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The Guardian: The firefighter

The Guardian: The firefighter

“Calpers has emerged as corporate America’s self-styled moral compass.”: Shell is on Calpers’ annual “focus list”, which identifies the biggest problem companies.”

David Teather in Sacramento

Saturday September 4, 2004

Sean Harrigan has made some powerful enemies. As president of Calpers, the largest public pension fund in the United States, he has become a thorn in the side of corporate America, taking on some of its best-known and biggest egos.

Earlier this year the fund locked horns with Michael Eisner, the beleaguered boss of Walt Disney, leading the call for his resignation. Calpers also played a pivotal role in the ousting of former New York Stock Exchange chief Dick Grasso as he became embroiled in a bitter dispute over his eye-popping salary.

In April, the fund pressed other investors to back its campaign against Sanford Weill, the boss of Citigroup, the biggest banking firm in the world. Weill, Calpers said, “should be held accountable” for the numerous Wall Street scandals in which the bank played a role. With profits returning and the Citigroup share price heading up, few others agreed. He remains chairman.

Among other head-on collisions, Calpers has filed a suit against Time Warner alleging fraud, and even withheld votes for the re-election of Warren Buffett to the board of Coca-Cola, inviting the opprobrium of America’s favourite investor. The list, a who’s who of the US business community, goes on.

Calpers, an acronym for the California Public Employees’ Retirement System, has a long history of shareholder activism – taking an active role in the companies it invests in instead of the traditional passive approach. It cites studies that show active share ownership improves both performance and share prices in the long term. With $170bn (£95bn) under management, it wields the kind of power that directors take note of, whether they be at the exchange or corporations. In the year to June 30, it earned a return of 16.7%.

The fund started to engage company management two decades ago when it embarked on a campaign to rid corporate America of “poison pills”, the clauses adopted by boards to prevent takeovers.

More recently, though, Calpers has redoubled its efforts in response to the unprecedented wave of financial scandals in the US. Amid the accounting woes at the likes of Enron, WorldCom, Tyco and Adelphia, the fraud uncovered at mutual funds and the widespread sleaze at Wall Street’s biggest banks, Calpers has emerged as corporate America’s self-styled moral compass.

“I think we are probably the most active fund in the US; one of the most active in the world,” Harrigan says. “We believe very strongly that first of all it does enhance long-term value of our investments but secondly, if we don’t do it, who will? We are the largest in the US and as a result of being the largest I think we have a responsibility.”

Focus list

As the firestorm raged last summer over the $188m compensation package paid to Grasso at the New York Stock Exchange, Calpers exercised that responsibility and waded in. Grasso had been resisting intense pressure to quit. Calpers held a press conference demanding that he step down and within 24 hours he was gone.

Harrigan is still aghast. “It was outrageous,” he says. “Here you have the largest stock exchange in the world that should set the absolute right example. Then you’ve got a guy like Dick Grasso who’s got this $188m package. I said it as clearly as I could: it was an example of the pig being in the trough and our job was to get him out of the trough.”

The other tangible success for Calpers this year has been Disney. Led by Calpers, shareholders who were frustrated by the poor performance of the entertainment and media group withheld an unprecedented 43% of the vote for Eisner’s re-election to the board. Disney, which had stubbornly defended Eisner, reacted swiftly, stripping him of the chairmanship although leaving him as chief executive.

Harrigan says Calpers was pleased by the size of the withheld vote but still describes Disney as a work in progress.

“I was disappointed that the board would be naive enough to believe that splitting the role of chairman and chief executive would satisfy our concerns because we think that action will have no impact whatsoever on Disney’s performance. Eisner is the problem, and there’s only one way to correct that problem.”

The fund’s attention more lately has turned to Royal Dutch/Shell, where Calpers is engaged in efforts to reform the board. Like Disney, Shell is on Calpers’ annual “focus list”, which identifies the biggest problem companies. The other two on this year’s list are home appliance maker Maytag and engineering firm Emerson Electric.

Shell was sent reeling earlier this year by a series of downgrades to its oil and gas reserves that led to the departure of several top executives. Calpers, however, is dissatisfied with the pace of change at the company and the transparency of its review process. It is putting pressure on Shell to follow through with proposals to simplify its complex dual-board structure. The company has not been “particularly responsive”, Harrigan says.

“We aren’t convinced of Shell’s commitment to reform. We have some real concerns about Shell’s performance but more importantly about its structure. It’s hard to even figure out who you need to be talking to at Shell. We will continue to have a dialogue but they have a long way to go.”

As Calpers has pressed harder, though, corporate America has begun to push back. The resistance appears to be part of a wider business retreat from the rules and regulations put in place to improve standards of corporate governance in the wake of the Enron collapse.

