Pension shareholder clout reshapes corporations

A bitter breakup of a well-known Ohio company, Timken, approved by shareholders in a battle led by CalSTRS and one of its investment funds, Relational, has become a case study as activist shareholders try to squeeze more profit from companies.

Under the control of the Timken family, the company won praise for repeatedly investing heavily in modern steel-making equipment that keeps jobs in the rust-belt city of Canton, while also being a major donor to local education and arts.

Now some fear the vote to “maximize shareholder value” by splitting Timken into two separate companies, Timken and TimkenSteel, creates two weak takeover targets, more vulnerable to economic downturns and less likely to continue community support.

Suzanne Berger, an MIT political science professor who studied Timken for her book “Making in America,” told the New York Times it’s not “classical greed” but the creation of financial markets that harm long-term investments and industrial companies.

“We’ve got a financial system in the U.S. where California teachers have to protect their pension funds by hurting manufacturing in Ohio,” Berger told the Times, which tracked the Timken split and published a lengthy report in December.

Since the split in September, Relational Investors and CalSTRS (except for an index fund) have sold their Timken shares. Relational bought shares at $40 and sold at $70, a gain of $188 million in about two years, the Times said.

The California State Teachers Retirement System, with investments worth $189 billion at year‘s end, stands by its role in the Timken breakup, seeing no long-term harm to Canton, home of the Pro Football Hall of Fame, which elected its 2015 class Saturday.

“The family remains as involved in both companies as it was in the old one,” Ricardo Duran, a CalSTRS spokesman, said last week. “In fact, the stock appreciation gives them greater wherewithal to make the local investments that have so endeared them to the community.”

Relational, a San Diego firm, targeted Timken after calculating the company might be worth more if it split. (In 1965 the Timken family established the free-admission Timken Art Museum in San Diego, which has a Rembrandt and other masterpieces.)

Both CalSTRS and the larger California Public Employees Retirement System have more than $1 billion invested in Relational. But CalPERS did not join the drive to split Timken.

“Timken was a risky target for Relational’s executives,” said the Times story. “They could be painted as Gordon Gekko types trying to make a fast buck by attacking a well-regarded, family-run company that had outperformed the stock market.

“Getting CalSTRS on board helped neutralize that threat. The pension fund, long a champion of better corporate governance, made the case that Timken’s board was dominated by family members who paid themselves liberally and put their own interests ahead of shareholders’ interests.”

Pushing a principle of the shareholder rights movement, CalSTRS argued for more independent board members, noting that nine out of the 12 Timken board members were from Ohio.

A Relational co-founder, Ralph Whitworth, quoted in a CalSTRS news release in September, said the Timken split created two industry leaders and “ensures the long-term vitality and competitiveness” of the two companies.

“It’s the right answer for all constituents, including the city of Canton, which will now be the home of two world-class companies,” said Whitworth.

Patrick Garner inspects Timken spherical roller bearing

Patrick Garner inspects Timken spherical roller bearing

Much of the focus on public pensions has been on their impact on government budgets. Pension debt soared during the recession, and state and local governments are putting more money into pensions, squeezing funding for other programs.

But state and local public pension systems, which often expect investment earnings to pay two-thirds of their pensions, also have an impact on the business world through huge investment portfolios. CalPERS was valued at $294 billion last week.

Public pensions have been leaders in the drive for better “corporate governance” through corporate board independence and diversity, the Sarbanes-Oxley financial reforms after the Enron scandal, and Dodd-Frank after the 2008 debt-binge meltdown.

And public pensions, seeking above-market returns, were early investors in private equity leveraged buyouts, regarded as “creative destruction” that helps the overall economy by some, mainly destruction by others but a major force in the corporate world.

In a leveraged buyout, companies are bought, often with loans using the company’s own assets as collateral, made more cost efficient, sometimes through layoffs and splits, and then sold for tax-advantaged profits.

Activist investors like Relational are a smaller and less controversial trend. Instead of buying a company, an activist buys a large number of shares in a company and then, as a shareholder, urges changes intended to increase the company’s value.

CalSTRS has $5 billion invested in nine “governance” funds that are activist investors. CalPERS has $3.8 billion invested in the governance funds of eight activist managers, three in addition to Relational that also are in the CalSTRS portfolio.

