Archive | February, 2003

February 2002

Employees, Our Most Important Resource

Most companies say their employees are their most important resource. Yet, they pay their CEOs more that 500 times the average worker. Successful companies with employees stock ownership plans (ESOPs) far outnumber those whose ESOPs have failed, employee ownership advocates point out. According to data from the National Center for Employee Ownership (NCEO), companies with employee ownership grow an average 2.4% faster than their peers with no employee stake and that differential jumps to as high as 11% at companies where management and employees work together in an ownership culture on decision-making. Learn more at the NCEO/Beyster Institute Joint Annual Conference 2003, Employee Ownership and Employee Involvement: The Entrepreneurial Edge, in San Francisco, CA, which take place March 26-28, 2003.

WSJ Provokes Discussion

The Wall Street Journal is currently hosting a discussion based on a series of recent articles on “cleaning up corporations.”

“The recent wave of corporate scandals has left shareholders distrustful of the companies they invest in, and has left regulators and lawmakers debating how best to clean up the mess and restore confidence. How much of a role should the government play in regulating corporate governance? How can compensation guidelines be changed to make sure that executives are acting in the best interests of shareholders? Join the discussion.”

In their article, “Changing the Rules,” WSJ writer Carol Hymowitzgoes through a few of the major changes that have occurred and points to proposals such as the CEO/Chair split. “In the end, though, it’s the shareholders who hold the ultimate trump card. They can hold boards responsible for poor company performance — by voting out directors who are incompetent or too personally entangled with the company or its top management to exercise autonomous judgment.”

However, as Les Greenberg, of the Committee of Concerned Shareholders, and I have so frequently pointed out, the truth is otherwise. Even the Conference Board’s blue ribbon Commission on Public Trust and Private Enterprise acknowledged that Shareholders “have no meaningful way to nominate or elect candidates short of waging a costly proxy contest.”

Our jointly filed Petition for Rulemaking (SEC File No. 4-461) with the Securities and Exchange Commission would correct that fundamental flaw. by allowing shareholders to use a simple process to gain access to the corporate ballot for their director nominees. Get Active

ExxonMobil Faces Two Dozen Resolutions

Here them discussed at 1:30 p.m. Eastern 2/25 at 1-888/413-5356. Call five minutes before the start time and use conference ID number 76897. The media briefing will feature: State of Connecticut Treasurer Denise Nappier; noted shareholder activist Robert A.G. Monks, publisher of RAGM.com and founder of Institutional Shareholder Services; Tri-State Coalition for Responsible Investing President Sister Pat Daly (New York-New Jersey-Connecticut); and Campaign ExxonMobil national coordinator Peter Altman. A streaming audio replay of the news event will be available as of 6 p.m. EST on February 25th atCampaign ExxonMobile.

Wilcox Argues For Flexibility in Fund Voting

John C. Wilcox, Vice Chairman, Georgeson Shareholder Communications Inc. argues that “institutions should amend their voting policies to explicitly affirm the priority of investment return over governance correctness, to grant themselves flexibility to make policy exceptions where economic considerations or extraordinary circumstances warrant, and to eliminate overly detailed guidelines or bright line tests that might inhibit their ability to make decisions on the merits.”

According to Wilcox, the public debate over the new SEC rules requiring disclosure of mutual fund votes and voting policies never discussed the key issue, how the rules would impact the quality of voting decisions by fund managers. Regulations should not be allowed to undermine the practice of using shareholder resolutions for meetings between the funds and the corporations.

“The right balance can be achieved only if voting guidelines recognize that conformity to governance standards should never take precedence over free and open communication and informed decision-making.” (Leverage Proxy Voting to Ramp Up Returns,Mutual Fund Market News.

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California Public Employees Breathe Easier

Sean Harrigan got eight votes from the 13-member board — enough to win the presidency. Willie Brown Jr. received 4 votes; Robert Carlson, acting president and 32 year veteran board member, did not vote. Harrigan earned key support from three new members: business professor George Diehr, Bay Area Rapid Transit District financial analyst Priya Sara Mathur, state Controller Steve Westly, and labor leaders.

