After winning a years-long lobbying battle with business groups, big shareowners led by CalPERS and CalSTRS may get more clout in corporate boardrooms by nominating directors not picked by management.
A provision in a sweeping financial reform signed by President Obama last month is expected to allow institutional investors to put their candidates for board of directors on the voting material sent to shareowners.
One of the goals of the public pension funds and other big investors is to put more women and minorities on corporate boards, breaking up a network of what critics say are “old boy” directors often selected by company executives.
The nation’s two largest public pension funds, the California Public Employees Retirement System and the California State Teachers Retirement System, are developing a “diverse director database” of potential corporate directors.
“It’s already gotten some publicity,” Chris Ailman, the CalSTRS chief investment officer, told his board last month as he talked about corporate governance plans after the the financial reform victory. “But I think that really becomes our key focus.”
The pension funds cite studies, including one done for CalPERS, that conclude companies with women and minorities on their boards generally produce more value for investors than companies run by boards of directors that are virtually all white males.
State Controller John Chiang, who sits on the CalPERS and CalSTRS boards and urges corporate board diversity, got a laugh at a Stanford University conference last September with a line reportedly uttered by a British official after a corporate review.
“He said of corporate boards, ‘There is nothing wrong, simply that they are male, pale and stale,'” said Chiang.
A Stanford professor, Joseph Grundfest, told the conference research showing board diversity improves financial performance is inconclusive. He said there are other reasons for board diversity, such as reflecting the workforce and understanding markets.
The two big pension funds are negotiating with a firm to help them develop a diverse director list, beginning with current corporate board members and moving on to nonprofit and foundation boards.
“The diversity we’re looking for goes beyond race and gender into skill sets, experiences and areas of knowledge,” a CalSTRS spokesman, Ricardo Duran, said via e-mail.
For example, he said, a board candidate might be an entrepreneur who created a business, rather than someone whose experience has mainly been in Wall Street financial firms or business school.
Duran said the list advisory group includes corporations (Johnson & Johnson, Prudential, HSBC, Hermes) public officials (Connecticut and North Carolina state treasurers, New York comptroller, Wisconsin investment board) and academics (Yale School of Management and Stanford Rock Center for Corporate Governance).
The financial reform provision expected to help shareowners nominate directors was strongly opposed by two major business groups, the U.S. Chamber of Commerce and the Business Roundtable, in a lengthy partisan fight.
“The financial reform bill expected to clear Congress this week is chock-full of provisions that have little to do with the financial crisis but cater to the long-standing agendas of labor unions and other Democratic interest groups,” said a story in the conservative Washington Times last month.
“Principal among them is a measure to make it easier for unions, environmental groups and other activist organizations that hold shares to put their representatives on the boards of directors of every corporation in the United States,” said the Times.
Currently, the candidates for the board of directors of nearly all U.S. corporations are selected by management, which sends shareowners material authorizing a “proxy” to cast their vote.
The change is expected to give “proxy access” to large shareowners. Their candidates can appear on the material with management’s slate of candidates, allowing shareowners to avoid the cost of paying for a separate mailing and publicity campaign.
The financial reform law reaffirms the authority of the Securities and Exchange Commission to issue regulations allowing proxy access for shareowners who meet certain requirements, presumably based on the amount of stock and length of ownership.
As the SEC considered a proxy access regulation last year, a Wall Street Journal story said, the independent chairwoman, Mary Schapiro, was the key supporter as the other four commissioners split, two Democrats in favor and two Republicans opposed.
“Schapiro has said the financial crisis raised questions about directors’ responsibility and accountability,” said the Journal story. “Proxy access can give shareholders a credible path for ousting boards, which they can then use to push for mergers, asset sales, larger dividends or other measures to boost share prices.”
In a column in Compliance Week last month, a Yale professor, Stephen Davis, and a former New York city deputy comptroller and hedge fund manager, Jon Lukomnik, argued that the proxy access victory may signal a power shift in Washington.
“For the first time, investors showed – in dramatic fashion – that they can go head to head against the established business lobbies and win,” the two men wrote, even though the investors do not make big campaign contributions.
When the Enron and Worldcom scandals resulted in a corporate governance overhaul in 2002, the Sarbanes-Oxley Act, there was little in the new law for investors, which was followed by a “long war” over proxy access.
“Still, history may yet interpret the shareowner triumph as a fluke,” the two men wrote. “Already corporate lobbyists are pressing the SEC to restrict proxy access to the narrowest possible conditions.”
The CalPERS federal lobbyist, Tom Lussier, told his board last month that the investor coalition “will actively work with the commission” to get a proper regulation, which may be issued later this month or in early September.
A power shift sounded like it might be welcomed by public pension funds as Lussier predicted that “retirement security in America” may emerge as the next big federal issue.
“Leaders of both parties are talking about raising the retirement age as being one of the solutions to Social Security solvency,” he said.
Lussier said it may be difficult to defend public pension retirement ages in the mid 50s if the national retirement age nears 70. He also mentioned the growing media “drumbeat” about the long-term sustainability of state and local pensions.
Not only are some members of Congress and their staffs concerned that pension funds could be “next in line for a bailout,” he said, but some governors, legislators and retirement plan administrators are saying Congress could help.
“From my perspective this is the ultimate case of be careful what you wish for because federal intervention, no matter in what form it comes, will come with strings,” Lussier told the CalPERS board.
He said some friendly U.S. senators have suggested that “financial assistance to state pension plans might be a great way for the Congress to require pension reforms, pension consolidations in states where there are lots of local retirement systems.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com