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COMMENTARY: PUTTING YOUR MOUTH WHERE YOUR MONEY IS

Every year, the $80 billion New York State Retirement Fund screens the performance of some 900 companies in which it invests. Typically, about 30 laggards pop up on the radar screen. This year's list includes A&P, Ann Taylor Stores, Bausch & Lomb, and Kmart.

Then the pension fund targets a dozen boards for complaint. Making the list has little to do with governance. ''It's all bottom line,'' says Linda E. Scott, director of investor affairs. ''It's 'How much money did you make for us this past year?' We're not here to make sure that boards are composed of good directors. We're here to make sure boards make money for us.''

But that is a blinkered view. Isn't it likely that good directors will increase the odds of good performance? And that good directors will minimize the chance of a corporate meltdown? You bet. A strong board is essential for anticipating and responding to change. ''Companies like Sears, General Motors, and IBM took their preeminence for granted, sowing the seeds of their downfall,'' says Nell Minow, a shareholder activist and principal of the investment group Lens Inc. ''Corporate governance reforms laid the foundation for their recovery.''

Yet only a handful of public pension funds have become even remotely active in promoting the adoption of best practices in corporate governance. What about the mutual funds that currently manage some $1.5 trillion in equity? ''Go to any big mutual fund, and it's like the dog that didn't bark,'' says one prominent governance expert. ''Their emphasis has been on bringing money in the door. There is no recognition that being an active owner can benefit the funds.''

And corporate pension funds? It may be something of a stretch to ask money managers to pursue any kind of controversial activism. But as clear standards in governance emerge, even corporate funds should actively promote them. The $1.3 billion Campbell Soup Co. pension fund, for example, votes on proxy issues in accordance with its company's own progressive governance principles.

Similarly, public pension funds should closely watch what's going on at TIAA-CREF, the country's largest pension fund. As the owner of more than 1% of Corporate America, it has begun to recognize the responsibility it has to urge good governance on the companies in its portfolio. TIAA-CREF prods them to create independent boards, to adopt rules to strengthen director involvement, and to encourage tougher evaluation practices.

CRONIES. Unlike the New York Retirement Fund, TIAA-CREF isn't homing in on performance laggards. Instead, it monitors 25 governance issues--from board independence and diversity to the ages of directors and their potential conflicts of interest--at the 1,500 companies that make up its $92 billion equity investment. Companies that fall short under a point system devised by the fund will get visits--regardless of market performance. B. Kenneth West, former chairman of Harris Trust & Savings Bank and now a senior consultant for governance at TIAA-CREF, expects to contact up to 60 companies a year to press for reforms. The effort to define good-governance principles and to monitor and encourage them is costing the fund about $1 million a year.

Recently, West recalls, he visited a CEO whose board was loaded with cronies and outsiders whose average age hit 70. ''You should have seen what it was like when I got here,'' West recalls his saying. ''You had to turn the air conditioning up to keep everyone awake.'' Surely, there is an economic benefit to getting a better group of directors in that boardroom. Every pension fund and mutual fund in the country should understand that having a strong and independent board isn't mere procedural frippery. It can be a matter of corporate life and death.

By John A. Byrne


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Updated June 14, 1997 by bwwebmaster
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