Another setback for the old guard was Carlson’s defeat for the office of vice president That post went to Rob Feckner, a glazing specialist with the Napa Valley Unified School District. Feckner joined the board four years ago.

After winning the election, Harrigan laid out his agenda. “My two primary priorities are restraining health care costs and improving our investment performance,” he said. CalPERS projects a $2 billion liability this year.

James Hawley, who teaches business at St. Mary’s College in Moraga, aid he thinks Harrigan will resuscitate CalPERS’ reputation for better corporate governance. He said the board has backed off some in its shareholder activism. For instance, he said the board has avoided supporting the expensing of stock options, a cause celebre for corporate governance activists, because they are so popular among California’s powerful high-technology community. Hawley would not be surprised, however, if Harrigan revives CalPERS’ reputation on that front, if only because labor unions have developed a wide-reaching corporate governance agenda. I believe we can also expect the board to join the movement to open corporate ballots. See Get Active.

The pension fund is increasingly using its influence to push for social change. In the past year, the board has asked major companies that moved their headquarters offshore for tax purposes to return to the United States.

The decision to elect a labor leader over a longtime politician could make it more difficult for the state to defer payments to the fund, said Kim Rueben, research fellow at the Public Policy Institute of California, a think tank in San Francisco.

Harrigan has served as the CalPERS representative of the state Personnel Board since 1999.

Funds Seek Delay on Disclosure

The Wall Street Journal reports that large mutual-fund firms are lobbying the Bush administration to delay parts of a controversial new Securities and Exchange Commission rule on proxy-voting disclosure.

The Investment Company Institute, plans to send a letter to the Office of Management and Budget and the SEC arguing that the new rule would harm mutual-fund shareholders by increasing paperwork burdens and costs. The rule, approved by the SEC last month, for the first time requires fund firms to disclose their specific proxy votes.

“We felt the SEC rushed the entire rule-making process,” said David Weinstein, an executive vice president overseeing public policy issues at Fidelity Investments, the largest fund company, which votes annually on proxy issues at about 4,000 companies. Even before the SEC approved the proxy rules, ICI officials met with the OMB’s Office of Information and Regulatory Affairs to discuss the difficulty they would have complying. Representatives Fidelity, Vanguard Group and T. Rowe Price Group Inc. participated.

The Wall Street Journal notes the OMB doesn’t have the authority to review regulations that come out of independent agencies such as the SEC. What the OMB can do is review any “paperwork burdens” associated with a rule and suggest alternatives.

“It’s unbelievable that the ICI refuses to get the message that investors want disclosure,” said William Patterson, director of investments at the AFL-CIO. “The fact that they want to go one more round after being thoroughly defeated is stunning and only diminishes their standing on this issue.”

John Collins, a spokesman for the lobbying group, said “a thorough review” is warranted because the rule “causes harm to the interests of shareholders.” The ICI is expected to send its letter to both the SEC and the OMB by mid-March, when the comment period on the rule’s paperwork issues closes. The rules are scheduled to go into effect in time for the 2004 proxy season. (Big Fund Firms Seek Delay On Proxy-Vote Disclosures, 2/18/03)

Our opinion? The ICI is losing any remaining credibility.

Resolutions Rise

The Investor Responsibility Research Center reports 2003 will break all records for shareholder activism. More than 862 resolutions have been lodged, compared with 802 in the whole of 2002. Three years of bear markets and corporate scandals mean corporate America is prepared to negotiate. Shareholder resolutions targeting corporate governance accounted for 625 resolutions, a sharp rise from 529 last year.

Public pension funds, charitable foundations and unions have submitted a sharply increased number of motions on corporate governance issues, nearly half concern executive compensation. IRRC says 101 resolutions ask companies to treat stock options as expenses, link existing option plans more closely to performance or other such initiatives. Spliting chairman and CEO roles as well as addressing the issue of incorporation of US companies in offshore tax havens are also popular issues. (Boardrooms hear tread of shareholders on march, FT.com, 2/17/03) Governance activists are increasingly teaming with labor unions, religious investors and socially responsible investors.

