A shareholder proposal by the California State Teachers' Retirement System, aimed at breaking Timken Co. into two separate companies, is taking activism by pension funds to a new level.
Pension plans involved in corporate activism normally mount efforts to replace board members to make companies more accountable on governance and environmental issues. But the actions by the $165.5 billion West Sacramento-based CalSTRS go to the heart of Timken's business. CalSTRS officials say that spinning off the industrial company's steel operations from its bearings business will unlock shareholder value.
CalSTRS is sponsoring an advisory shareholder resolution to break up Timken, one of the first such actions by a pension plan.
In August 2011, the $129.5 billion Ontario Teachers' Pension Plan, Toronto, disclosed that the pension fund and its partner, hedge fund Jana Partners, had accumulated more than 5% of McGraw-Hill Cos. and was calling for the company to break up to unlock shareholder value. (Ultimately, the company's education unit was sold to Apollo Global Management LLC to satisfy Ontario Teachers and Jana.)
But CalSTRS has gone one step further because it has gone directly to shareholders through the advisory vote, according to academics, lawyers and analysts who follow corporate governance issues. The vote is scheduled for Timken's annual meeting on May 7.
CalSTRS is not just trying to change a company's governance practices but is directly inserting itself into the management activities by convincing other shareholders to vote against the status quo advocated by management, said Stuart Gillan, associate professor of finance at the University of Georgia's Terry College of Business, Athens.
“It's a huge change from the previous strategy by pension plans,” he said.
CalSTRS appears to be the first pension plan to expand its activism to the level of sponsoring a shareholder proposal to break up a company, said Paul D. Lapides, director of the corporate governance center and associate professor at Kennesaw State University in Kennesaw, Ga.
Mr. Lapides said if CalSTRS is successful, it likely will spur other pension plans to file their own shareholder resolutions directly involving company operations, in an effort to maximize shareholder value.
“I think it's a very exciting development,” he said. “Shareholders are exercising their rights to improve results not only for themselves, but for all investors.”
In its proposal, CalSTRS joined with Relational Investors LLC, San Diego, an activist investment firm with around $5 billion in assets.
While Relational has targeted underperforming companies since its founding in 1996, using money from the $258.3 billion California Public Employees' Retirement System, CalSTRS and other investors for its investment funds, the investors traditionally have not had a big say in the investments made.
Anne Sheehan, director of corporate governance at CalSTRS, said the strategy that has targeted Timken is “an evolution” of CalSTRS' corporate governance policy beyond corporate board issues. “In our shop we have often said wasting shareholder money is the worst corporate governance offense there is,” she said.
But beyond the Timken battle is a larger question about whether pension fund activism should have limits. CalPERS officials differ with their peers at CalSTRS on whether it is proper to get directly involved with management of a company.