http://www.latimes.com/business/la-fi-calpers20may20.story

Backlash Confronts CalPERS

Business interests say the pension fund's fight for good governance hides a pro-union agenda.

By Tom Petruno
LA Times Staff Writer

May 20, 2004

The nation's biggest public pension fund has a long history of pushing companies to mind shareholder concerns.

This spring, some of the country's most powerful corporate interests are pushing back — contending that the California Public Employees' Retirement System has become arrogant in its demands and aggressively pro-union in its agenda.

The war between the California fund and opponents including the Business Roundtable, the U.S. Chamber of Commerce and the California Republican Party has escalated significantly in recent weeks. Both sides say that reflects the high stakes involved.

Some observers see the attacks on CalPERS as a clear sign that the business community is drawing a line in the sand on the pressure for corporate reforms that began with the Enron Corp. accounting scandal in 2001.

"There are people out there who would like [the CalPERS efforts] to backfire," said Paul Lapides, director of the corporate governance center at Kennesaw State University in Georgia.

The battle takes center stage in Pleasanton, Calif., today at the annual meeting of supermarket giant Safeway Inc. CalPERS, which owns 2.7 million Safeway shares, is insisting that Chief Executive Steven Burd resign, arguing that he has mismanaged the company for years.

CalPERS' critics, in turn, charge that the fund's campaign is personal — an attempt by CalPERS directors with union ties to punish Burd for the recent 4½-month strike by workers at supermarkets in Central and Southern California. The dispute ended Feb. 29 with a new contract that cut pay and benefits for new hires.

Corporate lobbying groups and some state Republican leaders have seized on the composition of the 13-member CalPERS board. CalPERS represents a largely unionized workforce, and not surprisingly, most of its board members have ties to organized labor.

"Labor disputes are best settled at the bargaining table," said David Hirschmann, senior vice president of the U.S. Chamber of Commerce in Washington. "We agree that investors should play an active role" in corporate governance, he said. "But we don't believe that company boards should become a forum for every social agenda in the public domain."

CalPERS denies that its push to unseat Burd is driven by a desire to avenge union workers.

Sean Harrigan, the president of CalPERS' board, said the fund was motivated by Safeway's net loss of nearly $1 billion over the last two years and by the 65% drop in its share price since early in 2001.

CalPERS pointed to support it has received from other big investors. Public-employee pension funds in Connecticut, Illinois, New York and New York City say they will withhold their votes for Burd and two other Safeway directors.

Two large investor-advisory firms — Institutional Shareholder Services and Glass, Lewis & Co. — also oppose Burd's reelection.

Harrigan said his role as a senior executive of the United Food & Commercial Workers Union, which represents grocery store workers, had no bearing on CalPERS' position.

"I'm not an old-school labor leader," he said. "There's no reason for me to want Safeway to be anything but successful."

But his comments didn't appease state Sen. Jim Brulte of Rancho Cucamonga, one of the state's leading Republicans.

"If there is no union agenda here, then this has to be one of the greatest coincidences in the history of California governance," Brulte said of CalPERS' stance on Safeway.

The California Republican Party on May 5 issued a sharply worded condemnation of CalPERS' drive against Safeway.

The supermarket firm declined to comment this week on today's vote. In recent statements, Safeway has said it was disappointed in the opposition to Burd, and that it had adopted a number of reforms requested by dissident shareholders.

Apart from its Safeway stance, CalPERS has drawn fire this spring for a broader effort opposing the reelection of certain directors at 2,700 companies nationwide.

The fund, which has the bulk of its $166-billion in assets invested in the stock market, says it is sending a message that corporate boards must pay closer attention to some key shareholder concerns, in particular about companies' relationships with the accounting firms that audit their books.

Harrigan said the fund adopted a policy to automatically withhold share proxy votes from all directors who are members of a board audit committee, if the audit committee has allowed the company's independent accountants to perform non-audit-related services to the firm.

That policy has put CalPERS in conflict with 90% of the companies in its investment portfolio, the fund concedes. What's more, one of the directors it targeted was billionaire investor Warren E. Buffett, who sits on the board of Coca-Cola Co. and is a leading proponent of better corporate governance.

The Wall Street Journal, in an editorial May 11, said the CalPERS vote against Buffett was taking governance reform "to absurd new lengths."

CalPERS argues that accountants face serious conflicts of interest if they are paid for services besides monitoring a company's books. And once CalPERS adopted a "zero tolerance" policy regarding audit committee decisions, Harrigan said, the fund believed it couldn't make individual exceptions in its voting, even for Buffett.

But "our withhold certainly does not mean we're in any way objecting to Warren Buffett's service on the board of Coca-Cola," he said.

At least one CalPERS director, state Controller Steve Westly, a Democrat, has called for the fund to reconsider its proxy-voting policies. Harrigan said the board would do so this summer.

In one sense, criticism of CalPERS' governance efforts is nothing new. The fund has periodically taken heat over the last two decades when it was largely alone in pushing companies to change practices that the fund believed were detrimental to long-term shareholder value. Since Enron, many other public pension funds have joined such campaigns.

The argument for activism is that pension funds are simply stuck with many stocks because their size and their long-term focus dictate that they must be buy-and-hold investors. Under those circumstances, if certain shares are laggards, agitating for change can't hurt, the funds say.

But some investor activists now fear that business interests are marshaling their forces to restrain corporate governance reform, just as the effort attracts more big shareholders. The concern is that CalPERS' controversial policies this spring have given opponents potent weapons to use against the reformers.

Specifically, both sides are lobbying hard to influence the Securities and Exchange Commission, which is weighing whether to give activists the ability to nominate their own director candidates to corporate boards. Reformers say greater access to the nominating process is crucial. The business community is adamantly opposed, fearing that some large investors would try to stack boards with special-interest candidates — for example, union representatives.

John J. Castellani, president of the Business Roundtable in Washington, said that his organization would cite CalPERS' campaigns in advising the SEC not to change the rules.

"What we're concerned about is that there are groups out there that will hijack the process of picking directors under the guise of good governance, but for reasons that have nothing to do with good governance," he said.