According to BusinessWeek, labor filed 89 resolutions that would require companies to expense options; an additional 75 resolutions call for basing fure executive option grants on company performance; 7 resolutions would ban options for senior execs; several resolutions would require a shareholder vote on exec severance or retirement deals; additionally, the AFL-CIO plans to oppose reelection of directors on compensation committees that give huge payouts to underperforming CEOs. (A Battle Royal against Regal Paychecks, 2/24/03)

One of the more innovative resolutions is the following to Occidental Petroleum for its meeting on April 26 in Los Angeles byCarl Olson, Chairman of the Fund for Stockowner’s Rights. The Fund also supports the open ballot movement.

RESOLUTION ON SIGNIFICANCE AND ENFORCIBILITY OF STOCKOWNER VOTES

Be it resolved by the stockowners to request that for each item of business to be voted on at a stockowner meeting, the proxy statement shall include a statement of:

1. the percentage of the vote required for approval

2. the legal effect of the approval. This would include stating if an effect automatically occurs or if some other specified action(s) would be required to be taken in order to be implemented. If any other specified action(s) would be required, an intended timetable of these actions would be presented.

3. if an item of business is approved, how a stockowner can be informed as to what action the board or management has taken to implement it. This would include whether the board and management will make a report that is distributed to all stockowners, or whether a stockowner would need to make a request (with details of how the request would be made). This would also include an intended timetable for board and management to implement it.

4. if an item of business is approved which requests that the board or management take (or refrain from taking) some action, and if the board or management fails to take (or refrain from taking) such action, the rights of stockowners to enforce the approved item of business (a) by a process within the corporation and (b) by court action.

SUPPORTING STATEMENT

When we stockowners vote on items of business at stockowners meetings, we should know the consequences of all the votes. We should also be informed of the follow-up by the board and management.

The right to know what actions are taken (or the failure to take such actions) is important for proper corporate governance. Boards and managements must be accountable for the votes of stockowners, and prompt and full compliance with them.

Perhaps the best argument for this resolution is that the proxy statement you are reading does not include a complete statement about the significance and enforcibility of each item of business, as is requested in this resolution.

Vote yes, and future proxy statements may well have such vital information. If this resolution is approved, wouldn’t you like to know how and whether it is implemented?

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SEC Says No to Shareholder Nominations

The SEC will not recommend enforcement action against Citigroup Inc. for refusing a shareholder vote on changing the process to elect board members.

The decision was an expected loss in the open ballot movement. Investors, led by the American Federation of State, County and Municipal Employees (AFSCME), filed with six companies in an action which Michael Zucker, director of corporate affairs, indicates represents “real democracy vs. fake democracy.” With 1.4 million members, AFSCME manages about $500 million of assets.

The proposal would have allowed shareholders to nominate and place the names of those nominees on company controlled proxy materials, rather than going through a prohibitively expensive solicitation process, as is now the case. In what is called “a no-action letter,” SEC staff essentially sent a Valentine’s Day (2/14/03) card to shareholders saying, essentially, shareholders can go to hell.

Zucker said AFSCME plans to appeal the staff decision to the full five-member SEC. AFSCME also submitted proposals to Sears Roebuck & Co., Exxon Mobil Corp., AOL Time Warner Inc., Eastman Kodak Co. and the Bank of New York Co. The proposals at Citigroup, Sears and Exxon Mobil were binding and called for rewriting company bylaws. Other proposals called only for resolutions urging action. The resolutions appear to violate SEC Rule 14a-8(i). James McRitchie, the editor of Corporate Governance, and Les Greenberg of the Committee of Concerned Shareholders filed SEC Rulemaking Petition File No. 4-461, with no response from the SEC to date despite many comments e-mailed to the SEC, virtually all in favor.

AFSCME and other investors acknowledge they need a cost-effective way to put their own board candidates up for election to improve board independence. The current definitions of independence do not rule out good friends or lapdogs such as occurred at Enron Corp., WorldCom Inc. and other companies. Candidates who are supported by shareholders but not the board, must send shareholders their own ballot for the annual meeting, a strategy that typically costs hundreds of thousands of dollars and has slim prospects for success because many institutional investors and brokerage firms who hold proxy voting rights in trust, mindlessly vote with management.

