CalPERS and CalSTRS backed a provision in major financial reform legislation making it easier for shareholders to nominate corporate directors, drawing a court challenge from business groups.
The push for more say in corporate governance is the “G” in “ESG,” a worldwide drive by public pension funds and other large shareholders to use investment clout to move corporations toward broader environmental, social and governance practices.
Supporters think the use of proper ESG criteria is a sign of quality corporate management and “sustainable” long-term profit. Some even argue that ignoring ESG could breach the legal duty of pension funds to pursue the best interest of beneficiaries.
A provision in the sweeping Dodd-Frank Act, enacted in July after the financial system meltdown, led to a new rule allowing big investors to put their corporate board candidates on voting material sent to shareowners, along with management’s candidates.
In the debate over the new rule, commentators on both sides have referred to a work published nearly 40 years ago by the late Peter Drucker, a well-known author and management consultant.
“The Unseen Revolution: How Pension Fund Socialism came to America” predicted that worker pension funds would have a controlling interest or “ownership” of major U.S. corporations through stock holdings.
An editorial in the Wall Street Journal in August, briefly mentioning Drucker’s prediction, warned that the “proxy access” rule adopted by the Securities and Exchange Commission on a 3-to-2 vote will aid activists and unions, not shareholders.
“Activist groups and union-led pension funds will come knocking on a corporation’s door threatening to run opposition candidates if, for example, the firm doesn’t endorse ObamaCare, or won’t stop supporting the U.S. Chamber of Commerce,” said the Journal.
Jon Taplin, a University of Southern California Journalism professor, said on TPMCafe in July that now that workers control the means of production through pension fund holdings they should make sure corporations have “long-term sustainable” values.
“This is both the genius and irony of America,” Taplin wrote, after citing Drucker. “In Communist China, the workers have no control over the means of production and in America they do.”
A former board president of the California Public Employees Retirement System, Sean Harrigan, was criticized in 2004 for trying to use the pension fund’s influence to oust the chief executive of Safeway during a lengthy supermarket strike.
But Harrigan, a leader in the striking union, was ousted when the state Personnel Board voted 3-to-2 to remove him as its representative on the CalPERS board. He reportedly blamed business interests and Gov. Arnold Schwarzenegger.
CalPERS has a well-publicized corporate governance program. The release of an annual “focus list” of companies underperforming because of poor governance is said to have boosted the average stock prices of 142 targeted companies from 1987 to 2008.
The improved average performance, sometimes the result of big gains by just a few of the companies on the list, has been called the “CalPERS effect” in some of the studies.
This year CalPERS did not release a focus list because 14 of the 15 companies in the screening process improved their governance and shareholder performance. The lone exception was a company being sold.
CalPERS also has more than $4 billion invested in 21 funds and partners that use corporate governance strategies to turn around ailing companies. Although the program has struggled in recent years, it’s said to have outperformed its benchmark since 1999.
Both CalPERS and the California State Teachers Retirement System, which also has a corporate governance program, were among the leaders in lobbying to keep authorization for the new director-nominating rule in the reform bill.
The two pensions funds are working on a “diverse director database” of potential corporate board nominees, citing studies that show putting women and minorities on the boards can improve performance.
After losing the battle in Congress, the U.S. Chamber of Commerce and the Business Roundtable filed a challenge on Sept. 29 to the SEC’s new rule allowing large shareholders to put their nominees on material authorizing a “proxy” to cast their vote.
To get “proxy access” and avoid the expense of a separate mailing of their own to all the shareholders, the director nominators must have owned at least 3 percent of the stock for three consecutive years.
The business groups contend that the new rule will give activists too much leverage to pursue their agenda, trigger more costly board elections, encourage a short-term business strategy and undermine state regulations.
“The SEC’s proxy access rule empowers unions and other special interests at the expense of the vast majority of retail shareholders,” David Hirschmann, president and CEO of the U.S. Chamber’s competitiveness center said in a news release.
The pension funds may join in a legal defense of the new rule. A CalSTRS news release said the pension fund seeks long-term growth from companies in its investment portfolio.
“Our ability to change our representatives in the boardroom is fundamental to good corporate governance and shareholder democracy,” said Jack Ehnes, the CalSTRS chief executive.
The CalSTRS release also said the 3 percent stock ownership requirement means that boardroom changes will probably require broad coalitions of investors sharing the same vision.
Two of the broadest investor coalitions, both based in London, held back-to-back conferences last week in San Francisco, allowing members of both groups to attend during a single trip.
The International Corporate Governance Network held panels, two with representatives from Intel and Microsoft, on proxy access, ESG, sustainability and managing investment and corporate risk after the stock market crash.
The lunch speaker was the outgoing chairman of a similar group, the United Nations-connected Principles for Responsible Investment, which encourages the use of ESG criteria in investments.
Donald McDonald, who also is a trustee of the British Telecom pension fund, said a law in the United Kingdom a decade ago requiring pension funds to “comply or explain” with ESG criteria helped spread the concept to other jurisdictions.
“Perhaps the United Kingdom’s new stewardship code, which requires us to report on how we exercise ownership responsibilities, will have a similar effect,” MacDonald said.
PRI has a clearinghouse that encourages coalitions to work on issues such as reducing carbon emissions, protecting human rights in a supply chain, and establishing governance systems to deter corruption.
An example of a success, says a PRI publication, is Robeco asset management joining a coalition to ask 100 of the world’s biggest companies to make more efficient use of scarce water supplies.
Among the 15 companies that joined the effort was Nike, which worked with other apparel brands and retailers to establish “a program that encourages suppliers’ adherence to high water quality standards” beyond local regulations.
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 13 Oct 10