On beyond CalPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance
Choi, Stephen J., Fisch, Jill E., Vanderbilt Law Review
In recent years, the California Public Employees Pension System ("CalPERS") has received extensive attention for its active participation in corporate governance. CalPERS's activities established it as a leader among activist institutions.1 CalPERS's strategy was based on identifying underperforming companies with poor governance practices and then working to change those governance practices and improve performance.2 Through its implementation of this strategy, CalPERS was at the forefront of broader-based initiatives to increase shareholder monitoring, initiatives that included the use of shareholder proposals to improve corporate governance and support of the SEC's shareholder direct access proposal.3 CalPERS also embraced Congress's invitation to public pension funds to take an active role in monitoring securities fraud class actions through its visible and influential role in the highprofile Cendant litigation.4
CalPERS has served as a case study for many as a model of institutional activism. Academics, regulators, and policymakers have looked to the examples of CalPERS and several other public pension funds to support the claims that institutional investors can use their substantial equity stakes and sophistication effectively to overcome collective action problems, and that institutional activism can improve corporate performance.5 Public pension funds hold approximately 20% of publicly traded U.S. equity and, according to the U.S. Census Bureau, held over $2.5 trillion in cash and securities as of the end of 2004-05.6 Collectively, public pension funds have the potential to be a powerful shareholder force, and the example of CalPERS and its activities have spurred many to advocate greater institutional activism.
CalPERS is only one fund, however. There are a substantial number of public pension funds-at least 2,656 as of 2005.7 Many of these funds are relatively new; they were formed as a result of revisions to state and municipal benefit programs.8 Accordingly, in order to understand the potential role of public pension funds in corporate governance, we go beyond CalPERS in this Article. Little is known about the vast majority of public pension funds and their involvement in corporate governance. What, if any, governance activities are other public pension funds involved in, and why?
This Article offers some preliminary data. Using a combination of publicly available information, interviews, and survey data, the Article provides a status report on the developing role of public pension funds in corporate governance. In part, a description of institutional activism is a moving target. Many funds report that they have increased or changed the nature of their activity in response to legislation, experience, or market developments. At the same time, our data reveal important factors concerning the overall level and type of public pension fund activism. Our primary focus is on discerning what factors correlate with (and potentially cause) public pension funds to engage in a particular form of activism.
What have we learned? First, activity levels vary dramatically. Although some funds engage in a substantial amount of governance activity, a significant number do little or nothing. The most significant factor distinguishing among funds is size: funds with more assets under management are far more active in corporate governance. Second, public pension funds engage in a very limited spectrum of activities. Virtually no funds in our sample played any role in the nomination of director candidates, formally or informally. Similarly, although CalPERS has made high profile use of the shareholder proposal process, very few other funds have followed its example. For the most part, public pension fund activism is limited to low-visibility activities, such as participation in corporate governance organizations or withholding votes from a management nominee. One of the best examples is the widespread willingness to withhold votes from director candidates. …