The AFL-CIO labor federation intends to ask the SEC to draft rules that would force companies to add nominations from large investors to their proxies. (Ruling Lets Citigroup Bar Vote On Elections, Bloomberg News, 2/16/03)

At least the SEC did agree to let GE shareholders vote on splitting the chairman and CEO posts in a non-binding resolution filed by Helen Quirini of the GE Retirees Justice Fund. Several groups, including the Conference Board’s blue ribbon Commission on Public Trust and Private Enterprise have urged companies to consider splitting CEO and chair positions. GE had argued they had already “substantially implemented” the shareholder resolution by appointing a presiding director, Andrew C. Sigler, retired chairman of Champion International Corporation. According to a report by Corporate Governance, the Dow Jones newsletter(SEC to Let GE Holders Vote on Splitting Chairman, CEO posts, 2/13/03), GE will cite the new structure in asking shareholders to vote against the proposal at its annual meeting to be held on April 23rd.

The SEC will also allow a shareholder proposal at Verizon Communications that seeks a cap on CEO compensation of 50 times the average compensation paid to minimum-wage employees. Louis Scinaldi of the Communications Workers of America, who submitted the proposal, notes that co-CEOs Charles Lee and Ivan Seidenberg were paid $14.5 and $13.4 million respectively in 2001. According to the 2/14/03 ISS Friday Report, organizations such as the AFL-CIO have made executive compensation a high priority this year. GE and Coca-Cola agreed to phase out certain salary and pension benefits for top executives at their request. Responsible Wealth also submitted proposals seeking review of executive compensation. Paul Hodgson, of theCorporate Library, says the most likely response for such reviews would be, “We just had one.” Better to be more specific.

Korean Corporate Governance on Rise

It is heartening to see coverage of the great events in Korea in Business Week’s “Korea’s Young Lions.” Roh Moo Hywn‘s presidency can be expected to provide a real boost to good corporate governance.

In April 2000 I traveled to Korea, sponsored by the US State Department, to discuss corporate governance reforms with leaders in the movement there, such as Professor Hasung Jang who heads the Participatory Economy Committee (PEC) at thePeople’s Solidarity for Participatory Democracy (PSPD). At that time we discussed many issues such as broker voting rules in the US, which make it extremely difficult for US investors whose shares are held in “street name” to vote with shareholder activists. If they haven’t voted within ten days of the meeting, their broker exercises “discretionary” voting rights in support of management’s proposals. This practice unfairly stacks the deck against shareholders everywhere, but is particularly egregious in Korea and Japan where proxies are typically sent out only 14 days prior to the annual meeting.

About an hour before we met, Professor Jang held a press conference on accounting manipulations on the investment trust side of the Hyundai chaebol. I had the same feeling as the BusinessWeek writer when I entered PSPD’s headquarters with dozens of volunteers at computers with signs overhead with outlining dozens of issues. A year later, ICGN awarded Professor Hasung Jang special recognition for exceptional achievements throughout their careers to promote good corporate governance and fair treatment of all shareholders by supporting uniform global accounting standards; equitable shareholder voting procedures for all investors, whatever their country of origin; and sharper focus on corporate governance matters by company managements; the need to address and resolve cross-border proxy voting problems. See Advancing Corporate Governance Reform In Asia)

The Center for Good Corporate Governance, headed by Kim Joo Young, is Korea’s first research institute specialized exclusively in the area of corporate governance. It’s great to see they have a contract to provide consulting services for a $300 million investment fund backed by the World Bank that will invest in Korean enterprises that meet its tough corporate governance standards. We expect great strides to accelerate in Korea.

Job Opportunity: Corporate Governance Officer
Ohio Public Employees Retirement System (OPERS)

Person will be considered the subject matter expert on corporate governance and be responsible for developing and leading OPERS’ governance strategy, programs, and activities. This person will take an active role in coordinating governance activities with other pension funds, corporate advocacy groups and regulators to promote OPERS’ interests. For more information, see link.

CalPERS Rumor$

Rumor has it that CalPERS may invest about $50 million in the Boston Capital Fixed Income Mortgage Fund. Boston Capital’sCEO, Jack Manning, and his wife, Lyle Howland, have been heavy contributors to the Democratic Party. I like the fact that Boston Capital is one of the national leaders in affordable housing and I like their motto, “Doing well while doing good.”