Ted White, a managing director of one of the CalSTRS funds, Legion Partners, is a former CalPERS governance portfolio manager. CalSTRS invested $200 million in the small fund that had $20 million under management and took 30 percent ownership.

Legion Partners had been managing investments for private individuals in small companies, said Duran, the CalSTRS spokesman, and the big pension fund had been having difficulty finding a “true small-cap activist manager” in an area with growth potential.

“The folks at Legion presented a solid investment thesis, a good investment team and a compelling incentive structure,” said Duran. “The 30 percent ownership aspect is a mechanism to reduce our fees as the seeding partner while simultaneously better aligning our interests.”

Not all corporate breakups under activist shareholder pressure are bitter battles. A Wisconsin company, Manitowoc, announced last week that it will split into two companies, one manufacturing cranes and the other food and beverage equipment.

Manitowoc’s management and board of directors said they agreed with Relational Investors and billionaire Carl Icahn that the split should produce more value for company shareholders.

How is the CalSTRS portfolio of activist funds performing? Charts in the corporate governance annual report last fall show the CalSTRS funds yielding a little more than the public equity index.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 2 Feb 15

15 Responses to “Pension shareholder clout reshapes corporations”

  1. Michael C Genest Says:

    Greed is good!

  2. Dr. Mark H. Shapiro Says:

    I’m sure that Ed Mendel would be the first one to scream if CalSTRS did not act to maximize shareholder value.

  3. Bring Back the WPA Says:

    Following the 2008 meltdown Occupy Wall Street, unions and left-leaning groups vilified banks and bankers as greedy basturds (I agree to an extent that some of them should have gone to jail). It’s well known Wall Street instigated the pension reform movement as payback for Occupy. Pension reform, if it were successful in changing DB plans into 401Ks, would give Wall Street a double benefit — income from 401K fees and pension fund activism would be eliminated.

  4. Captain Says:

    Bring Back the WPA Says: “It’s well known Wall Street instigated the pension reform movement as payback for Occupy.”

    ???? Maybe in your warped mind.

    WPA, can we just start with fixing the current pension system without bankrupting 50 percent of California cities whom are being required to pay ridiculous sums of money to current public employee union members, for work that was performed years ago?

    These Pension & Healthcare Benefits are strangling State, Local, County, and Special District budgets – which in turn are strangling the Middle Class. How many fees have been increased in just about every city, in the name of providing services, only to end up paying PUBLIC EPLOYEE UNION member’s exorbitant & inflated benefits? Your comment about Occupy is beyond moronic.

    And in the meantime, these organizations (CalPERS & CalSTRS) are doing damage to State, Local, County, and Special District budgets while also, maybe, even doing damage to the very same corporations they invest billions of dollars in.

    But, more importantly (IMO): CalPERS, CalSTRS, and the Teachers Unions are destroying what was once a California Hallmark – the California Educational System.

  5. Captain Says:

    “CalSTRS argued for more independent board members, noting that nine out of the 12 Timken board members were from Ohio.”

    – The CalPERS Board of Administration doesn’t want to engage in any argument related to anything that has anything to do with changing the configuration of their own CORRUPT CALPERS BOARD of ADMINISTRATION. CalPERS is Corrupt!

    Maybe CalSTRS should be attacking CalPERS for their own lack of independent Board Members, or looking in their own mirror.

    Both calPERS and CalSTRS have been stealing money from taxpayers for over a decade!

  6. Bring Back the WPA Says:

    I’m not making it up, Captain. Where was one the first pension reform efforts? Rhode Island, 2011. Who’s the governor there? Raimondo, a venture capitalist. Who are her top contributors? Big banks, wall street hedge funds and former Enron exec John Arnold.

    Google Matt Taibbi’s expose “Looting the Pension Funds” to learn more. Also “Enron billionaire’s diabolical plot to loot worker pensions” at

    CalPERS has $293 billion and Wall Street can’t stand it. They desperately want CalPERS out of business and have that money chopped up into individual 401k accounts so Wall Street can charge fees to “manage” the accounts. That’s why they have been waging a political war on public pensions, to make money on fees.

