To Foes, CalPERS Needs to Check Itself

The genius of the U.S. Constitution, as every schoolchild learns, is the simple concept of checks and balances among the executive, legislative and judicial branches of government.

In the world of corporate governance, the checks and balances on executives historically have been supplied by company directors and by state and federal regulators. But as we learned with the rash of corporate financial scandals of the last few years, directors and regulators can doze off at the wheel.

That reality fueled a new surge in activism by shareholders, specifically by public- employee and union pension funds that were stung by the heavy losses suffered in shares of Enron Corp. and other scandal-ridden firms. The pension funds also felt, with justification, that company directors and government regulators had failed them.

It was inevitable that, as the activists have pushed harder for business governance reforms, at some point the corporate world would say, “Enough.” That day appears to have arrived. And a primary target of business wrath is the California Public Employees’ Retirement System.

CalPERS, the nation’s largest public pension fund, has provoked the Business Roundtable, the U.S. Chamber of Commerce and the Republican Party by waging a vituperative campaign to remove Safeway Inc. Chief Executive Steven Burd and by taking a zero-tolerance stance on directors who allow their companies’ independent auditors to perform non-accounting services for fees.

The hyperbole is flying on both sides.

The California Republican Party titled a May 5 news release “It’s the Union, Stupid!” The release posited that CalPERS’ reform ideas were driven by a union agenda, potentially at the expense of the $166-billion fund’s fiduciary responsibility to its 1.4 million members and retirees.

State Treasurer Phil Angelides, a CalPERS board member and a probable Democratic candidate for governor in 2006, has subsequently shot back with attacks lumping the fund’s critics together as “economic royalists,” a term coined by President Franklin D. Roosevelt to describe wealthy forces that he believed were trying to control the economy in the 1930s.

Some Californians may not be surprised by charges that CalPERS has a union agenda. It is, after all, a pension fund whose membership of state, school and local agency employees is heavily unionized, so the 13-member board is dominated by people with labor ties.

As the police chief in “Casablanca” intoned, “I’m shocked, shocked.... “

Still, CalPERS should know it has to be careful about being perceived as overtly political, or union-led, in its corporate governance efforts.

For one thing, the fund risks scaring off other investors that might otherwise be inclined to join it in pushing for reforms.

For another, CalPERS is required by the state Constitution to be a responsible fiduciary, meaning it is supposed to focus on providing good investment returns for its beneficiaries. By definition, that means the fund’s shareholder activism can’t be motivated by personal vendettas of its directors.

The campaign to oust Safeway’s Burd has left CalPERS particularly open to criticism.

The fund’s president, Sean Harrigan, is a senior executive with the United Food and Commercial Workers union. (Like corporate directors, most of the CalPERS directors have day jobs.) The union represents Safeway employees in Central and Southern California who struck the grocery giant and its main rivals last fall. The strike ended in February with a new contract that cut pay and benefits for new hires, a key demand of Safeway.

So CalPERS’ push to remove Burd has naturally raised some eyebrows.

Rob Feckner, the CalPERS board’s vice president who serves as the representative of school employee members, said the campaign had been orchestrated by him, not by Harrigan.

“All of the decisions have been mine,” Feckner said. “This was my lead.”

CalPERS has argued that Burd should be removed because he has badly mismanaged Safeway. The fund points to a 66% decline in Safeway’s stock price since early 2001. The average blue-chip stock is down about 17% in the same period.

But it has been extremely rare for CalPERS, or any public pension fund, to demand the resignation of a chief executive.

What’s more, Burd can appeal to shareholders with a simple question: Faced by larger competitors such as Wal-Mart Stores Inc., shouldn’t Safeway pursue a policy of cutting costs, including labor expenses, to boost its competitiveness and profit -- and the stock price?

That may have resonated with investors at Safeway’s annual meeting on Thursday. CalPERS, joined by some other pension funds, sought to have shareholders withhold their votes from Burd in his reelection bid for a board seat. Yet Burd won 83% of votes cast.

His opponents can say that having 17% of shares withheld makes a statement, but it wasn’t close to the statement that Walt Disney Co. shareholders made in withholding 45% of the vote from CEO Michael Eisner in March.

There’s another reason CalPERS has to be sure to take the high road in corporate governance: If the fund can’t demonstrate that its portfolio returns are benefiting from its business reform agenda, critics can say CalPERS is costing California taxpayers money.

This year, the state will be on the hook for a payment of as much as $2.6 billion to CalPERS to keep the plan properly funded. That payment makes up what the fund’s investment returns couldn’t provide.

Harrigan said it wasn’t fair to blame the fund for poor overall returns since 2000. Given the bear market in stocks from that year through 2002, all pension funds have struggled, he said.

He said CalPERS’ policy of prodding companies to improve their governance -- to elect vigilant independent directors, for example, and to rein in executive pay -- unquestionably had provided a payoff in lifting targeted firms’ stock prices over time.

“Probably the wisest money we spend is money spent being active owners,” Harrigan said.

But even some of CalPERS’ allies allow that the effects of shareholder activism are as yet difficult to quantify.

“This is an investment strategy in its infancy,” said Nell Minow, editor of the Portland, Maine-based Corporate Library, a governance research service.

Still, she said, investors in general should be happy that funds like CalPERS are asking more questions about business practices in the name of boosting long-term shareholder value.

Minow noted that critics say CalPERS has no business trying to apply tougher standards for accounting firms -- in terms of the services they can provide companies whose books they audit -- than what Congress decreed in the Sarbanes-Oxley corporate reform act of 2002.

What’s the harm of another opinion? Minow asked. CalPERS can’t decree corporate policy. It can only advise, or protest with its share votes. It seeks to provide a check on corporate managers, but all investors are free to make up their own minds on governance issues.

At Intel Corp.’s annual meeting last week, shareholders voted 54% in favor of expensing stock option costs. Two days later, Yahoo Inc.’s shareholders rejected expensing options, with 53% of shares cast against the idea.

Companies aren’t democracies, but shareholders are entitled to let their views be known. From time to time, managers and directors might even learn something useful from their investors -- including how to keep their company in business.

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Tom Petruno can be reached at tom.petruno@latimes.com.