However, I’m not sure CalPERS should be paying 65 basis points, plus other management fees, for what is basically a mortgage bond fund that might be expected to have fees closer to 20 basis points. While I support seeking double bottom line returns, I don’t support investments as a form of political payoff. Let’s hope the Board considers this investment on its merits, not based on political contributions and let’s hope Board members who have received campaign contributions from Jack Manning, Lyle Howland, or anyone else associated with the Boston Capital, recuses themselves from voting when the investment is considered.

Ernst & Young Takes Lead

Accounting firm Ernst & Young reversed its stand on expensing options. In a letter to the Financial Accounting Standards Board, the Ernst & Young said it strongly supported efforts by both the FASB and the International Accounting Standards Board to develop a method to ensure that “stock-based compensation is reflected in the financial statements of issuing enterprises.”

Their statement puts Ernst & Young in the lead, since none of the other major accounting firms have come out as strongly in support of treating options as an expense. (Ernst & Young Changes Mind on Options, NYTimes, 2/14/03)

CERES 2003 Conference

Advancing Sustainable Governance
April 1,2: New York Hilton
Learn about shareholder activism led by institutional investors, fiduciary duty and liability, and other issues that will change business as usual on Wall Street.

Sixth Annual Corporate Governance and Equity Offerings Conference

Presented by the Anderson Graduate School of Management at UCLA in cooperation with the Nasdaq and the National Venture Capital Association. This event will feature top-level speakers addressing various board-level issues focusing on the best practices and emerging trends in corporate governance and the issuance of equity. This event opens with the Nasdaq Networking Dinner on March 25th and continues on March 26th with a one-day conference and the Fifth Annual NVCA Los Angeles Networking Luncheon. Anderson School at UCLA: 110 Westwood Plaza, Los Angeles, CA. Registration/Information.

Court Finds CalPERS in Violation

In a decision filed 1/30/03, the Third Appellate District Court in Sacramento found the CalPERS Board “does not have plenary authority to evade the law that limits the pay of the Board and its employees, that specifies the employees exempt from civil service, and that authorizes the Controller to issue warrants and audit their legality.”

We reported on these violations in September 2000 (seeCalPERS Shouldn’t Ignore the Law; see also CalPERS board votes itself big pay increase, Sacramento Bee, 9/20/00). James McRitchie, the editor of CorpGov.Net, immediately filed to request a determination by the Office of Administrative Law concerning the legality of the Board’s actions. Kathleen Connell, later replaced as State Controller by Steve Westly, soon afterward filed suit in court.

Interestingly, I traded legal points concerning the case with her Deputy, Fred R. Buenrostro, Jr., now the CEO of CalPERS. Mr. Buenrostro felt the same as I did; the Board should follow the law. I must admit, it not only feels good to have the courts vindicate our position, it also feels good that the current CEO of CalPERS seems much less likely to go along with suggestions by the Board that they are above the law.

The Board had claimed their Constitutional authority under theCalifornia Pension Protection Act of 1992, Art. XVI, § 17, which granted them “plenary authority and fiduciary responsibility for investment of moneys and administration of the system” placed the Board above California statutes.

“Contrary to article VII, section 4, of the California Constitution, which limits the employees exempt from civil service to one deputy or employee selected by the Board, and contrary to section 20208, which classifies personnel with investment expertise as civil service employees, the Board exempted at least 10 portfolio managers from civil service. Contrary to article XVI, section 7, and the uniform payroll provisions of section 12470, the Board issued its own warrants for the pay of its portfolio managers. Contrary to section 20091, which limits the compensation of Board members for attendance at Board meetings to $100, the Board increased the compensation to $400 per meeting. Contrary to section 19820, subdivision (a), which limits travel reimbursements for Board members and employees, as determined by the Department of Personnel Administration (DPA), the Board adopted an expense reimbursement policy that exceeded its amounts. Contrary to section 20092, which limits the amount the Board may reimburse a member’s employing agency (known as ‘release time’ reimbursements) to 25 percent of the member’s annual compensation, the Board increased the reimbursement rates beyond 25 percent. ” (see Calif. court rules Calpers pay raises illegal, Forbes.com, 1/31/03)

