesses they run.

    CalPERS' adoption of new statistical procedures - called economic value added, or EVA - is part of its revamped corporate governance program for 1997-'98.

    Using EVA, investors can uncover some corporate managements that pump up their stock values using common accounting procedures.

    Some of those managers and their companies might suffer the public humiliation of winding up on CalPERS' corporate governance focus list. The list publicly identifies 10 companies that have poor stock performance and that, in CalPERS' view, also have poor corporate governance practices.

    CalPERS' list - expected at the beginning of the year - is believed to influence the lists of troubled companies drawn up by other shareholder activists.

    The decision to use EVA was made at the CalPERS' October investment committee meeting.

    EVA is a company's after-tax net operating profit, minus its cost of capital for one year. A company with a series of negative EVAs is sometimes characterized as a wealth destroyer, rather than a wealth creator.

    Big firms have negative EVAs

    Stern Stewart & Associates, New York, is a consulting firm CalPERS is using to evaluate the EVAs of companies. According to that firm, in 1997, NYNEX Corp. had a negative EVA of $617 million; RJR Nabisco Holdings Corp. had a negative EVA of $1.2 billion; Digital Equipment Corp. had a negative EVA of $1.4 billion; Westinghouse Electric Corp. had a negative EVA of $1.59 billion; Tele-Communications Inc. had a negative EVA of $2.5 billion; and General Motors Corp. had a negative EVA of $3.5 billion.

    One year's negative EVA doesn't mean a company would make CalPERS' focus list or that the company was in trouble. It would take three years of negative EVA to raise concerns.

    Even then, the company would have to be underperforming in the market and have poor corporate governance practices before it would be considered for CalPERS' list.

    But by adding EVA, CalPERS executives expect to add strength to their reasons for putting a company on the focus list.

    According to Stern Stewart, a company with repeated negative EVA will lose value as investors lose confidence in the firm.

    CalPERS will look at EVA figures over a three-year period. The fund will use EVA as its first screen for focus list candidates.

    Fund executives hope the EVA test will help them find underperforming corporate managers who might otherwise go unnoticed.

    How EVA works

    EVA is a more direct measure of performance of corporate managers. Stock market performance is, at best, an indirect measure, said Robert L. Boldt, senior investment officer at CalPERS.

    According to CalPERS officials, stock market performance, even over a three-year period, frequently doesn't fully reflect the basic economic performance of a company.

    EVA, an attempt to measure a company's true economic profit, employs the assumption that a business is not adding value unless the return on total investment from its endeavors exceeds the cost of capital.

    "EVA helps you to differentiate companies that are simply manufacturing gains in their (earnings) per share by plowing back retained earnings in projects that do not cover the shareholders' required return," said Bennett Stewart, a senior partner at Stern Stewart.

    "You see right now with long-term government bonds yielding 6.5%, the evidence shows that stock market investors expect about 6% more than that overtime," said Mr. Stewart.

    A company can reinvest earnings in a project that produces an 8% return. That company's earnings per share will continue to climb, but the company's EVA will not, said Mr. Stewart.

    Tennis without a net

    "Earnings per share is like playing tennis without a net. There is no charge for the use of retained earnings. So it is quite tempting for mangers to plow back retained earnings and to earn poor returns, less than what the equity holders expect," said Mr. Stewart.

    EVA can pinpoint companies that are expanding in size, but not in value, said Mr. Stewart. Stern Stewart also attempts to correct accounting distortions in measuring the EVA, he said.

    CalPERS' officials believe EVA is the best measure of corporate management's economic performance.

    According to a CalPERS report, by including both stock price performance and economic performance in its screening measures, the fund "pinpoints those companies where poor market performance is due to underlying economic performance problems and not due to industry or extraneous factors."

    "It is an enhancement" to the selection process for the focus list, said Sheryl Pressler, CalPERS' chief investment officer.

    She said the new process asks if a company is "generating a real economic profit or would you have been better off investing" elsewhere.

    CalPERS also is commenting on U.S. corporate managers in other ways.

    Reviewing proxy votes

    According to CalPERS data for the 1996-'97 proxy season, CalPERS voted only 9% of the time against directors' elections and only 12% of the time on director stock options.

    But CalPERS voted its proxies negatively 36% of the time on executive stock plans and 39% of the time on executive bonus plans.

    Those votes appear to have more to do with executive pay than with any negative attitude toward corporations. CalPERS voted negatively 22% of the time on management proposals, but 57% of the time on shareholder proposals.

    CalPERS officials haven't made up their mind yet about whether to develop a focus list for foreign firms.

    Mr. Boldt, the investment officer, told trustees CalPERS didn't want to "ruffle feathers" of international corporate managements.

    Still, executives of foreign companies didn't escape CalPERS proxy votes. For fiscal 1996-'97, CalPERS voted on proxies of approximately 780 international companies with an aggregate market value of $23.7 billion.

    Among international firms, French companies got most of CalPERS' negative votes. It voted against management proposals of French companies 33 times.

    CalPERS voted against corporate management in Switzerland, Thailand, Brazil, and Malaysia, once each; Australia, Germany, Spain and Singapore, twice each; Hong Kong and South Africa, three times each; Japan and the United Kingdom, six each; Philippines, seven; the Netherlands, nine; Korea, 10; and Indonesia, 15 times.

    Most of its negative votes on international proxies involved increases in equity capital issued without pre-emptive rights to existing shareholders, use of all the authorized capital to ward off hostile takeovers and amending articles of incorporation where no pertinent information was provided.

    In the United States, Mr. Boldt said the fund has some success in voting its proxies with Apple Computer Corp., Cupertino, Calif., and the Student Loan Marketing Association, Washington.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    SPDR® ETF’s New Approach to Bond Liquidity
    Sponsored Content: SPDR® ETF’s New Approach to Bond Liquidity

    Reader Poll

    June 6, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Nearing the finish line: Ideas on end-state investing for corporate DB plans
    The Meaning of "Portfolio Intelligence"
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Crossroads: Politics, Inflation, & Bonds
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    June 20, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit