Pension Funds Take on Role of Activist Investors ; Groups Press to Influence Operation and Election of More Corporate Boards

Article excerpt

Calpers and Calstrs, the giant pension funds in California, are beginning to take a more aggressive role in the operation and election of corporate boards.

Activist investors like Carl C. Icahn, Daniel S. Loeb and William A. Ackman are getting deep-pocketed imitators.

Some of the biggest public pension funds, which have sought to influence companies for years, are now starting to emulate these investors by engaging with, and sometimes seeking to oust, directors of companies whose stock they own.

Anne Simpson, director of corporate governance at the California Public Employees' Retirement System, the largest United States pension plan, with $279 billion in assets, said "board coups" this year that led to the departure of directors at Hewlett-Packard, JPMorgan Chase and Occidental Petroleum showed "how shareholder activism is evolving from barbarians at the gate to acting like owners."

The retirement fund, known as Calpers, is one of several big United States public funds that have played roles in shareholder uprisings in recent years at companies that included Chesapeake Energy, Nabors Industries and Massey Energy. While some of the revolts were led by labor groups or activist investors, Calpers has often cast its votes alongside them.

Ira M. Millstein, a lawyer who specializes in corporate governance at Weil Gotshal & Manges, said it was significant that "the biggest pension fund in the U.S. is taking an activist role, going to companies that aren't doing well and saying, 'You really ought to change."'

The second-largest public fund, the $176 billion California State Teachers' Retirement System, went so far as to co-sponsor a proposal with the activist fund Relational Investors to break up the Timken Company, the maker of steel and bearings, criticizing the outsize representation of the founding Timken family, which held three of 11 board seats while holding 10 percent of the stock. Four months after the proposal won a 53 percent vote, Timken acquiesced to a breakup in September.

Anne Sheehan, director of corporate governance at the teachers' retirement fund, known as Calstrs, said pension fund "activism and engagement has stepped up quite a bit more as a result of the financial crisis when we all lost a lot of value. As universal owners, how can we not assert our rights and develop a relationship with companies in our portfolio?"

The big public funds have successfully campaigned in the past decade for the right of shareholders to elect each director individually by majority vote on an annual basis, more recently using the procedure to seek the ouster of directors who receive a heavy no vote. While the companies often are not legally bound to replace directors who do not win a majority, some directors have resigned voluntarily.

One of the last big holdouts against majority voting was Apple, where Calpers waged a three-year battle with steadily increasing shareholder votes, which culminated in Apple's agreement in 2012 to allow electing directors by majority vote.

The adoption of majority voting "has made directors far more willing to engage," said Ann Yerger, executive director of the Council of Institutional Investors. Nell Minow, the co-founder of the governance advisory firm GMI Ratings, said there had been "a shift in tactics" among big activist investors "from shareholder proposals to engagement and director replacement."

This year may have marked a "pivot point where the central focus of shareholder activism shifted" to "direct challenges to board members," according to a report in August by Institutional Shareholders Services, which advises investors on proxy voting and other governance issues.

At JPMorgan, for example, Calpers and other investors backed a call by Change to Win, a labor group, for the ouster of three directors on the board's risk committee whose qualifications were questioned after the bank suffered a $6.2 billion loss on what became known as the London whale trades. …

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