Unrun Calls for Pension Funds to Flex Muscles

If Jesse M. Unruh has learned one thing after four decades in California politics, it is that “the public sector does not have a corner on incompetence.”

Unruh, for years one of the best-known and most influential state legislators in America, and now California’s state treasurer, is of the opinion that corporate America shares in the wealth of that commodity too.

So it is that Unruh, the consummate organizer, feels doubly committed to his latest crusade: organizing America’s largest source of capital, the pension funds, into an influential constituency for more effective decision-making on such critical shareholder matters as takeovers.

Through his brainchild, the newly formed Council of Institutional Investors, Unruh wants to strike out at a vice he holds in as much disdain as incompetence--ignorance.

“We can’t just sit there and watch the action pass by, and yet that’s exactly what we’re all doing,” Unruh said of the role pension funds play in the outcome of corporate takeover attempts. “Up to this point, we have all been used and generally abused by everybody--corporate raiders, arbitrageurs (a breed of takeover speculators) and management--because we are all so ignorant and ineffective in these situations.”

Target for Criticism

As support swells to find solutions for taming the latest corporate takeover wave and the devices that have sprung up to challenge unwanted takeover bids, pension funds have emerged as a target for much of the criticism.

Target companies, for example, say these institutional investors are much likelier than individuals to side with raiders, a problem for U.S. companies since many are more than half-owned by pension funds and other institutional holders. Moreover, because trustees of pension funds are bound by law to make investment decisions that bring their beneficiaries the highest immediate return, they have been accused of passively playing into the hands of corporate raiders, thereby fueling what some call the takeover craze.

Even Robert Monks, until recently administrator of the Labor Department’s pension and welfare benefits program, has called on pension funds to more vigorously exercise their rights as shareholders. “Is it unreasonable to ask,” he inquired recently, “that pension funds invest with the future in mind?”

Out of such concerns grew a crusade for Unruh, who served 7 1/2 years as speaker of the state Assembly before giving up the post to run unsuccessfully for governor against Ronald Reagan in 1970.

Shortly after joining the board of two California pension funds--with combined assets of more than $38 billion, two of the largest in the country--Unruh realized to his astonishment that here was a vast collection of wealth wielding virtually no influence. This was an amazing revelation for a politician whose trademarks are the manipulation of power and money.

“Money is the mother’s milk of politics,” the well-known turn of phrase, was his creation.

“We were sitting there, not really knowing what was going on, not talking to other pension funds, unable to respond in any way except to sit there” while decisions were being made by others that would greatly impact the funds’ investments,” said the 62-year-old Unruh.

This realization, he recalled in an interview last week in Los Angeles, coincided with the takeover mania’s escalation into the big leagues. In quick succession last year, Texaco, Walt Disney Productions, St. Regis and Carter Hawley Hale faced unwanted suitors.

In fact, it was Texaco Inc.’s March, 1984, buy-back from the Bass brothers of Texas of their 9.9% stake in the White Plains, N.Y.--based oil company, widely regarded as the largest “greenmail” case to date, that spurred Unruh into action. (The funds on whose boards he sits own about 2 million shares of Texaco stock.)

“I became acutely aware that something was seriously wrong when Texaco paid off the Bass brothers” with no input from large shareholders, said Unruh, who finds greenmail, the most controversial weapon in the raider’s arsenal of hostile-takeover devices, anathema. Often called legal corporate blackmail, greenmail occurs when a company buys back its stock from an unwanted suitor at a premium over the market price. It has been sharply criticized for benefiting a single shareholder at the expense of other investors.

“After a great deal of discussion, we decided to vote our stock against the payoff,” he said.

But it was not until the formation in California last month of the pension-funds council that this enormous resource group served notice that it is ready to flex its muscle in an organized fashion.

So far, 22 public pension funds have joined the council. All are public or quasi-public funds (representing state and local governments and unions), but Unruh said he thinks several corporate funds are on the verge of joining.

The council’s aim is to organize as many public and private pension funds as possible in order to “build another voice into the marketplace” and to enable even the smallest pension funds to get an audience with management when faced with difficult decisions on takeovers and corporate reorganizations. It does not, he stresses, “propose to become a lobbying group.”

The Los Angeles City Employees Retirement System, with assets of $1.3 billion, was lured to the council by the promise of information-sharing and by the extra clout a group with $100 billion in assets is likely to have. “We’re particularly interested in the long-term implications of (takeover) strategies being carried out in the market place, and that’s information we would hope to get from the council,” said Jerry F. Bardwell, the fund’s general manager.

