SACRAMENTO, Calif. - Requiring companies to undergo corporate governance audits, sponsoring academic research projects on important corporate governance topics, enhancing its corporate governance Web site and developing alliances with investors in foreign markets for greater participation in the international corporate governance movement are the main elements proposed in the 12th annual corporate governance "plan of action" by the California Public Employees Retirement System for the 1999 proxy season.
"It's an understatement to say the plan is ambitious," said Pat McGurn, vice president and director-corporate programs, Institutional Shareholder Services, Bethesda, Md. "I think their message is 'damn the torpedoes, full speed ahead'." He added, "There were some people who thought they might retrench after this election year, but that clearly is not the case."
Officials at the $134 billion CalPERS want to move to the next phase of their international corporate governance program: activities that support the fund's effective participation in the corporate governance dialogue that is occurring within the four largest foreign markets - the United Kingdom, France, Germany and Japan.
Last week CalPERS announced its first foreign alliance, with Hermes Pensions Management Ltd., London, which is wholly owned by BT Pension Scheme, the United Kingdom's largest pension fund. It has about 35 billion pounds (about $59 billion) under management.
The alliance has three main components: CalPERS and Hermes each will endorse the other's home-market corporate governance voting policies, and will generally vote their foreign proxies in accordance with these policies.
CalPERS and Hermes officials will consult with each other when engaged in active governance discussions with companies within each other's home markets to develop strategies and determine if cooperative action is warranted.
CalPERS and Hermes will work cooperatively and represent each other in their respective markets.
"Through this alliance, the corporate governance message will be louder and stronger, and will be heard in a voice that is influential and indigenous to each market," said William D. Crist, president of the CalPERS board.
"Hermes and CalPERS both believe that active and constructive exercising of shareowners' rights is an important element in enhancing shareholder value. We are, therefore, natural partners in this global initiative," said Peter Butler, corporate focus director of Hermes.
Although CalPERS wants to form such alliances with funds in all four countries, it has not yet identified any potential partners in the other three countries, according to Brad Pacheco, who handles public relations for the CalPERS corporate governance program.
"We want to get one proxy season under our belt," with the Hermes alliance, said Mr. Pacheco. "We haven't identified any organizations in other countries, but if one comes to us next month and it's reputable," CalPERS would consider forming an alliance, he added.
"We're now trying to identify other organizations that CalPERS can team up with in other countries," he said. "For this proxy season, no others are now planned."
Although it won't reveal its Focus List of underperforming companies until early next year, CalPERS has mapped out a list of issues to which it intends to have these companies respond:
*The corporate governance audit would require companies to hire independent consultants to evaluate the companies' governance function and report back to shareholders.
*CalPERS also will ask companies to have their audit committees provide shareholders with a report that describes, in detail, issues affecting the independence of the company's auditor, such as the level and impact of consulting work performed by the audit firm and considerations of rotating audit firms.
*It also will ask companies to disclose their year 2000 compliance issues in a way that is easily understandable to all shareholders.
*In addition, the giant pension fund will submit shareholder resolutions requiring companies to prohibit option repricing without shareholder approval.
The fund also has an ambitious plan to sponsor more academic research on cutting-edge corporate governance issues.
It will invite a minimum of five representatives from national universities - in its proposal it mentions Columbia, Harvard, the University of California at Berkeley, Stanford University, Ohio State University and the University of Texas - to propose how each would approach several possible studies.
Proposed topics include:
*The dilution effect of stock option grants on share value: At what point does this negative effect outweigh the potential benefit of aligning company employee interests with those of shareholders;
*Option repricing: Does this practice remedy a company's staff retention problems (a potential case study)? If so, to what extent is this benefit offset by potential dilution?
*The growth of stock options: Has this growing practice changed the shareholder base of major U.S. companies? Is this growth resulting in a "shadow privatization" of publicly traded companies?
*What are the voting practices of mutual funds? and
*Can voting rights legally be unbundled and traded separately from share ownership?
"These are hot issues," said CalPERS' Mr. Pacheco. "It's important to get the information out there. We haven't done these types of studies for some time."
He pointed out that in the past, the retirement system has concentrated more on its Focus List companies. Now, however, the fund also wants to play a significant role in corporate governance research.
UPDATED WEB SITE
CalPERS also wants to enhance its corporate governance Web site, so it is "among the pre-eminent corporate governance resources on the Internet," according to the proposed plan of action.
"The Internet is a powerful tool," said Mr. Pacheco. "We're hoping to grab the attention of other shareholders. At some point they'll be able to log on to our guest book and get information on issues."
Among the new features CalPERS wants to include are:
*A library of corporate governance literature, with a search engine, to advance the state of research in this area;
*A compendium of corporate governance principles, both adopted by CalPERS and other organizations;
*CalPERS' decisions on specific proxy votes, posted on the Web site in a timely manner so other investors can consider CalPERS' views when making their own voting decisions;
*Detailed information about the performance of, and communication with, the Focus List companies, along with CalPERS historic Focus List activities;
*A monthly "CalPERS Viewpoint" column containing opinion pieces written by board members and staff on newsworthy topics; and
*A "guest book" so visitors can register (on a volunteer basis) to automatically receive additional and updated information about selected companies and topics, as that information is added to the Web site.
CalPERS also has several other projects it wants to include in its corporate governance activities in 1999. These include:
Developing new relationships and discussions with investors who have not historically been active owners, such as mutual fund companies;
Publishing CalPERS' views on corporate governance issues and participating with others in collaborative publications; and
To have its officials accept speaking requests at corporate governance functions, both domestically and internationally, when they present opportunities to influence the ongoing corporate governance debate and to proactively identify and seek speaking opportunities before new audiences, again, both domestically and internationally.
"It's a very ambitious and exciting plan and I'm pleased with where they're going," said Richard Koppes, former CalPERS general counsel, now of counsel at Jones Day Reavis & Pogue, Sacramento, who teaches a corporate governance course at Stanford University. "They've put a lot of thought into this plan and they will clearly be on the scene in 1999."