The Pension’s Pugilist
Dale M. Hanson, executive officer of the California Public Employees Retirement System, thrives on what he calls “constructive tension.” And he’s creating a lot of it in corporate boardrooms.
Earlier this year, he backed a hostile takeover attempt at Lockheed and filed a lawsuit against Occidental Petroleum. He is considering joining a suit against the parent of United Airlines. He’s also waged battles against company managers at firms ranging from Avon and USAir to Consolidated Freightways and Halliburton.
In his spare time, he lobbies Congress and the Securities and Exchange Commission on his proposals to revamp the nation’s rule book on proxy solicitations and tries to organize a coalition of other concerned investors.
Hanson’s goal is simple: increase shareholder rights and management accountability. In the long run, he says, that should result in increased share values.
Although his rhetoric sounds a lot like that of the corporate raiders of yesteryear--or even of company gadflies--Hanson has much more clout. Between his ideas and the power of his $58-billion fund, the fourth-largest pension fund in the world, Hanson may change the way companies deal with their shareholders.
“We have a hope, a goal, that at some point in time we will see a return to a balanced triangle of power between shareholders, the board and management,” Hanson said.
That’s a mouthful.
Hanson and many shareholder activists maintain that companies have not been responsive to shareholders since the days of J. P. Morgan, when owners were frequently managers and vice versa. Today, company executives often hold minuscule stakes in the firms they run, yet their control is so complete that Hanson compares public corporations to feudal monarchies.
“In the main, companies ignore their shareholders,” said Phil Copeland, president of the Los Angeles chapter of the American Assn. of Individual Investors. Company managers “know they have to have a meeting once a year and have to send shareholders some information, but they generally hope shareholders will not get too involved.”
Enter Hanson.
The 47-year-old, barrel-chested Wisconsinite blew into California three years ago with some old-fashioned ideas about investing.
“We’re not just investors,” Hanson said. “We are investor-owners, and as an owner, we have a duty to be active.”
Bustling through CalPERS’ modern Sacramento headquarters in his shirt sleeves, Hanson has the look of a street fighter. He smiles mischievously when talking about the variety of disputes he’s had with major corporations. And he acknowledges that just by taking the job, he was risking a battle.
Hanson, in fact, was hired as the fund’s top executive when CalPERS’ board was deeply divided along partisan lines. The 13-member board had just fired Hanson’s predecessor, Sid McCauslin. Half wanted to replace McCauslin with a staunch conservative; the other half wanted a liberal. Hanson, who was then second-in-command of Wisconsin’s Employee Trust Funds, was told by a number of friends and advisers that joining such a divided board was a losing proposition.
But State Controller Gray Davis, an ex officio member of the board, said Hanson’s selection was a turning point.
“It was a unifying event,” Davis said. “The board got together and selected the best candidate. And Dale has been able to maintain that cohesiveness for the past three years.”
It hasn’t been easy, though.
“We have a unique situation from the standpoint that we know that, nearly always, half of the board will not like any given proposal,” Hanson says. He combats that by providing trustees with volumes of information but says he refuses to participate in a fight.
“You have to let the board solve the problems,” he says.
But when it comes to fighting with company managers, Hanson doesn’t hesitate to step into the fray.
Indeed, nearly since the day he took the helm of California’s biggest retirement system, Hanson has made headlines with aggressive investment practices and shareholder activism. He landed the job in April, 1987, when stock prices were rising at a rapid clip. Several months later, just after the Dow Jones industrial average crashed a record 508 points, CalPERS decided to buy $1 billion in corporate stocks--a risky and controversial move.
It wasn’t Hanson’s last.
More recently, he’s taken the fund heavily into “indexing”--buying all stocks in a particular index, such as the Standard & Poor’s 500, to match the performance of the market as a whole. Some critics maintain that that’s a risky strategy.
But Hanson maintains that it’s the best course because the bulk of the nation’s money managers fail to meet or beat the performance of the index, and yet they often charge substantial fees. By avoiding the managers, CalPERS has been able to keep its costs low; the fund spends less than half of what comparable funds spend on managing its money, Hanson notes.
So far, CalPERS’ returns haven’t suffered. Last year, the fund’s total return was 14.8%, slightly more than the average pension fund return.
