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Shareholder Activism: CalPERS

News
The $100-billion California Public Employees' Retirement System (CalPERS) announced on September 18 that its Board had approved its 1997 corporate governance "model" to evaluate and grade the nation's 300 largest companies.

Analysis
I would like to use this news as an illustration of "shareholders activism" as a mechanism to discipline corporate management.

Corporate managers are the agents of the shareholders and thus are expected to engage in activities that would maximize shareholders’ value by maximizing the market price of the stock. However, these two groups can potentially have divergent interests leading to what is commonly referred to as the "principal-agent problem."

One source of pressure on management to induce them to act in the best interest of shareholders comes from shareholders. However, medium and large U.S. corporations tend to have thousands of shareholders, and coordinating the desires of such a heterogeneous group is almost impossible. That is precisely where large groups of shareholders become valuable. CalPERS with its $100 billion pension plan can make corporate shareholders very attentive. It can publish a list of companies that it believes are underperforming. Such negative publicity tends to depress the stock prices of the targeted companies. Obviously, if corporate managers have a significant portion of their compensation tied to the price of the company’s stock, underperformance would translate into lower compensation.

CalPERS’ strategy is to meet with each company's independent directors to discuss performance and shareholder value. If the companies don't cooperate, CalPERS may take more aggressive steps, like filing shareholder proposals or voting against a management slate of directors. Efforts have forced corporations ranging from General Motors Corp. and IBM to Charming Shoppes Inc. and Venture Stores Inc. to take notice of shareholder concerns over the past 11 years.

CalPERS won't name the companies it plans to target until January or February. Typically, this gives the system time to work with companies before making its efforts public.

According to the L.A. Times (September 20, 1996), this year the system plans to again target small and medium-sized companies. To be a target, a company must rank among the "poorest long-term relative performers as compared to industry peers, based on stock price." These companies also must be part of CalPERS' stock portfolio, which has more than 1,500 companies.

Nationwide, public employee retirement assets total about $2 trillion

CalPERS’ Muscle Might Be In Jeopardy
A state of California bill to let public employees take billions of dollars out of CalPERS’ pension programs and manage their own retirement plans is on hold till next fall. Under the bill, state employees would get to choose whether they want to continue participating in the current program or make a ``defined contribution'' to a self-directed program like a 401(k) plan.

Mutual fund companies, which manage hundreds of billions in retirement plans of their own, are strong supporters of the measure, as are banks, insurance companies, dozens of cities and others who stand to benefit from its passage. Taxpayer groups also have expressed their support.

If history is any guide, public employees in other states have only shifted a modest portion of their funds to private 401(k) plans. According to the San Francisco Chronicle (June 29, 1996), in Oakland County, Mich., about 40 percent of eligible employees moved more than 10 percent of their pension fund's assets to a defined contribution plan. More than 60 percent of employees in West Palm Beach, Fla., transferred nearly 15 percent of their assets.

By Alex Tajirian