The nation's largest public pension fund has issues with how the country's largest department store governs itself.
The California Public Employees' Retirement System will withhold votes for Sears, Roebuck and Co. Chief Executive Alan Lacy and three other directors because the Hoffman Estates retailer does not hold annual elections for board members.
Calpers will also vote against Sears' auditor, Deloitte & Touche LLC, for performing non-auditing functions. Sears' annual shareholder meeting is May 13.
"It's an opportunity for us to vote our proxies for good corporate governance," Calpers spokeswoman Pat Macht said Wednesday.
Sears has almost 215 million shares outstanding, so Calpers' 374,147 shares represent less than 1 percent. But the California fund is an influential force in corporate governance.
In March, Calpers was part of a shareholder revolt against Michael Eisner, chairman of the Walt Disney Co., in which 43 percent of Disney shareholders withheld support for Eisner's re-election to the Disney board.
Calpers believes that annual elections for board members foster greater accountability.
Sears' directors serve staggered three-year terms. Besides Lacy, up for election this year for terms expiring in 2007 are former PricewaterhouseCoopers partner William Bax, former American Airlines Chief Executive Donald Carty and Piper Rudnick adviser Hugh Price.
But Calpers' discontent with Sears could end up to be largely symbolic.
At last year's annual meeting, Sears' shareholders with 61 percent of the stock voted for a non-binding resolution seeking annual elections. The board didn't adopt the measure.
But even if Sears doesn't change its practice of three-year terms, at least one corporate governance expert suggests investors not give up.
Change is widespread
"Sears is swimming against the tide," said Patrick McGurn, senior vice president for International Shareholder Services, a proxy advisory service.
ISS also recommends that investors withhold votes for Lacy, Carty and Price for repeatedly rejecting shareholder resolutions to elect directors annually, known as "declassifying" the board.
ISS and Calpers are seeing progress. Earlier this week, Avon Products Inc. announced that it will submit a proposal in the company's 2005 proxy statement to declassify its board, leading to the annual election of directors.
"We've seen 40 companies putting management proposals to repeal a classified board structure on their 2004 ballots," McGurn said. "The tide has turned on the issue."
Do longer terms add stability?
Sears argues that staggered, three-year terms make it tougher for a hostile acquirer to remove all the directors at once. The company added that three-year terms ensure that directors get enough time to understand the business.
"Many boards took the same position that Sears is taking, talking about stability. But what you've seen over the past 12 to 18 months are boards being more responsive to shareholders and eliminating the classified structure," McGurn said.
Merck & Co. Inc, for example, ignored five straight majority votes from shareholders to change its structure before recently making the change, he said.
Calpers has other beefs with Sears directors Bax and Carty.
Both are members of the Sears audit committee that authorized Deloitte to perform non-auditing services for the company. Calpers believes such arrangements are a conflict of interest.
Sears paid $9.6 million in fees to Deloitte in 2003, the retailer's proxy shows. Of that, about $7 million was for audit-related fees but the rest of the costs ranged from preparation of international tax returns, tax-credit consulting and software licensing.
Calpers has said it expects to withhold votes from audit committee members at 90 percent of the roughly 3,000 companies where it casts votes.
The pension fund said it also will support another proposal opposed by Sears management. It is voting to create a shareholder committee that would meet with the board, particularly its independent directors, if a shareholder resolution is adopted but not carried out.
Sears said it already has open communications with its stockholders.
Sears has three major investors: ESL Partners, a Greenwich, Conn., investment house that owns 13.5 percent of Sears' stock; State Street Bank & Trust Co., which holds 11.3 percent, most on behalf of participants in Sears' 401(k) program, and AXA Financial Inc., which owns 5.4 percent.Calpers to withhold votes for 7 Ford directors.