SACRAMENTO, Calif. -- After more than a year of discussion and dialogue with investors, board members and executives throughout corporate America, the California Public Employees' Retirement System, Sacramento, last week approved its first set of corporate governance standards and principles.
While critics have argued the final draft is much weaker than the version circulated in June, corporate governance experts praised the standards, which spotlight the importance of independent directors.
Ken Bertsch, director of corporate governance services at the Investor Responsibility Research Center, Washington, said: "Even though the standards were modified, I think they are still pretty strong."
What's most important, he said, is that the $135 billion retirement system is continuing to press for a lead director at corporations. The principles, in subtle wording, say if the positions of chairman and chief executive officer are not separate, then it's necessary to have an outside director lead the board.
The new principles also include these recommendations: independent directors should comprise a substantial majority of seats on a board; no director may serve as a consultant or service provider to the company; competing time commitments of directors should be specifically addressed by each company; a mix of director characteristics, experience and diverse perspectives should be reflected on each board; and the board should consider director tenure and take steps to maintain an openness to new ideas.
The retirement system's new principles will be taken seriously because they are quite mainstream, said Patrick McGurn, director of corporate programs, Institutional Shareholder Services, Bethesda, Md. Mr. McGurn compared them with corporate governance principles adopted by the National Association of Corporate Directors in 1996 and the Business Roundtable in 1997, and found them to be similar.
"Although these don't break new ground, they don't fall short either," he said.
The introduction to the Core Principles and Governance Guidelines states the pension fund's belief that these are important considerations for all U.S. companies. However, it adds that it doesn't expect or ask that every company it owns to adopt or embrace every aspect of the principles.
"These principles represent the evolution and ongoing development of CalPERS' corporate governance program," William D. Crist, president of the fund's board of administration, said in a statement. "We hope they will further strengthen independence in America's boardrooms and influence the corporate governance movement toward greater consensus on corporate governance standards."
The modified principles are a big change from the original draft, which argued that one set of principles would work for all. Richard Koppes, former chief counsel to CalPERS who now specializes in institutional investor matters at Jones, Day, Reavis & Pogue, Sacramento, said: "People were very concerned that they went too far. Many of our clients are relieved that CalPERS isn't expecting them to toe the line on every one of these issues."
But, he said, "the new principles still push the envelope. Most important is the fact CalPERS is not giving up on the need for a separation between the office of chairman and chief executive -- even though much of corporate America believes they can be combined."
Experts also praised CalPERS' recommendations that no director serve as a consultant or service provider to the company and that competing time commitments of directors be addressed by each company in its proxy statement.
Some of the more controversial proposals in the original draft have been eliminated. Among those were standards calling for mandatory retirement if a director reached 70 or had served on a board for more than 10 years, because the director then would be considered an insider. Now the guidelines are softer, asking boards to consider the tenure of directors during their renomination process and to maintain an openness to new ideas.
Mr. Bertsch of the IRRC said chief executives like the more automatic process because it results in board turnover without a need to evaluate the directors.
"Backing off of those is not significant, if they are going to have meaningful evaluation of board members. It will take time to see where this goes."
CalPERS also dropped its controversial program to grade the performance of the largest companies it owns against its new standards and principles -- after many businesses complained about the plan.
"The big question now is how they will monitor performance, or what they will do instead," said Mr. McGurn of ISS.