Pension funds fine-tune approach on governance

Some major pension funds are refining their corporate governance guidelines because they are either too aggressive or not aggressive enough.

The $70.6 billion State of Wisconsin Investment Board, Madison, plans to revise some its guidelines, including reconsideration of how it votes on directors, said Keith L. Johnson, chief legal officer. Earlier this year, it withheld votes for the re-election of Warren Buffett at Coca-Cola Co., following its guidelines. But he noted guidelines might be too rigid to provide for flexibility on voting for individual situations.

The Illinois State Board of Investment, Chicago, refined its guidelines recently. The board retains voting of the proxies on its stocks, although external managers run its $10.3 billion in assets. Following its guidelines, it voted earlier this year in favor of the re-election of all the directors of Walt Disney Co., including Michael Eisner, chief executive officer and then chairman, and George Mitchell.

"We had to follow our guidelines," which essentially call for supporting management, unless the election is contested, said William Atwood, executive director of the Illinois fund. But, the board sympathized with other pension fund shareholders that voted against Mr. Eisner and other Disney directors, he said.

A few months later in voting on Safeway Inc., the Illinois board voted to temporarily suspend its guidelines to withhold votes for the re-election of three directors whose terms were expiring. Because of Safeway's continuing underperformance, the Illinois fund helped lead a campaign to oust the directors, although it was unsuccessful.

One area the Wisconsin board will re-examine is its stance on use of audit firms for non-audit consulting work, Mr. Johnson said. Under SWIB's guidelines, the board votes against ratification of auditors when at least 25% of their fees come from non-audit-related work; it also withholds votes for re-election of directors who are members of the audit committee that approves such arrangements.

"We want to evaluate what is the best way to evaluate the issues," he said. "We want to see whether it is too blunt an instrument to apply across the board. We will be taking a look at trying to incorporate more analysis of individual company situations and (also) look at the qualities of directors."

"Coke, that's a good example of why we'd like to refine our proxy-voting guidelines in this whole area," he said.

SWIB, like some other major pension fund investors, opposed the re-election of Mr. Buffett and some other Coke directors because they are members of the audit committee. Fees paid to Coke's auditors for non-audit-related work amounted to 80.5%, or $13.6 million, of the audit fees.

Mr. Buffett was re-elected, along with the rest of Coke's directors.

"SWIB is withholding more votes for directors than ever before," Mr. Johnson said. "We want to look at how the withhold process is working. Do we need to develop more contours to our guidelines? Should we do a deeper analysis?"

"We want to delve into issues a little deeper so we are no knee-jerk followers of guidelines."

For instance, he said on issues such as splitting the position of chairman and CEO, SWIB in 16 instances this year voted for splitting the positions. It opposed the move to separate the positionsat Citigroup Inc., Wachovia Corp. and General Electric Co.

In some instances, he said, a combined position of chairman and CEO can benefit shareholders, typically when the board is strong and largely independent and company performance is good.

Also, later this year, SWIB plans to seek bids for a host of proxy-voting services, now provided by Institutional Shareholder Services, Mr. Johnson said.

The services include corporate governance analysis, proxy-voting recommendations, vote casting following SWIB guidelines, Corporate Governance Quotient ratings of companies, and assisting SWIB in posting its votes on its website.

SWIB has never done an RFP for such services before, said Vicki Hearing, public information officer, although the board reviews the ISS contract every year.

ISS used to be about the only firm in the business, she added. Now there are more.

"It will be a good opportunity to see what's out there" in the market, because more companies provide proxy voting services, she said. "We feel this area has grown."

She said SWIB might consider unbundling the services, although she said, "having a packaged program has its benefits." ISS will be invited to rebid.

At the Illinois board, Mr. Atwood said the officials recently contracted with Proxy Voting Services, a unit of ISS, and adopted its guidelines for the most part for corporate governance. The board reserves the discretion to override any PVS proxy recommendation.

"The board wanted to adopt a more aggressive standard toward dealing with protecting the rights of shareholders," he said. The Illinois board supports more corporate transparency, the splitting of the positions of chairman and CEO, and director independence.

He said these are issues the board's previous guidelines didn't fully address.

Mr. Atwood believes pension funds should vote their own proxies, rather than leaving the decision to money managers. "Companies, other shareholders and the market are better served when pension funds vote their own proxies," he said.