Early last fall, the California Public Employees' Retirement System--undisputed tiger of America's activist shareholders--suddenly said it was changing its stripes.
Instead of confronting corporations with proxy resolutions at this spring's annual meetings, the $68 billion pension fund had decided to try a "kinder, gentler" approach: It was quietly calling on executives at 12 companies to discuss their poor performance, excessive pay, or board problems, just as some chief executives had recommended.
Well, forget the pussycat. The tiger is back. And its reappearance forbodes yet another beastly proxy season. CalPERS' Chief Executive Dale M. Hanson has so little to show from his new tactics that he's ready to escalate his campaign. For a start, he's going public with the 12 names, which he revealed to BUSINESS WEEK (table). CalPERS plans to vote against the board of directors at three of them--Dial, Control Data, and Polaroid. Discussions are scheduled or under way, but with little hope for swift change, at three: Time Warner, USAir, and Hercules. They may see "nay" board votes--or proxy resolutions next year. American Express, Salomon, IBM, and Chrysler seem to be mulling over Hanson's concerns. Only two--ITT Corp. and Ryder System Inc.--have settled with CalPERS.
" 'Kinder, gentler' is not working," Hanson says. "It has shown us that a number of companies won't move unless they have to deal with the problem because it's in the public eye." From now on, expect CalPERS to pressure its targets more forcefully--using publicity, proxy resolutions, negative votes, whatever it takes.
STRAIGHT ON. CalPERS' reincarnation is likely to mean more trouble for corporations with restive investors. Other activists are also starting to present their concerns directly to managers and directors, a tactic that such corporate leaders as General Mills Inc. Chairman H. Brewster Atwater Jr., head of the Business Roundtable's corporate governance task force, say they favor. And, like CalPERS, they are moving away from broadly protesting bad governance practices and are instead singling out poor performers for attention. Many CEOs thought the funds were misguided in their choice of focus: Why, they asked, pester a good performer about its board's independence?
CalPERS took those sentiments to heart when it devised its new offensive last summer. It reviewed its holdings, searching for companies whose performance landed them in the bottom half of the Standard & Poor's 500-stock index. CalPERS also sought outside help. It bought company profiles from Washington's Investor Responsibility Research Center. It asked compensation expert Graef S. Crystal for his thoughts. And it hired Gordon Group Inc., a Cambridge (Mass.) consultant, to select and study a few dozen companies. Gordon produced reports analyzing each company's strategy, problems, and total return to shareholders, annually and over five years, in comparison to its peers and the market. Then, Hanson, CalPERS General Counsel Richard H. Koppes, and the fund's investment staff chose their marks.
By mid-November, the 12 were hit with "Dear CEO" letters, copies to members of the board. In them, CalPERS concentrated on three issues--board composition and practices, CEO pay, and formation of a shareholder advisory committee. Proposing an advisory panel is really a device to question a flawed strategy or lackluster record, should discussions fail and prompt a return to the shareholder-resolution process.
The missives met with various fates. At American Express Co., CEO James D. Robinson III got his, but the mailroom didn't recognize the names of the other 19 directors--even though they included Henry Kissinger and former RJR Nabisco Inc. chief F. Ross Johnson. The letters were returned to their Sacramento sender.
Responses differed, too. Dial Corp. declined any meeting. Polaroid Corp. and Control Data Corp. stalled, CalPERS says. The others slowly agreed to come to the table--though Time Warner Inc., where a key issue is the board's strength, won't set a meeting until its ailing co-CEO, Steven J. Ross, can attend.
When the CEOs did agree to meet, some were probably surprised by what they got. Ever since public pension funds began getting active in the mid-'80s, executives have complained about their naivete. Some have doubted their motivation, suspecting that Hanson, for one, had political ambitions and wanted publicity. But Ryder General Counsel James M. Herron says Hanson and Koppes "knew as much about Ryder as we did." ITT CEO Rand V. Araskog adds: "They don't try to tell you what to do. They give you their thoughts."
EARFUL. Hanson and Koppes also bring along their research reports, with governance and strategy recommendations. When they met Robinson in early March, for example, they queried him about the effectiveness of the company's large board, the closeness of several directors to Robinson, and their generous pay and perks. The reports also suggested that American Express consider spinning off its investment bank, Shearson Lehman Brothers Inc., because it consumes enormous resources but contributes little profit. And they complained that the company's pay system was too complex and too discretionary. American Express says the talks were "quite constructive."
Salomon Inc. got a similar earful. CalPERS wants the company to put more outsiders on its board and split the job of chairman and CEO, an idea its current CEO Warren E. Buffett brought up last fall. Salomon declined comment.
At Chrysler Corp., Hanson quibbled with CEO Lee A. Iacocca's pay and the company's strategy since 1987, when--Hanson says--"it went brain-dead." He also queried Iacocca, back in February, about how his successor would be chosen. "We had no preference, but we want to make sure that a totally independent committee is doing the job, that this isn't just Lee choosing his successor," Hanson says. That appears to have happened: Long board deliberations preceded the Mar. 16 announcement of Chrysler's CEO-designate Robert J. Eaton (page 24).
Considering that none of CalPERS' concerns are novel or unrelated to shareholder value, it may seem surprising that companies don't respond more readily to a major owner. After all, Ryder merely agreed to codify some practices it was already following, such as composing its compensa tion panel entirely of outsiders.
Too many CEOs, though, are used to doing things as they please, without much accountability. Many don't like to hear opinions contrary to their own and fear intrusive shareholders. In fact, in its dealings so far, CalPERS has turned initial entree into ongoing relationships with its targets. Hanson will meet with Herron and Ryder CEO M. Anthony Burns, for example, again this spring--agenda undetermined.
STRONG WEAPON. That may be the real value of shareholder activism: It exposes CEOs to differing views. As Texaco Inc. CEO James W. Kinnear, who had to talk with many institutions during Texaco's 1987 bankruptcy and 1988 proxy fight with Carl C. Icahn, notes: "Now, having met them, I'm in favor of talking with them. I feel communication is very valuable." The knowledge that someone is monitoring their moves also acts as a check on CEO performance.
In any case, shareholders have a powerful weapon in their proxy votes, which have rarely been used to express displeasure with general policy. Says General Mills' Atwater: "When they get no response, they should use their votes. I don't know who wouldn't be stimulated beyond belief if 20% of the votes for directors were withheld."
CalPERS, perhaps joined by other investors, will test that tactic this spring. And, eyeing the future, the fund is boosting its clout--narrowing the holdings in its portfolio while increasing its stakes. This cat isn't slinking away.