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January 12, 1998 12:00 AM

CALPERS TAKES NEW ACTIVE ROLE IN U.K.: $200 MILLION GOING TO GOVERNANCE FUND

Steve Hemmerick
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    SACRAMENTO, Calif. - The California Public Employees' Retirement System is funding the export of rough-and-tumble, American-style corporate governance to the United Kingdom for the first time.

    Trustees approved a $1 billion alternative investment plan that includes a $200 million commitment to a U.K-based activist corporate governance fund, Active Value Fund Managers L.P. It will target medium-size U.K companies.

    The commitment will bring an end to the cautious, go-slow approach to corporate governance that CalPERS trustees had endorsed outside the United States.

    Staff members for the $124 billion pension fund said they recognize CalPERS' reputation will be linked to the activist partnership.

    And a staff report to CalPERS trustees said AVFM general partners believe "CalPERS' presence as a partner will enhance the fund's ability to promote change" and generate good investment returns.

    CalPERS' willingness to fund the AVFM venture is an "extremely significant development" in corporate governance, said Stephen Davis, president of Davis Global Advisors, Boston, an international corporate governance consultant.

    Board seats doubtful

    On another corporate governance subject, it now appears doubtful that CalPERS' representatives will be seeking directorships on U.S. corporate boards, except in unique circumstances.

    Kayla A. Gillan, the pension fund's general counsel, warned CalPERS trustees the pension fund could face considerable liability if CalPERS designates a representative to sit on a corporate board.

    In 1988 Texaco Corp. invited CalPERS to name a board or staff member to its board. CalPERS declined, on counsel's advice.

    Taking a new look at board representation issues, Ms. Gillan presented her latest research to the investment committee, which tends to heed counsel's advice.

    She said CalPERS would not be entitled to the protection of a company's indemnity and insurance provisions. Thus, the fund could be put at risk for financial damages.

    Another concern for CalPERS, said Ms. Gillan, might be conflicting fiduciary duties for CalPERS' representative on a board. Also, board seats could result in lost trading opportunities because of insider trading restrictions.

    Ms. Gillan didn't recommend a blanket prohibition against the fund seeking board representation. The fund, she said, could gain benefit of a representative when CalPERS already faces the liability of a director or when benefits outweigh risks. Such situations, she said, are likely to be infrequent.

    Still, she urged trustees to act with a "great deal of caution" before seeking board representation.

    SHOCK FOR U.K. firms?

    But while U.S. corporate boardrooms generally are secure from CalPERS-backed directors, some U.K. companies executives may be in for a shock.

    The AVFM fund of Active Value Advisors Ltd., London, uses American-like activist corporate governance tactics.

    The fund is expected to have at least $425 million in investment capital, including CalPERS' money.

    No one at Active Value Advisors could be reached for immediate comment. Brian Myerson and Julian Treger, co-founders and directors, have committed a total of $6.5 million to the fund.

    The investment approach of AVA is to buy into undervalued companies, make recommendations to management about organizational changes, and take stronger steps if a timetable for change is unmet.

    Investors, such as CalPERS, can reinvest profits, and co-invest with the AVFM partnership.

    AVFM executives plan to target U.K. companies that are under-managed or have weak management teams. They also will target U.K. companies with poor capital structures, undervalued brand names or franchises, over-expanded positions or companies in industries facing consolidation.

    AVFM will use such U.S.-style corporate governance approaches as appointing independent directors, changing company operations, making divestitures and seeking capital restructuring.

    "CalPERS is putting its money where its mouth is," said Mr. Davis, who said he helped draft CalPERS' corporate governance principles for the United Kingdom and France. He said AVFM is likely to be "very aggressive" in its use of U.S.-style corporate governance practices.

    He said U.K. corporations are not new to corporate governance and are ahead of their U.S. counterparts in some ways. But the way corporate governance is practiced there is very different from here.

    In the United Kingdom, said Mr. Davis, corporate governance is done quietly, behind closed doors and over a cup of tea. But American corporate governance practices, he said, sometimes use the press and can involve shareholder proxy campaigns.

    CalPERS has seen its corporate governance practices improve investment returns at home and it expects the same overseas, said Mr. Davis.

    The actions of the AVFM fund strategists could surprise U.K. executives unused to American tactics.

    Action rare in u.k.

    While investors' corporate governance actions even include forcing out U.S. corporate chief executives, such investor actions appear to be been rare in the United Kingdom.

    U.K. and European investors historically have taken passive investment positions, not focusing on corporate governance, stated a staff memorandum to CalPERS trustees.

    CalPERS does face some risks in this approach, said Bob L. Boldt, senior investment officer. "CalPERS' reputation in the (United Kingdom) will be affected to some degree by the actions of the AVFM. CalPERS will not have complete control of all AVFM actions," he said in a report to the board.

    AVFM holds corporate governance positions similar to those of CalPERS. The pension fund's AVFM investment will project CalPERS' governance position to the U.K. market, CalPERS officials believe.

    Mr. Boldt added AVFM will pursue a more aggressive implementation of the CalPERS' approach in the U.K. market, "which should prove to be a fertile ground for such investments."

    CalPERS' staff members believe the risks are worthwhile. They say AVFM has shown success in the past in using its activist approach, though with smaller amounts of money.

    A previous AVFM fund formed in 1994 generated an internal rate of return of 29% through Sept. 30, 1997.

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