Pension Funds Seek to Nominate Marsh Directors

A group of major public pension funds said Monday that they would attempt to elect their own candidates to the board of Marsh & McLennan Cos., the parent of scandal-tainted mutual fund giant Putnam Investments.

The move could become the first test of a proposal the Securities and Exchange Commission is considering to make it easier for investors to break up clubby and unresponsive boards.

The shareholder resolution -- filed by the California Public Employees’ Retirement System, the California State Teachers’ Retirement System, the New York State Common Fund and the American Federation of State, County and Municipal Employees’ pension plan -- seeks to nominate at least two directors to Marsh’s board.

Gerald McEntee, chairman of AFSCME, said the funds targeted Marsh because of “its gross failure to have proper controls that could have prevented the Putnam disaster.”

Putnam was the first company charged with fraud by state and federal regulators in the probe of fund trading abuses by insiders and by favored clients. Putnam settled the charges with federal regulators in November, but the firm has continued to see assets flow out as angry investors have fled.

Shares of New York-based Marsh have fallen from $51 in early September, when the industry scandal first was made public, to $44.59 as of Monday. They rose 38 cents for the day on the New York Stock Exchange.

The four pension funds said they owned 1.3% of Marsh stock.

Marsh responded with a sharply worded letter to the group, saying the basis for their proxy contest was “flawed and not supported by the facts.”

The firm said its board already is dominated by independent members, meaning they aren’t company managers. Nine of 15 directors are independent, Marsh said.

Nonetheless, the company said, it would welcome the opportunity to meet with the group and hear their suggestions for qualified director candidates.

“We are and have always been open to suggestions from shareholders about the company, its governance and other matters of mutual concern,” said Senior Vice President William L. Rosoff.

Under existing SEC rules, shareholders who want to nominate a candidate to a company’s board without management’s support have to wage a costly proxy battle, spending money to get access to shareholder lists, mail investor solicitations and fight company challenges.

In the wake of the corporate scandals of recent years, the SEC in October proposed a rule change to ease the way for investors to nominate their own candidates to boards. The SEC has sought public comment on how best to open the process, and it expects to vote on a final rule next year.

Often, a corporate board is handpicked by the chief executive. Critics say that means boards can be more beholden to the CEO than to shareholders.

Under one reform scenario the SEC discussed, investors would face a two-step process: First, investors who had owned at least 1% of a company’s stock would have to persuade a majority of shareholders to vote at the next annual meeting in favor of directly nominating directors.

If successful, the following year an investor or group of investors who held 5% of the firm’s stock would be able to put candidates on the official proxy ballot.

Restrictions also might apply in terms of how long investors must own a stock before they can get access to a proxy.

The four pension funds said they were filing their resolution regarding Marsh’s board in anticipation of SEC approval of a rule change.

The concept of direct shareholder nomination of directors has been opposed by some business groups that say such a change could lead to confusing ballots. Others have contended that opening the process could lead to special-interest directors getting board seats.

Pension funds and other big investors have insisted they aren’t interested in gaining control of boards, but want directors to be more responsive to shareholders’ concerns.

“We are talking about accountability, not control,” said David Neustadt, spokesman for New York State Comptroller Alan Hevesi. “The best way to prevent scandals is strong, effective boards.”

Sean Harrigan, president of CalPERS, said big investors “do not have any interest in using the proxy statement process to nominate a director unless the problems are so severe they are Enron-esque. Putnam and Marsh & McLennan’s problems are in that category.”