The strategy means “we have to tend the gardens with some companies that aren’t ideal,” Hanson said. Tend he does, with a combination of “jawboning,” negotiating, threatening and formal challenges at annual shareholder meetings.
The scope of Hanson’s interest is broad. He takes up everything from social issues such as divesting from South Africa and creating responsible environmental policies to questions of corporate governance, such as suggesting formal criteria for selecting chief executives and advocating confidential voting procedures for shareholders. (Companies are generally allowed access to records on how their shareholders have voted. In hostile contests, managers often try to get big shareholders to change their votes when they disagree with the company’s position.)
CalPERS generally does not get into specific areas of day-to-day management, but the pension fund has fought to create shareholder committees at some firms so that it and other owners can have a greater say in company operations.
Some company managers are less than impressed. But few would criticize CalPERS openly because of the power of Hanson’s fund.
“We can’t talk to them about strategy and long-term investments because they’re not listening,” grouses one manager who has had run-ins with CalPERS in the past. “The changes they’re pushing for don’t necessarily make sense. You can’t just apply a formula to management.”
The formula that CalPERS promotes is one of “good corporate governance.” In other words, Hanson wants managers to get rid of the anti-takeover plans and golden parachutes and give shareholders more rights. But even he’s not sure these changes will actually make companies more profitable or their stock more valuable.
“To say that corporate governance improves performance is stretching it,” Hanson says. “But lack of corporate governance can impede making changes in corporate performance.”
Moreover, he says: “Sometimes American companies need to get a shock to the system.”
That’s just what Hanson provides.
Consider Lockheed Corp. The Calabasas-based aerospace firm saw its earnings slide to nearly nothing in 1989, which spurred CalPERS to take a look at the way the company governs itself.
The pension fund wanted Lockheed to eliminate an anti-takeover plan and create a shareholder advisory committee, among other things. The company, which was then in the throes of a hostile takeover battle with corporate raider Harold Simmons, balked.
CalPERS backed Simmons. But what really irked Lockheed managers was that the pension fund publicly announced its plans to do so. The managers, grousing about Hanson’s “grandstanding,” felt that they had to work doubly hard to gain shareholder support because of the possibility that other public pension funds would follow CalPERS’ lead, according to insiders. Although the battle was eventually decided in Lockheed management’s favor, the pension fund’s role in the Simmons battle continues to rankle Lockheed insiders.
“In voting for Simmons, they were really expressing a view about management,” said one source close to Lockheed. “We felt that was uncalled for, and it was frustrating. We felt the decision (to support Simmons) had been made before we even talked to them.”
The pension fund may also join a lawsuit against UAL Corp., the parent of United Airlines, objecting to UAL using company funds to pay investment banking fees for a failed management-led leveraged buyout.
“I think it is absolutely ludicrous that the company will reimburse management $58 million because they couldn’t get financing for their takeover,” Hanson fumes. “And its more ridiculous because at one point they had another buyer (for UAL) and they shut him out.”
Nevertheless, shareholders’ chances of a clean-cut victory in any of these battles are probably slim. Generally speaking, managers have almost complete control over how company money is spent. In some cases, shareholders can approve plans to limit greenmail or anti-takeover devices, but managers are not bound to follow shareholders’ wishes, Hanson notes.
“What you are talking about is trying to make some of the most powerful people in the world more accountable,” said Ralph Whitworth, director of the United Shareholders Assn. in Washington. “I admire Hanson’s courage.”
Hanson sees progress even in the losses. Each year that he proposes the same initiative, CalPERS tends to pick up a few more votes, he says. He thinks that will eventually translate to more wins.
If not, Hanson’s “big stick” is the sheer value of California’s pension system. CalPERS has $23 billion invested in company stocks today, and Davis says the system’s assets are growing so fast that it must invest an additional $400 million each month. With that kind of cash, Hanson has enough money to take control of many a large company. And he knows it.
Companies shouldn’t complain about CalPERS policy to avoid large investments in single firms, Hanson says. “These companies . . . don’t seem to realize that we could come in and take a 10% stake and just love ‘em to death.”
Still, Hanson’s most effective weapon may simply be time. The pension fund is a long-term investor that just doesn’t go away, he notes. If he’s unhappy with what a company is doing, he’s likely to fight it out year after year until some changes are made.
