SACRAMENTO, Calif. -- The California Public Employees' Retirement System's decision to invest in a British activist corporate governance fund likely will present problems for poor performing larger companies in the United Kingdom.
Until now, most larger U.K. companies have escaped the tougher, targeted U.S.-style shareholder activism.
The alliance of CalPERS and Hermes Pensions Management Ltd., London, which together have $24.5 billion in U.K. equities, means the pension fund giants can bring enormous pressure on poor performing U.K. companies.
CalPERS trustees, pending final negotiations, decided to contribute $200 million to the UK Focus Fund, a joint venture of Hermes and shareholder activist Lens Investment Management, Washington.
Hermes in Focus
Hermes Pensions Management, which manages $61 billion for the British Telecommunications Pension System and British Post Office, earlier contributed $203 million to the UK Focus Fund. The fund will select targets for corporate governance reform.
CalPERS has been active in supporting corporate governance in the United Kingdom and it has contributed to Active Value LP, a corporate governance fund that targets U.K. companies with less than $1 billion capitalization.
Still, this is the first time the giant pension fund, using an approach known as relational investing, has gone after big U.K. companies.
The UK Focus Fund will target five to 10 (eventually 15 as the fund's assets grow) U.K. companies and suggest improvements. It intends to establish a 1% to 3% position in each company.
A report for CalPERS trustees by Wilshire Associates, Santa Monica, Calif., shows the real strength in the UK Focus Fund is the massive U.K. stock holdings of CalPERS and Hermes, and their prestige with other institutional investors. Wilshire is the general pension consultant for CalPERS.
While the UK Focus Fund can take significant positions in a small number of large U.K. companies, the shareholder strength to force companies to reform likely will come from either CalPERS' and Hermes' U.K. equity holdings or the assets of other institutional investors persuaded to follow their lead.
"Bringing CalPERS into the UK Focus Fund is extremely important . . . CalPERS is not only a substantive investor in U.K. stocks, but also provides a legitimacy which other institutional investors will follow," the Wilshire report said.
Hermes, meanwhile, "is one of the top six shareholders in most U.K. companies," the report said.
Hermes has $18 billion in U.K. equity assets and CalPERS has $6.5 billion. CalPERS' U.K. holdings total 0.5% of the capitalization of the largest 900 U.K. companies, about the same percentage it owns in the broad U.S. equity market, the report showed.
The reports and comments of Wilshire and CalPERS staff members also brought out that U.K. companies are ripe for a corporate governance effort.
"Corporate governance in the U.K. is brand new," Steve Nesbitt, a senior vice president with Wilshire, told the trustees.
"The lack of concerted effort to promote shareholders' interests has not led to good corporate governance" in the United Kingdom, the Wilshire report stated.
The UK Focus Fund is supposed to use private persuasion of executives of targeted companies, at least at first. But the fund's directors, if need be, will go so far as to seek removal of corporate executives and directors of troubled U.K. companies and even seek support from the media.
The UK Focus Fund has been around since October and already has made some investments. But CalPERS has breathed new life into what was a small fund with potentially limited impact.
According to Robert Boldt, senior investment officer for public markets with CalPERS, the fund's commitment will draw investments from other pension funds.
"Many other (pension) funds watch what we do. Other funds will make decisions (to invest) as well," he said.
Executives of the UK Focus Fund hope to reach $812 million in commitments; it's about halfway there now.
While just getting started, the UK Focus Fund has its detractors.
Philip Angelides, California's new state treasurer, a job that gives him a seat on the CalPERS board, criticized Hermes for not having a long track record in corporate governance. He also objected to investing in the UK Focus Fund, saying Lens Investment Management has never been able to raise much money.
But the Wilshire report noted the UK Focus Fund already has had some indications of success in turning companies around. From Oct. 1, 1998, to Feb. 28, 1999, the UK Focus Fund returned 28.1%, vs. 21.3% return for the FTSE All Share index.
Despite the relatively small amount managed by Lens, Wilshire's Mr. Nesbitt said it does have an extensive track record in corporate governance activities.
But investing in the UK Focus Fund won strong support from Charles Valdes, CalPERS investment committee chairman, and William Crist, CalPERS board of trustees chairman.
Influential CalPERS board member Robert Carlson also supported the UK Focus Fund. "This is the right time to get into the fund," he said.