As I recall, several members of the Board argued that they would be violating their fiduciary duty if they failed to raise their own reimbursement because the Board would be unable to attract qualified candidates unless they were paid more. That logic came only months after the Board sought to enact election rules which the Sacramento Bee called “undemocratic, chilling and wrong,” warning that they “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” (see CalPERS muzzles critics: Ballot rules protect board, keep others in the dark, Sacramento Bee editorial, 5/24/99 )

I have no problem with Board members and portfolio managers being paid more. The Board should simply sponsor a bill in the Legislature to change the law. If Robert Carlson is elected as the Board President, expect such legal abuses to continue. If Sean Harrigan is elected, such abuses will likely end. Willie Brown, who knows? I’m betting on and lobbying for Harrigan.

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SRO for Mutual Funds?

The SEC will seek comments on additional ways to expand the role of the private sector in “fostering compliance by investment companies and investment advisers with the federal securities laws.” The following possibilities were listed in their press release:

  1. a requirement that advisers and funds obtain periodic compliance audits from third party compliance experts;
  2. reliance on independent public accountants that audit fund financial statements to examine fund compliance controls in connection with the audit;
  3. the formation of one or more self-regulatory organizations to oversee the activities of funds and/or advisers; and
  4. a requirement that advisers obtain fidelity bonds.

Comments that I’ve seen in the press focus on item 3, formation of an SRO modeled after the National Association of Securities Dealers, which oversees brokers and dealers. According to theBoston Business Journal, the new SRO would regulate the $6.6 trillion mutual fund industry and the 7,500 advisers registered with the SEC, which manage $20 trillion for funds as well as individual and institutional investors.

Vanguard and other industry representatives criticized the concept and some shareholder advocates expressed preference for continued direct SEC oversight of mutual funds.

The 2/7/03 ISS Friday Report quotes Barbara Roper of theConsumer Federation of America saying “it would need to have a majority of non-industry people on the board. Mercer Bullard ofFund Democracy told the Friday Report that such a move would “only be justifiable it it’s being done because of lack of SEC resources,” adding his fear that NASD would try to become the SRO.

Personally, I see the proposal as an opportunity. Key, as Barbara Roper indicates, would be to have a majority of board members who do not represent management companies. Perhaps we can somehow use this idea to bring the “mutual” back into mutual funds. Cooperatives of shareholders should control the management companies. Instead, we often see management companies placing their own desires ahead of the needs of their clients. For example, the law requires that funds give shareholders the opportunity to approve contracts with fund managers, but the SEC has exempted hundreds of funds from the requirement.

Let’s have an SRO that is dominated by the likes of Barbara Roper, Mercer Bullard, John Bogle, Roy Weitz of FundAlarm.comand long term investors. Maybe then mutual funds can get away from what Bogle has termed “a rent-a-stock industry.” “Responsible corporate citizenship and proxy voting are rarely on a fund manager’s agenda, because a company’s stock may not even remain in the portfolio until the next annual meeting.” (see Bogle’s “Just When We Need It Most… Is Corporate Governance Letting Us Down?” and his proposal for a Federation of Long-Term Investors) Maybe that could be the core of a Self-Regulating Organization of mutual fund owners. Are any of the SRI funds ready to get aboard?

Sarbanes-Oxley Act: What Public Companies Need to Know

That’s the title of a Toronto conference put on by OpenDialogue in early April. The key note address will be made by Martin P. Dunn, Deputy Director, SEC on the topic “What Does the Sarbanes-Oxley Act Mean for Canadian Companies, Their Officers, Directors, Auditors & Lawyers?” Register online.

SEC Sets Bar at 9%

Pensions&Investments reports the SEC intends to challenge corporations with pension funds that assume long-term returns of 9% or higher. Last summer P&I reported that 87 of the 100 largest corporate defined benefit plans had return assumptions of 9% or higher. (SEC will challenge some return assumptions, 2/3/03)

CalPERS Falls From Grace?

A recent Wall Street Journal article titled “Cronyism at Calpers” (1/31/03) started out: as follows: “How have the mighty fallen. And how quickly. For decades, Calpers , the giant California state pension fund, set a standard of excellence in investment performance and probity. Lately, however, Calpers has become the poster-plan for bad performance, cronyism and lousy corporate governance. And it’s about to get worse.”

