Rolling up its sleeves for a new skirmish with Corporate America, the powerful California Public Employees Retirement System has put Chrysler Corp. on notice that it doesn't like the auto maker's plan to sell millions of new shares.
CalPERS holds 1.6 million of Chrysler's 224.5 million outstanding common shares, and the giant pension fund does not relish their losing value if the No. 3 U.S. auto maker follows through with plans to offer 33 million new shares and distribute 23 million shares to the company's pension plan.
"The new equity issue is going to have a quite negative effect on current shareholders," Dale M. Hanson, CalPERS' activist chief executive, said in an interview Friday. "We'd like to see some other things done at Chrysler (such as reducing debt) than just coming back to shareholders for a bailout."
On Aug. 7, Chrysler announced plans to issue the shares as part of a plan "to strengthen its financial condition by adding to its equity base." Chrysler said at the time that the offering would help stabilize its credit ratings and enhance funding of the company's $16.6-billion five-year program for new products and plant modernizations.
But the flood of new shares would also depress the value of current holders' stakes, the company has acknowledged.
In an appearance on Cable News Network Thursday night, Hanson mentioned that the $64.2-billion CalPERS fund planned to target Chrysler Corp. for some sort of action in the coming proxy season.
However, Hanson indicated Friday, the hope was that by naming Chrysler he could induce the company to involve more institutional investors such as CalPERS in its current "road show" about the offering. Chrysler executives and Salomon Bros., the underwriter, are attempting to woo investment analysts in a series of meetings.
Following the news, Chrysler shares fell 37.5 cents per share to finish at $11 in New York Stock Exchange trading.
Hanson is no stranger to using such "corporate governance" techniques. Since becoming head of the fund in 1987, he has pushed into the vanguard of the institutional-shareholder movement, using shareholder proposals and negotiations to win changes in management compensation, board makeup and policies.
On Monday, CalPERS' investment committee plans to whittle to a dozen a long list of poor performers that the fund intends to target for further action. Among the possibilities, Hanson said, are Time Warner and USAir. Among other companies with poor records are Wang Laboratories, Bally Manufacturing, Salomon Bros., the troubled investment firm, and insurer USF&G.;
"We look at total shareholder returns over the last six years," he said. On the Standard & Poor's list of 500 stocks, he noted, Chrysler ranked 423rd with a minus 4.9% total return over that period.
How Pension Funds Influence Companies
Sarah Teslik, executive director of the Council of Institutional Investors in Washington, offers these "corporate governance" tools that pension funds can use to make companies more responsive:
* Sell or buy stock. Companies notice when a lot of little purchases or sales are made.
* Vote. This method is impersonal and inexpensive and comes with each share of stock, like a coupon on a box of cereal. A stockholder can vote "plain vanilla"--in other words, for everything the company wants--or tie the vote to an aspect of performance. For example, the fund could say it would always vote with management as long as there is an average 8% return on investment over five years.
* File a shareholder proposal. This can be useful in a narrow way to encourage change on a specific issue. It's relatively inexpensive. Although most such proposals still fail, this method is increasingly effective.
* Launch a proxy fight. Despite spending a fortune, the investor almost never gets the support of more than one-third of the board. No fund Teslik knows of has ever initiated a proxy fight. The likelihood is that the investor will get sued by the company, which will allege securities violations or misrepresentation. Buying a company is an expensive way to change its policies. Besides, would a fund want to buy a dud?
* Run candidates for the board. Robert Monks, president of Institutional Shareholder Partners, ran for the board of Sears, Roebuck & Co.--unsuccessfully--but he did get publicity about his concerns. Such an effort will be expensive. The company probably will not supply its shareholder list, making the campaign time-consuming and difficult. But getting someone on the board often makes management clean up their act.
With any one of these methods, Teslik notes, the investor can combine informal talks with companies, another potentially expensive method involving lots of travel. That, of course, is effective only if the fund has the power to back it up, as the California Public Employees Retirement System usually does.