The Business Roundtable, a powerful coalition of US chief executives, and the national chamber of commerce have both launched bitter attacks on the Californian pension fund, arguing that the corporate governance movement is out of control. “This is not about good corporate governance,” the head of the Business Roundtable, John Castellani, recently said. “This is hysteria being driven by union-dominated pension funds. They are wrapping themselves in the cloak of corporate governance to gain power and influence.”

The Californian Republican party has also gone on the offensive, accusing the Democrat-dominated Calpers board of political grandstanding. Most of the pension funds that have backed Calpers, including New York and New Jersey, are from Democratic states.

Harrigan, a blunt-speaking union boss, appears resigned to the criticism. Detractors, he replies, are trying to “protect the status quo” by discrediting the fund. “You have to try and assess the motives of the people who are making those observations,” he says. “If someone was to poll the average American on whether they believe executive compensation is totally out of line, recognising it was 40 times the average wage for a production worker in 1980 and 520 times that last year, I think the average American probably lines up with Calpers.

“Then you look at the fraud and what impact that has had on workers and pension funds and what has gone on in corporate boardrooms. What has happened over the past four years has been absolutely despicable and the criticism of Calpers comes predominantly from individuals who have benefited greatly as a result of the excesses and the lack of accountability that have taken place.

“I certainly understand their motivation. While I don’t agree with it, I guess if I had enjoyed the sanctimony of the positions that they’ve enjoyed over the last 60 years I might be inclined to protect the status quo also.”

Critics have seized on Calpers’ stance on auditors. The fund last year decided to withhold votes for re-election to the board for any members of audit committees that allowed accounting companies to provide other services, such as tax or management consulting, potentially compromising their independence.

A key finding in the Enron and WorldCom scandals was that auditors were simply too much in the thrall of their clients. Calpers’ analysis suggested that 29% of fees still come from consulting services.

The problem was more pervasive than Calpers realised. It resulted in the fund withholding votes from directors at 90% of the companies it owns shares in, including Buffett at Coke and Steve Jobs at Apple, provoking widespread ridicule. Buffett described the vote as plain “silly”. The Wall Street Journal said the “withhold” against Buffett was taking governance reform to “absurd new lengths”.

Harrigan responds: “Buffet is a great investor, he really is. Is he a great advocate of proper levels of checks and balances in terms of corporate governance? I don’t think that is his strong point. We weren’t suggesting those members be removed from the board. We were making a statement about how important we think it is that you draw a bright line between audit and non-audit related services.”

The criticisms appear to have had an effect. Calpers is unlikely to continue the aggressive stance on auditors and will set out a more selective policy in October or November. “Some people think we did the right thing, some people think we did the wrong thing. I don’t know. I think we made a lot of noise. This is the first time we’ve done it. Maybe what we did was absolutely the right thing to do for the first proxy season. Maybe now we need to look at refining it.”

Overseas targets

The fund’s next big focus will be executive compensation, an incendiary issue on both sides of the Atlantic. Calpers is planning a separate focus list of the most egregious cases of excessive pay which will be published later this year or early next.

Harrigan says Calpers will also focus more efforts on shaking up poorly managed companies overseas, including Britain – it was part of the failed revolt against James Murdoch’s accession at BSkyB. Calpers was a founding member in May of the International Forum for Active Shareowners to encourage more cross-border cooperation and holds about 25% of its equities outside the US.

Harrigan judges the most important imminent issue for investors in the US to be the so-called access to the proxy.

At present, US shareholders have no means of ousting directors. But, under a rule being considered by the securities and exchange commission, shareholders will be able to nominate an alternative for a board position if more than 35% of the vote is withheld from him or her in the previous year. Corporate America and, Harrigan suspects, the Bush administration are lobbying hard against the rule being adopted.

Opponents argue it will be a Trojan horse, allowing special interest groups to find a way on to boards, something Harrigan describes as “bunk”.

“This is huge,” he says. “It is the one issue that I believe has the potential of aligning interests of shareholders and management. It has the potential to create an environment in which we don’t see the kind of fraud we saw at Enron and WorldCom and has the potential of making sure that executive compensation is reasonable and tied directly to performance. Without question, it is the issue that has the potential for creating the kind of environment that we think needs to be created in the boardrooms of American corporations.”

If it is passed, Eisner at least could face a genuine fight for survival next year.

The CV

Age: 57

Education: Economics degree, Whitman College, Washington State

Career: 30 years’ experience in the supermarket sector, including seven years at Safeway Supermarkets; joined Union of Food and Commercial Workers in mid-1970s, specialising in member recruitment, collective bargaining; director of field operations, coordinator of activities relating to 2000 national presidential election, UFCW; international vice president and executive director, UFCW; February 2003, president, Calpers board of administration

Family: Wife Kathy, children Kathleen and Ryan

Interests: Golf, sailing

http://www.guardian.co.uk/business/story/0,,1297138,00.html

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