Public and private pension funds with $3 trillion in assets are pushing long-sought reforms that give shareholders more control over corporate boards of directors and executive pay, hoping for a boost from the stock market crash.
But a year after the historic market plunge there is stiff opposition from business groups and others, who say the reforms would allow pension funds to pursue a labor agenda and press for short-term gains that can undermine long-term company growth.
A strong plea to “assist the policymakers to get the job done” and enact reforms came at a conference of the Council of Institutional Investors — a nonprofit association of public, union and corporate pension funds — in the Wilshire Grand Hotel last week.
“The future of corporate governance and financial markets reform is up for grabs right now,” the council chairman, Joe Dear, chief investment officer of the California Public Employees Retirement System, said in his welcoming remarks.
“I think victory is within our grasp, but there are days now when it feels like it could be slipping through our fingers,” Dear said. “The fierce resistance to our agenda is growing stronger as memories of the crisis fade.”
Dear listed some of the huge losses in the stock market crash, followed by massive federal spending. He said there is “no accounting for the shattered dreams and insecurity” left in the wake of the catastrophe.
“Our political system is designed to try to make change difficult,” Dear said. “So it shouldn’t be a surprise that a change that had seemed so obviously needed, and was so enthusiastically supported by the new administration and newly invigorated congressional leaders, is running into some difficulty.
“If I had a reserved seat on the world’s all-time sweetest gravy train I would try to keep my ticket. But those of us in this room work directly or indirectly for millions of public and private sector workers, and they don’t have a ticket.”
Most of the major reforms backed by the council are in two bills: The Shareholder Bill of Rights by U.S. Sen. Charles Schumer, D-N.Y.) and the Shareholder Empowerment Act by U.S. Rep. Gary Peters, D-Mich.
The case for the reforms sought by the pension funds was presented to a congressional subcommittee last July by Ann Yerger, the council executive director. She said regulatory reform is not enough.
“The council believes that many corporate governance failures contributed to this financial crisis,” Yerger said.
“Some (corporate boards) failed to adequately understand, monitor and oversee enterprise risk,” she said. “Some failed to include directors with the necessary blend of independence, competencies and experiences to adequately oversee management and corporate strategy.
“And far too many corporate boards structured and approved executive compensation programs that motivated excessive risk taking and yielded outsized rewards — with little to no downside risk — for short-term results.”
What are the pension funds’ proposed remedies?
The Schumer bill would allow major shareholders, not just current directors, to place board candidates on the “proxy” ballots used to authorize others to cast votes for absent shareholders. All directors, not just a third, would be elected annually.
Directors would have to be elected by a majority, not just a plurality, in uncontested elections. The role of the chief executive, who in the past often selected directors, would be separated from the board. Shareholders would cast annual advisory votes on executive pay.
What is the reaction of the corporate community to the Schumer bill?
The president of the U.S. Chamber of Commerce, Thomas Donahue, said in an article in the Wall Street Journal last July that the changes would give labor unions more pension-fund shareholder clout to pursue their own agendas.
“This includes repeated motions by the AFL-CIO to require pharmaceutical companies to disclose their drug reimportation policies and pressuring oil companies to reduce greenhouse gas emissions,” Donahue said.
“They also have used their pension funds to force employers to negotiate union contracts or agree to specific demands. Richard Trumka, secretary treasurer of the AFL-CIO, said in 2000 that the labor federation planned to use the ‘clout of union pension funds as major corporate stockholders to influence contract talks and organizing drives.’”
Donahue said there has been questionable management of some underfunded union pension systems. He said polls show union members want pension funds to focus on investment earnings not other agendas.
“Politically and socially motivated proxy activity may violate the fiduciary duties of union pension trustees,” Donahue said, referring to a federal retirement law he said requires pension assets to be used for the “sole purpose” of benefiting retirees.
A Harvard professor and two New York lawyers argued in a Wall Street Journal article last May that the Schumer bill, though intended to improve long-term corporate performance, would do the opposite.
“Excessive stockholder power is precisely what caused the short-term fixation that led to the current financial crisis,“ wrote Martin Lipton, Jay Lorsch and Theodore Mirvis.
“As stockholder power increased over the last 20 years, our stock markets also became increasingly institutionalized,” the trio said. “The real investors are mostly professional money managers who are focused on the short term.”
A rebuttal came from Anne Simpson, the former executive director of the International Corporate Governance Network in London, whose members have about $9.5 trillion in global assets.
Simpson said the international group, contrary to a suggestion in the trio’s article, supports the reforms in the Schumer bill, which “would simply bring the U.S. into line with other major markets.”
Last January, Simpson became the CalPERS corporate governance chief. Anne Sheehan became the corporate governance director at the California State Teachers Retirement System in September of last year, a newly created post.
At the pension funds’ conference last week, a speaker referred to the “three Annes” of corporate governance: Simpson, Sheehan and the investor council’s Yerger.
Simpson said CalPERS and CalSTRS were the hosts of a meeting at the conference on developing a “talent pool” of potential corporate board directors with appropriate skills and racial and gender diversity.
“Proxy access a year ago seemed to be a foregone conclusion,” Simpson said as she moderated a panel on the topic, noting Dear’s “cautionary remarks.”
At the conclusion of the panel, she called for a show of hands from those in the audience who think “proxy access” might be enacted next year. Only one person raised a hand. Then Simpson asked about 2011.
“A fair number,” she said, looking at the hands raised in response to her second question. “Some think it might get pushed back.”
This article originally appeared on the Capitol Weekly Web site. Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. His blog is www.calpensions.com.