c.2013 New York Times News Service
c.2013 New York Times News Service
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’ Pension Fund, the largest U.S. pension plan with $279 billion in assets, says “board coups” this year that led to the departure of directors at Hewlett-Packard, JPMorgan Chase and Occidental Petroleum show “how shareholder activism is evolving from barbarians at the gate to acting like owners.”
CalPERS is one of several big U.S. public funds that have played roles in shareholder uprisings in recent years at companies that included Chesapeake Energy, Nabors Industries and Massey Energy. Although 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, says it is 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 Co., the maker of steel and bearings, criticizing the outsize representation of the founding Timken family, which held three of 11 board seats while holding just 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 CalSTRS, says 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 governance advisory firm GMI Ratings, says there has 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.
After receiving votes of just 53 and 59 percent at the bank’s annual meeting in May, Ellen V. Futter, president of the American Museum of Natural History, and David M. Cote, the chairman and chief executive of Honeywell International, stepped down in July. The bank also designated Lee R. Raymond, the former chief executive of Exxon Mobil, to be the lead outside director after defeating an investor campaign to separate the jobs of chief executive and chairman, both held by Jamie Dimon.
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CalPERS also voted for a boardroom shake-up at Hewlett-Packard, where two directors, G. Kennedy Thompson, chairman of the audit committee, and John L. Hammergren, chairman of the finance and investment committee, came under fire after the company took $19 billion in write-downs on three expensive acquisitions.
At a meeting in Washington in February, a month before HP’s annual meeting, the company’s chairman, Raymond J. Lane, and another director faced a group of about 15 institutional investors including CalSTRS and the $144 billion New York City pension funds. While the directors “tried to defend the board processes” in reviewing the acquisitions, “it was too little, too late,” said Michael Garland, head of corporate governance for the New York City comptroller, John C. Liu. After votes of just 59 percent for Lane, 55 percent for Thompson and 54 percent for Hammergren, Lane stepped down as chairman and the two others also left.
CalPERS has also backed director reshuffles or resignations over executive pay at Occidental and Chesapeake and over safety at Massey. Simpson says stocks of companies subject to such actions have beaten the market — some critics dispute that — and CalPERS plans to increase the assets it has devoted to those causes. In recent years, she says, “what once upon a time had been viewed as sniping has become viewed as responsible ownership.”
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Sometimes companies work harmoniously with investors. At the UnitedHealth Group, where CalPERS had the right to appoint one director unilaterally under the terms of the settlement of a past lawsuit, Simpson worked with the chairwoman of the nominating and corporate governance committee, Michele J. Hooper, in 2012 to find a mutually acceptable nominee, Rodger A. Lawson, a former president of Fidelity Investments.
Many companies are also deploying board members to gain the support of big investors in case they are confronted by activist hedge funds seeking management or strategy changes or fielding their own director candidates through proxy votes.
“We advise our clients that it makes a great deal of sense for directors to meet with the major shareholders,” said Martin Lipton, who represents numerous corporate boards at Wachtell Lipton Rosen & Katz.
But other companies resist shareholder pressure. At Nabors Industries, an energy services company, where investors have complained about oversize executive severance pay, two directors, John Yearwood and John V. Lombardi, received votes of just 47 percent and 44 percent last June. But the Nabors board rejected resignations by the two directors, which they had tendered pursuant to company bylaws, and they continue to serve.
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Simpson, who joined CalPERS in 2009, cut her teeth in governance at the World Bank. There she worked on a task force led by Millstein that barnstormed emerging markets in the late 1990s to help local officials understand what kind of governance protections are sought by global investors. She and Millstein have since taught corporate governance together at Yale.
CalPERS, which once published an annual list of companies it said had poor corporate governance, has halted its so-called name and shame program in favor of a more behind-the-scenes approach, which Simpson calls “speak softly and carry a big stick.” The stick, she adds, “needs to be used sparingly.” She added, “The issue needs to be fundamental, or when you have a demonstrable failure of oversight.”
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Because CalPERS indexes much of its stock market investments, it owns 0.5 percent or more of most public companies. As long-term investors who plan to hold on to the stock, Millstein says, CalPERS can credibly tell companies “we’re willing to work with you.”
CalPERS sets its own priorities and doesn’t slavishly follow activist investors or proxy advisory services, Simpson notes. She said she urged a separation of the chairman and chief executive jobs at JPMorgan in her first meeting with Dimon in 2010, before the trading blowup.
What is more, she adds, the fund’s efforts depend on gaining widespread support among other mainstream investors. She often works with other big funds to reach common goals, like soliciting votes for governance proposals by the New York City funds at Chesapeake and Nabors.
Gianna McCarthy, director of corporate governance at the $161 billion New York State Common Retirement Fund, adds, “I think there is more of an ability for public funds to register their dissatisfaction with directors and eventually have them resign from boards.”