Business Applauds Shake-Up at CalPERS
The ouster Wednesday of one of the nation’s strongest voices for corporate reform may signal a turning point in the post-Enron era, as business groups push more aggressively to thwart activist shareholders.
Sean Harrigan, who as president of the California Public Employees’ Retirement System led efforts to impose more accountability on big business, will lose his job after the state Personnel Board voted 3 to 2 to replace him as its representative to the pension fund. The move was expected.
Harrigan’s departure was cheered by the U.S. Chamber of Commerce in Washington, which in a statement said it hoped “the change would lead to broader reforms at CalPERS and other public pension boards across the country.”
Some of Harrigan’s allies at other large investment funds expressed concern that his removal marked a significant victory for business interests in their campaign to stymie shareholders seeking more clout in the executive suite.
“Things are moving more in the corporate side’s direction,” said Ann Yerger, acting executive director of the Council of Institutional Investors, a Washington-based advocacy group for large pension funds.
But she and other fund representatives also said Harrigan’s sacking could spur shareholders to ramp up their attempts to rein in executive pay and confront company directors on other issues of corporate performance.
“There is a risk that this could have a chilling effect, but I think it actually will strengthen shareholders’ backbone,” said Michael Garland, an officer in the AFL-CIO’s investment division.
Yerger added that New York Atty. Gen. Eliot Spitzer’s recent allegations of widespread bid rigging and other illegal practices by insurance companies should serve to boost public support for more corporate accountability.
“From our standpoint, there is a lot more to do,” she said.
For their part, business groups and the California Republican Party insisted that they had not lobbied the Personnel Board to reject Harrigan. But they repeated previous attacks on Harrigan, a supermarket union official who critics say has used his post at the $177-billion CalPERS fund to advance the cause of organized labor.
“The nation’s largest pension fund has been managed by people with a real political agenda,” said Karen Hanretty, a spokeswoman for the state Republican Party in Sacramento.
Harrigan and CalPERS became key targets in a concerted push-back by business in recent months, after two years of general acquiescence to tougher state and federal oversight.
The wave of corporate scandals that began with energy giant Enron Corp.'s collapse late in 2001 triggered public outrage and led to extensive new federal regulation of business accounting practices and the conduct of company officers and directors.
Congress in mid-2002 passed the Sarbanes-Oxley Act, the most sweeping corporate-reform law since the Great Depression. Among other things, it required chief executives to personally vouch for the veracity of company financial statements.
For CalPERS and other pension funds that had long sought to influence company conduct -- citing the aim of enhancing stock returns over time -- the spectacular meltdowns of Enron, WorldCom Inc. and other once highflying firms were viewed as vindication of the funds’ self-ascribed watchdog roles.
Activist shareholders’ optimism about their efforts may have reached its zenith in March, when they sought other investors’ support in a no-confidence vote for Walt Disney Co. Chief Executive Michael Eisner at the company’s annual meeting.
Eisner, who had been held up by CalPERS and other pension funds as a prime example of executive greed for his pay and for what the funds asserted was his unwillingness to listen to shareholders, suffered a stinging rebuke: He was rejected by the holders of 45% of the shares voted in his reelection bid as a director.
Typically, dissident shareholders have struggled to reach even the 5% level in such votes.
But as the corporate annual-meeting season progressed through the spring, CalPERS increasingly found itself on the defensive on two of its campaigns.
One was an effort to oust Steven Burd, CEO of supermarket chain Safeway Inc., the parent of Vons and Pavilions in Southern California. CalPERS said Burd’s stewardship of Safeway had hurt shareholders, but CalPERS’ critics said Harrigan -- whose union was at war with Safeway -- was simply seeking to punish Burd for the long Southland supermarket strike that ended with workers agreeing to major concessions.
The other campaign centered on a newly adopted CalPERS policy that required the fund, at annual meetings, to vote its shares against any directors who allowed their firms’ accountants to perform certain other fee-generating services.
The policy, meant to target perceived conflicts of interest in auditing, was so broadly written that CalPERS automatically voted against hundreds of directors -- even though the fund insisted it wasn’t signaling that the directors were unfit to serve on boards.
For the U.S. Chamber of Commerce, the Business Roundtable and other corporate groups, Harrigan and CalPERS quickly became symbols of what many executives decried as excessive meddling in business affairs by activist shareholders.
Under Harrigan, CalPERS “has been a glaring example of the way organized labor hijacks public pension boards to advance its own agenda at the expense of shareholders,” David Hirschmann, a senior vice president at the chamber, asserted Wednesday.
Hirschmann said the chamber “absolutely supports” the idea that shareholders should be involved in improving corporate governance, and he said the issue of executive pay was “a very legitimate governance issue.”
He and other business leaders also said they weren’t seeking to roll back the major provisions of Sarbanes-Oxley and other corporate reform laws.
However, they want a time-out on new regulations.
Since 2002, “there have been tremendous reforms, and now we need to see what the impact is before enacting new rules,” said Tita Freeman, a spokeswoman for the Business Roundtable in Washington.
In addition, the chamber and the Business Roundtable say pension funds and other activist investors shouldn’t be able to target corporate practices in the name of narrow agendas that don’t have all shareholders’ interests at heart.
To that end, both groups have vociferously opposed a pension fund-led proposal that would make it easier for unhappy shareholders to nominate their own director candidates for corporate boards.
The proposal has been bottled up at the Securities and Exchange Commission as SEC members have faced heavy lobbying by both activist investors and business interests.
Meanwhile, some pension officials say their gravest concern is that the backlash against the funds could presage a move by pro-business legislators in some states to abolish public pension funds and convert them to so-called defined-contribution retirement plans such as 401(k)s. This would effectively silence some of corporate America’s most powerful critics.
For now, though, many pension fund leaders insist they will continue to fight for greater corporate accountability, even though Harrigan’s impending exit is a clear blow to the movement.
“Sean has been a powerful advocate for corporate governance reform, and he will be missed,” said Alan Hevesi, New York state’s comptroller and a leading activist investor as trustee of the state’s pension fund. “But the corporate governance movement is bigger than any one individual.”