The “worse,” of course, is the possible pending election of the colorful former Speaker of the Assembly and current Mayor of San Francisco, Willie Brown. While he has a reputation for doling out contracts to friends, punishing enemies and spewing witticisms, Brown has never been caught doing anything illegal, despite being constantly investigated by an army or reporters and others who would love to bring him down.

The Wall Street Journal continued: “Since Governor Gray Davis has enormous influence over board membership, it’s no surprise that a majority represents, or is supported by, labor or the Democratic Party.” All partisan statewide offices in California are held by Democrats and all CalPERS directors elected by members require the support of labor to win. Yes, all CalPERS board members are supported by labor and/or the Democratic Party. That’s hardly a phenomenon attributable to Governor Davis.

The article ran through a short litany of sins – CalPERS invested in companies whose managers have made campaign contributions board members or to Governor Davis. And board members own stock in companies CalPERS has invested in. There’s also the fact that CalPERS has been loosing money and investing in increasingly risky ventures to try to make up for those losses.

The article concludes by noting the first two candidates to declare themselves for the CalPERS presidency were Sean Harrigan, “a boss of the Food and Commercial Workers Union” Bob Calrson, “a retired general counsel for the State Department of Transportation. Then a third candidate popped up — with the support of Mr. Davis — Mayor Brown.”

Why is Sean Harrigan a union “boss,” whereas Bob Carlson is a retired general counsel? Carlson was president of the California State Employees Association. Doesn’t that qualify him to be labeled a former labor boss? The picture painted by the Journal is one of CalPERS falling from “probity” with an investment strategy “increasingly twisted” toward socially responsible investing ”designed to reward the Democratic faithful.”

Countless studies recently have shown that socially responsible investing is at least equally profitable as investing solely to make money. Yes, the board is starting to lean more and more in the direction of wanting to get double or triple bottom line returns…earning money for members, jobs for Californians and an increased tax base from companies that don’t pollute and favor diversity.

The article was incredibly naïve, especially considering the source. The Journal should know the board of any organization that controls $130 billion is unlikely to be without conflicts of interest. CalPERS didn’t suddenly fall from probity; it fell years ago. Despite that, it is still far ahead of most corporate pension funds or mutual funds in representing the interests of its members.

Conflicts of interest are nothing new at CalPERS. Twenty years ago a list of contributors to Treasurer Jesse Unruh, who coined the phrase “money is the mother’s milk of politics,” ran to dozens of pages from investment banks and others doing business with the System.

Ex-board members have become “placement agents,” lobbying their cronies for personal enrichment. One such board member even recently returned to the board…perhaps to renew acquaintances? The board has argued its constitutional status allows them to ignore Government Code limits on their own salaries and requirements that their proposed regulations be subject to public notice.

CalPERS wants corporations to limit the number of boards directors sit on. Yet, the current acting president, a director for more than 31 years, also serves on 12 private investment trusts. Another current board member declared personal bankruptcy twice while chairing the investment committee.

The previous board president violated regulations in order to ensure reelection. When it looked like future elections may actually raise conflicts of interest as a major issue, the board proposed rules, which the Sacramento Bee warned “risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.”

Despite all these problems, for the most part, CalPERS meetings are held in public, campaign contributions and the investments of all board members are disclosed, members of the System get to directly elect almost half the board, and the System’s votes in corporate proxy elections are published online. How many corporate pensions or mutual funds can boast such openness and such democratic foundations?

Yes, CalPERS board members are fallible. Like corporate directors, they behave differently when observed. Willie Brown’s election to board president would surely result in the press shedding more light on potential conflicts of interest. That alone might be a welcome legacy.

If the Wall Street Journal wants to do something constructive, they should cover the next CalPERS elections. I’ve been following CalPERS news for almost 30 years but I cannot recall any newspaper endorsing CalPERS board candidates who are elected by the members. I’ve never even seen them do a crude analysis of the candidates and their positions. If the Wall Street Journal doesn’t want to cover such elections, what about the Los Angeles Times, San Jose Mercury News or Sacramento Bee? They cover school board elections; why not CalPERS elections?

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