Two of the biggest losers in the stock market crash, CalPERS and CalSTRS, are leading a drive by pension funds for reforms to prevent future financial meltdowns.
The holdings of the California public pension funds, ranked first and second in the nation, had lost nearly a third of their value by last month. CalPERS was down to $180 billion at one point, and CalSTRS was down to $125 billion.
The two California funds met with pension funds from a half dozen other states in Washington, D.C., on Dec. 11 to discuss reform proposals. The funds were briefed by a former member of the Securities Exchange Commission and two congressional aides.
“There is a shared belief that institutional investors need to have a unified posture going into the supercharged environment for change and reform that presently exists,” said a report given to the CalPERS board after the meeting.
The pension funds are following a path blazed by a legendary California politician, Jesse Unruh. In a tribute to his overbearing political power and girth, he became known as “Big Daddy” during his reign as Assembly speaker during the 1960s.
Unruh engineered, for better or worse, the creation of a full-time Legislature. After his speakership, he lost races for governor and mayor of Los Angeles before being elected state treasurer in 1974.
In what had been a ministerial backwater, Unruh expanded the power of the treasurer’s office over boards and commissions controlling bond funds. Then he responded to trouble in the corporate world in the 1980s.
One of the problems was a wave of what journalists called “greenmail.” Big investors would buy stock in a corporation, threatening a hostile takeover unless their stock was purchased by the corporation at above-market prices.
As state treasurer, Unruh had seats on the two California pension funds with big stock holdings. He became a driving force for the creation in 1985 of a national coalition of pension funds to push for good corporate governance.
The Council of Institutional Investors issued a shareholders bill of rights, serving notice that the pension funds would no longer be passive investors. Council staff members were at the Washington meeting last month.
The pension funds are still working on their reform proposals. A planned first step is a statement about why the funds are pushing for reforms, including their “serious concern” about meeting pension and health-care funding obligations.
The report to the CalPERS board last month said, among other things, that in the debate in Washington there are “high levels of disagreement” about whether reforms should take the form of “principles” or rules-based regulation.
Several tentative reform topics, all very broad, were mentioned in the report: transparency, systemic risk, investor protection and corporate governance, rational regulation, mark-to-market accounting, and global coordination.
Whatever the funds propose, it’s already clear that two decades after Unruh created the council, the role of pension funds as reform agents has indeed become institutionalized.
It’s not only what the pension funds expect of themselves, but apparently what others expect of the funds as well.
The CalPERS federal lobbyist, Tom Lussier, told the board last month that CalPERS was asked for its views on market reforms. He said the unsolicited request came from the camp of President-elect Obama.
What began as broad governance reforms evolved at CalPERS into targeting individual corporations. The pension fund says it screens hundreds of companies each year before placing five on its annual Focus List of underperforming slackers.
As evidence of the success of the “CalPERS effect,” prodding that improves stock performance, the pension fund cites several studies. Andrew Junkin of Wilshire Associates looked at 134 companies targeted from 1987 through 2006.
He said the annual stock performance of the companies averaged 12.7 percent below benchmarks in the five years before being placed on the CalPERS list. In the five years after listing, the annual average was 3 percent above the benchmarks.
Junkin said the performance of most of the targeted firms remained below the benchmarks after the listing by CalPERS. But the strong performance of a few firms pushed the average performance above the benchmarks.
“CalPERS’ involvement has had an impact on the stock prices of the targeted companies and, at a minimum, has slowed the erosion of shareholder value on a cumulative basis,” Junkin wrote in his report last July.
The CalPERS Focus List is not just a public relations exercise. The pension fund says it talks to the companies before putting them on the list and continues to work with them afterward.
The concept of the Focus List, as explained in one of the studies, is that a “breakdown in good governance principles” can lead to management focused more on keeping its job, hefty pay and perks than on building shareholder wealth.
When the Cheesecake Factory, a restaurant company, was placed on the list last year CalPERS called for an end to staggered board terms, which make accountability difficult.
“CalPERS also seeks a ‘clawback’ policy to recoup executive compensation based on fraudulent behavior or erroneous performance figures, a majority vote policy for directors in uncontested elections and the right of shareowners to act by written consent on an issue outside the annual meeting,” said a CalPERS news release.
Sometimes the big one gets away. The CalPERS focus list in 2005 was topped by AIG, American International Group, the world’s largest insurer with 116,000 employees and operations in 130 countries.
Allegations of fraud and accounting problems led to the ouster of Hank Greenberg, the long-time AIG chief. The California state treasurer at the time, Phil Angelides, threatened a lawsuit, never filed, to recover $400 million in AIG stock losses.
AIG would sail on to become, three years later, one of the most costly casualties in the current financial meltdown.
The firm bet big and lost on an unregulated insurance product, credit-default swaps, and has received more than $150 billion in taxpayer bailout money.
A week after receiving the federal money, AIG executives spent $440,000 on a retreat at a luxury Orange County resort — $150,000 on meals and $23,000 on a spa.
At a congressional hearing, the executives were grilled about the need for the retreat. But there has been no “clawback” of AIG executive salaries and bonuses.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 19 Jan 09