A crusade by the $167bn California Public Employees Retirement System (CalPERS) to improve corporate governance is dividing the pension fund industry in the US.
America’s biggest pension fund has said it will withhold votes this year from directors at 90 per cent of the 3000 companies in which it owns stock.
It is focusing on two main issues: the independence of directors from real or perceived conflicts of interest and the separation of auditing and non-auditing services by external accounting firms.
Its targets include some of the biggest names in corporate America such as Berkshire Hathaway’s Warren Buffett, Apple CEO Steve Jobs and former vice-president Al Gore.
Brad Pacheco, a spokesman for CalPERS, said some of the $10bn loss in the fund’s assets over the past three years could be attributed directly to poor corporate governance.
He said: “All state funds have suffered from the collapses of Enron and WorldCom, and we believe there is a link between good performance and good corporate governance.”
Many of the large public funds had previously backed CalPERS in its corporate governance scraps but its recent campaign to oust Citigroup chairman Sandy Weill and chief executive Charles Prince seems to have polarised opinion.
CalPERS opposed Mr Weill because he was at the helm of the company when its investment-banking unit was involved in the Wall Street scandals that forced the company to make a huge payment to settle civil charges against it.
CalPERS said it preferred to have an independent director serve as chairman rather than Mr Weill. As for Mr Prince, it said he had a conflict because his wife was a partner at a firm that provided some legal services for Citigroup.
Lining up behind CalPERS to block the re-election of both men were the New York State Retirement Fund and the Institutional Shareholders Services, the provider of proxy voting services.
In the opposing camp, the New Jersey Investment Council, the Massachusetts Pension Reserves Fund and the New York City Employees Retirement System all supported their re-election.
Scott Taffet, a spokesman for the comptroller of The New York City Employees Retirement System, said CalPERS had done what it felt was right for its membership.
He said: “Different pension funds have different litmus tests and, in this case, we differed from CalPERS but we may well vote with them in the future.”
Orin Kramer, chairman of the New Jersey State Investment Council, had previously backed CalPERS in its bid to oust Michael Eisner at Disney but said its current campaign had gone too far.
He said: “If we’ve moved to the point of having a rigid checklist on corporate governance, which tells us that we’re supposed to reject Warren Buffett and half the Citigroup board, then the rules have taken precedence over the purpose of the game.”
In the case of Citigroup, the action by the Californian fund failed to bring down the board of directors. CalPERS holds less than 0.5 per cent of the shares and does not seem to have drawn a groundswell of support for its positions. CalPERS was also unsuccessful in its bid to remove KPMG as Citigroup’s auditor.
The Californian fund remains unmoved by the flagging support for its fight on poor corporate governance.
“We have a very high standard on the auditor issue compared with other pension funds, but we are all after the same goal,” said Mr Pacheco.
CalPERS sent out a letter in April last year to 2700 companies in its portfolio warning them not to allow auditors to perform non-audit services.
“This is a new policy,” explained Mr Pacheco. “We started withholding some proxy votes last year but the bulk of them are going out this season”
CalPERS is hoping its campaign will chip away at poor standards in companies.
“Our goal is to make them accountable,” added Mr Pacheco. “If next year we can reduce the number of votes we withhold from 90 to 70 per cent, then we will have achieved something. “
CalPERS has a long history of activism. Jesse Unruh, the state treasurer in the 1980s, raised the fund’s profile in corporate America and he was also involved in forming the Council of Institutional Investors.
The fund seems to have been emboldened by the role it played in the high-profile putsch against Michael Eisner, who was forced to step down as chairman of Disney last month. Mr Eisner remains Disney’s CEO.
It was CalPERS that mobilised a coalition of pension boards to challenge Disney and it was CalPERS that ratcheted up the pressure on Dick Grasso, the chairman of the New York Stock Exchange (NYSE) in Autumn last year.
Mr Grasso left the NYSE amid uproar over his $188m compensation package.
However, the divisions created over Citigroup are likely to be exacerbated as CalPERS takes its campaign to other boardrooms.
Its opposition to the re-election of Warren Buffett, the almost universally regarded chairman and chief executive of Berkshire Hathaway, tothe board of Coca-Cola has proved even more contentious.
The fund withheld support from all members of the group’s audit committee, which includes Mr Buffett, because it authorised the company’s auditor to perform non-audit services.
Institutional Shareholders Services (ISS), the provider of proxy voting and corporate governance services, has been one of its few backers in the push against Mr Buffett, who has served on the Coke board for 20 years.
Others have likened the move against Mr Buffett to a witch-hunt.
Under the ISS definition of independence, Mr Buffett is considered an “affiliated outsider” because of the many relationships that Berkshire Hathaway subsidiaries have with Coke.
“We have absolutely no issues with Warren Buffett serving on the Coke board,” explained John Connolly, chief executive and president of ISS. “However, under our view of best practice corporate governance, we believe Mr Buffett should move off the audit committee to ensure that Coca-Cola shareholders benefit from complete independence on that key panel.”
Responding to criticism of its move against Mr Buffett, CalPERS simply said: “Good people could be associated with bad decisions.”
Stephen Davis, president of Davis Global Advisors, a US corporate governance consultant, believes CalPERS may rein in its campaign now corporate governance is in the spotlight.
He said: “CalPERS is taking a vanguard position in trying a new approach. It is probably going further than the bulk of the activist community. The pack may take different position and CalPERS may even backtrack.”
