CalPERS Takes Aim at 6 Underperformers
In an annual ritual that companies have come to dread, the California Public Employees Retirement System on Wednesday named six firms that it says must improve financially and adopt more enlightened rules for corporate governance.
The companies on the 2006 edition of CalPERS’ “Focus List” are Brocade Communications Systems Inc., Cardinal Health Inc., Clear Channel Communications Inc., Mellon Financial Corp., OfficeMax Inc. and Sovereign Bancorp.
San Jose based-Brocade, which makes communications equipment, was the only California company on the list.
CalPERS chose the companies from 1,800 in its portfolio of U.S. stock holdings. Officials at the nation’s largest public pension fund said they intended to pressure the companies to boost earnings and make it easier for shareholders to replace directors and amend corporate bylaws.
“The stock performance and governance of these companies are unacceptable to us and other shareholders,” said CalPERS board President Rob Feckner.
The fund’s top stock specialist, Christy Wood, said CalPERS -- at times working with other institutional investors -- would use its clout and votes at proxy meetings to persuade companies to change. CalPERS has no plans to sell stock to punish corporations that do not meet its demands, Wood said.
She said CalPERS, with assets of $208 billion, has a track record of getting what it wants. Companies on the 2005 and 2004 lists, including insurance giant American International Group Inc. and Walt Disney Co., made “positive changes” and avoided continued scrutiny from CalPERS fund managers, Wood said.
This is the 14th year that CalPERS has issued its Focus List, which fund officials and outside analysts contend often leads to governance reforms and improved earnings performance at target companies.
“You don’t want to be on the CalPERS list,” said Paul Lapides, director of the corporate governance center at Kennesaw State University in Georgia. “Each one of the company boards will think long and hard about being on a list and what kind of changes they need to make to their corporate governance structure.”
A 2001 study by Wilshire Associates, an outside consultant for CalPERS, found that stock values of Focus List companies outperformed the Standard & Poor 500 Index by 8.1 percentage points over five years following the listing.
New research by Brad Barber, a UC Davis finance professor, suggests that short-term jumps in the value of Focus List stocks added $3.1 billion to the CalPERS portfolio between 1992 and 2005. Long-term gains, which are harder to quantify, could have reached as much as $89.5 billion over the same period, Barber said.
This strongly supports the notion that CalPERS lobbying rights improves shareholder value, he said.
In this year’s list, CalPERS criticized all the companies except Clear Channel for demanding supermajorities of as much as 80% to change bylaws. Corporate boards at OfficeMax and Sovereign rely on the supermajorities and other tough procedural rules to fend off potential takeover attempts, CalPERS officials said. At the same time, such defensive postures limits the ability of shareholders to push for changes in corporate governance.
CalPERS’ Focus List complaints also tagged Cardinal and Clear Channel for granting excessive severance pay, and Clear Channel for overpaying executives.
The targeted companies said they were eager to update CalPERS officials on improvements made to both their corporate governance procedures and their stock performance.
Although she conceded that “share price has not performed well recently,” Lisa Dollinger, the chief communications officer at San Antonio-based Clear Channel, said a recent realignment of business units should increase shareholder value.
Pittsburgh-based Mellon and San Jose-based Brocade said they had been actively engaged with CalPERS and were disappointed to be placed on the Focus List.
“We are committed to shareholder value and good corporate governance and will continue to make improvements on an ongoing basis,” said Leslie Davis of Brocade.