First on the new group’s agenda? Sniffing out greenmail.

Last week, the council sought--and won--a meeting with Mesa Petroleum Co. Chairman T. Boone Pickens Jr. and Phillips Petroleum Corp. Chairman William C. Douce to determine what a pact ending the recent takeover bid for Phillips by Pickens means for other Phillips shareholders. Specifically, Unruh said, “we want to know whether it’s camouflaged greenmail.”

Despite its member funds’ ownership of an estimated 1.5% of Phillips stock, the council doesn’t even “know what the hell (the pact) means” for shareholders other than Pickens and for Phillips, Unruh said. The Public Employees’ Retirement System and the State Teachers’ Retirement System, on whose boards Unruh sits, own a combined total of about 2 million shares of Phillips.

Unruh said he believes the council is a much better way than legislation to strike out at such takeover devices as greenmail and golden parachutes, which are windfall severance payments given key executives forced out by a takeover. Such groups as the Business Roundtable, a public-policy group of chief executives, and the Securities and Exchange Commission, which has determined that anti-takeover moves hurt stock prices, have called for legislation to curb these perceived abuses.

An aide to Andrew Sigler, chairman and chief executive of Champion International Corp. and the leader of a task force reviewing hostile-takeover problems for the Business Roundtable, said “legislation created the problems with tender offers in the first place and only legislation can undo those problems.” His reference was to such legislation as the Williams Act, which regulates tender offers and large accumulations of stock.

But Unruh said, “I’m not inclined personally to support economic marketplace legislation to do away with takeovers,” mostly because “there is so damned much smartness in the investment field that anything the lawmakers can come up with, (Wall Street) can find a way to get around.”

Moreover, “legislation more often just assuages pressure instead of providing . . . solutions,” because once the law is passed, legislators “just walk away, and the pressure dissipates.”

In the interview last week, Unruh also said the first organized muscle-flexing by pension funds is overdue, challenged the long-held view that pension-fund trustees are prohibited from questioning investment decisions that are financially rewarding for the funds’ beneficiaries, argued that the pension-funds group is neither anti-management nor anti-takeover and said the council may in the future tackle others of the “scads of problems” facing corporate shareholders that “nobody is dealing with.”

Unruh’s call for an end to pension-fund passivity has been endorsed by public and private pension funds, as well as by some notorious dissidents, who have in the past profited from the funds’ passivity.

“After the first public utterance I made on this, I got a letter from Boone (Pickens), saying this is absolutely the right thing to do,” Unruh said.

But not everyone is happy about the funds’ new-found backbone. “I’m beginning to hear some mutterings” from management interests, Unruh said. They go something like this: “Boy, if those pension funds ever get together, the next thing you know, they’ll be involved in management decisions.”

Unruh dismisses such concerns. “This group will never act in that much concert,” he predicted, “because we’re never going to be able to put together a group that is going to be monolithic.”

The council is designed strictly as a vehicle “for sharing information,” he said, not as a weapon for “fooling around in management decisions on a concerted basis.”

Even though he personally believes that institutional investors too often become extensions of management, blindly following its recommendations, Unruh said neither he nor the group is anti-management.

But neither is he diametrically opposed to hostile takeovers and the opportunities for enormous profit-taking they create.

“It is not my intent to destroy that kind of opportunity,” Unruh said. “I’m as aware as anyone of the (existence of) lethargic management that invites these takeover attempts. I just wish (pension funds) were getting in on more of the profits.”

What he does oppose is the long-held view that pension funds, as fiduciaries, haven’t the legal right to challenge a decision affecting their investments as long as that decision is in the best financial interest of the funds’ beneficiaries.

“I believe it is our fiduciary requirement that we know as much as we can possibly glean” before making a decision on such sensitive matters as a takeover, Unruh said.

As a matter of policy, “we may want to look at whether we want to be participating (as investors in companies) where we have no say” in decisions that directly affect the value of their investment, he said.

Such a dramatic shift in philosophy--toward a willingness to invest on the basis of things other than pure economics--could have a serious impact on the makeup of corporate ownership. The first test of that could come in the Phillips case.

As part of its pact with Pickens, Phillips proposes to set up an Employee Stock Ownership Plan with Phillips stock it would buy back from investors. Because ESOPs “are rarely ever independent entities,” Unruh said the council members “will have to decide whether we want to participate in something that is basically an extension of management” or whether they will sell their Phillips stock.