  7. Ed Grimley Says:

    Callers activist funds have done well and the social justice factor makes them socially sustainable…well done!

  8. SeeSaw Says:

    The pension reformers are salivating at the thought of over 800 million dollars that the Koch Bros are planning to put into Republican causes for 2016. The answers are at the round table that should occur between CalPERS and the entities who are funding the worker’s pensions. The fees are becoming insurmountable for some entities–its time for the principals to get together. There is nothing corrupt about the CalPERS Board–it is interpreting the guidelines that the State Legislature has bestowed on it. Go back to bed and get up again Captain–lower that blood pressure, or you won’t die happy. .

  9. Tough Love Says:

    Dr. Mark H. Shapiro,

    I’m sure that YOU would be the first one to scream bloody murder if YOUR Public Sector pension was even reduced to only TWICE that of a comparable Private Sector worker (retiring at the SAME age, with the SAME service, and the SAME age at retirement) …. noting that your pension’s value at retirement is NOW 3x-4x greater (and 4x-6x greater if a “safety” worker).

    Yeah … we know your type………

  10. SeeSaw Says:

    I wouldn’t doubt that you work for the Koch Bros., TL. I know your type.

  11. Captain Says:

    Bring Back the WPA Says: “I’m not making it up, Captain.”

    Sorry, WPA, the pension reform effort began long before Gina Raimondo. It should have begun about the same time CalPERS pushed SB400 while promoting their ability to continue to provide double digit returns for at least a decade – even though their internal documents suggested otherwise.

    As CORRUPT as CalPERS IS, CalSTRS and their EMPLOYEE UNIONS have follwed the CalPERS lead by milking their own pension system.

    But, of course, It’s all good in the CORRUPT WORLD of UNION DOMINATED PENSION FUNDS just as long as – THEY BELIEVE THE TAXPAYERS ARE STUCK PAYING FOR A SINGLE BONE-HEADED invesstment they make, or every single CORRUPT ACTION THEY TAKE!

  12. Captain Says:

    SeeSaw Says: “I wouldn’t doubt that you work for the Koch Bros., TL. I know your type.”

    Considering the CORRUPTION spewing from the public employee unions, and yourself, I’m thankful for the Koch Brothers – even though I’ve never heard of them until you and every other UNION started bad mouthing them.

    While I do not know much about them, I’m thankful for them. If they can even slow down the Public Employee Unions complete control/domination of of every single governing body in the state of California – they are my HERO’s.

    Afterall, it’s the Public Employee Unions and their Pension funds, CalPERS & CalSTRS, that are destroying both our cities budgets & the California Educational System.

  13. Captain Says:

    Dr. Mark H. Shapiro Says: “I’m sure that Ed Mendel would be the first one to scream if CalSTRS did not act to maximize shareholder value.”

    How do you reconcile CalSTRS attempt to maximize shareholder value with their policies that have driven that value into the dirt? Surely you are aware that CalSTRS funding percentage would be twenty percent greater if not for their Board of Administrations giveaway of taxpayer dollars.

    Have you not read the report, Dr. Shapiro? It is all there in Black & White.

  14. Bring Back the WPA Says:

    Captain: “Sorry, WPA, the pension reform effort began long before Gina Raimondo.”

    The first attempt in Calif was in 2005 when Schwarzenegger proposed converting CalPERS DB to 401(k)s. PERS was 90% funded, there was no funding crisis, so why 401(k)s then?

    The NY Times wrote 1/23/05: “The impetus for Mr. Schwarzenegger’s plan comes from some of the same … Wall Street interests pushing President Bush’s Social Security initiative. …Some opponents of privatization also detect a subtler agenda among those pushing private accounts – to silence … pension fund managers, who oversee some of the largest institutional investment accounts in the nation. CalPERS has been a leader in an effort to bring greater accountability to corporate boardrooms.”

    So there you have it. “Pension reform” has always been first and foremost a power grab by Wall Street for 401k fees and to stop CalPERS investor activism.

  15. Ed Grimley Says:

    Pension reform is a Wall Street power grab
    I like it
    Makes a lot of sense
    And the useful idiots line up in single file shuffling like sleepers from their cubicles

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