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Management: Shareholder Activists
"The Teddy Roosevelts of Corporate Governance"
In urging reform, TIAA-CREF speaks softly and carries a big stick
Activists in any field are rarely known for their civility, grace, or diplomacy. To prod the Establishment into change usually requires aggressive, headline-grabbing tactics. That's what Dale M. Hanson of the California Public Employees' Retirement System (CalPERS) used in the 1980s to force recalcitrant boards into toppling their laggard chieftains.
But in recent years, the world's largest pension fund, the $255 billion Teachers Insurance & Annuity Assn./College Retirement Equities Fund (TIAA-CREF), has championed an entirely different approach. Thanks to two former CEOs it hired to jawbone their ex-confreres, CREF has become the master of pushing change through quiet, behind-the-scenes diplomacy. And along the way, it has replaced CalPERS as the most powerful player in corporate governance. "We're not out to make noise," insists Peter C. Clapman, 63, the fund's chief counsel for investments. "We're out to be an effective force on corporate governance. I'd rather give companies the chance to make changes on their own than get their dander up with publicity."UP FROM CALPERS. The tactics have worked remarkably well in persuading companies to create more independent boards, adopt rules that strengthen director involvement, and ditch anti-takeover defenses. "They are every bit as influential as CalPERS in the 1980s," says James E. Heard, chairman of Proxy Monitor Inc., which advises investors on governance issues. "More quietly and methodically, they have been able to penetrate the boardroom in a way that CalPERS couldn't."
In large part, that's because the fund hired the consummate insider. B. Kenneth West, 65, former CEO of Harris Bankcorp Inc. in Chicago and a Motorola Inc. director, has pressed some 30 CEOs a year for changes since joining the fund in 1995 as a senior consultant.
His involvement over four years has given the fund a special advantage. "They can't B.S. me--because I've been there," says West. "I've thought a lot about these issues. My corporate friends sometimes needle me. But when you're on a tennis court or a golf course with your friends, the objective ones applaud what CREF is doing because they know there are abuses out there."
Among his first big targets in 1997 was the H.J. Heinz Co. board, where a majority of directors were insiders and longtime friends of Chairman Anthony J.F. O'Reilly. A letter from West expressing CREF's concerns led to a face-to-face meeting with O'Reilly at Heinz's Pittsburgh headquarters. At the session, West explained the fund's position. O'Reilly calmly gave his point of view, declining to make changes. "I have never had an acrimonious conversation or even a tension-filled one," says West. "I go in not only to talk but to listen."
Unimpressed with what it heard, CREF responded by filing a shareholder resolution with the Securities & Exchange Commission. Although Heinz was able to exclude CREF's resolution from its proxy because of a technicality, last year it filed another. After meeting again with O'Reilly and new Heinz CEO William R. Johnson, however, the fund withdrew it. Why? The steady increase in pressure appears to have worked. Resignations and new recruits have changed the board so that 11 of 19 directors are now outsiders. Heinz also assured CREF that more changes were coming.EAGER DRAFTEE. West wins plaudits from companies he has lobbied for reform. "Ken West has a balanced view over what is achievable and what makes sense," says Thomas M. McCoy, general counsel at Advanced Micro Devices Inc. "That makes him a very effective advocate." Earlier this year, CREF reached agreement with AMD to increase the independent directors on its board.
Pleased with West's success, the fund hired a second retired CEO in February: B.A. "Dolph" Bridgewater, 65, former CEO of Brown Group in St. Louis and a director of FMC Corp. His hiring as a senior consultant will allow CREF to double the number of company visits it makes to gain concessions. Like West, he is an eager draftee to the cause. "I have labored hard among the governed," says the lanky, gray Bridgewater. "I'm interested in the field and believe that good governance pays."
The fund also recently recruited as full-time governance director Kenneth Bertsch, 42, who spent 14 years at the Investor Responsibility Research Center in Washington, a group that gathers proxy data and analyzes governance issues. An expert at poring over company documents in search of poor practices, he rounds out a team that includes veteran Richard M. Schlefer, a CREF official who has been active in governance since the mid-1980s. In 1987, he presented the first resolution on a poison pill by an institutional investor.
Together, the group aims to maintain its reputation as the most influential player in governance. CREF's approach starts with a proprietary database that catalogs the governance practices at more than 1,700 of the 3,300 companies in its U.S. portfolio. The fund monitors 25 governance issues--from board independence to directors' conflicts of interest. Companies that fall short, under a point system devised by the fund, get letters and, often, visits from West.
Only when completely rebuffed will the fund go public with a dispute, filing shareholder resolutions and using its massive resources to throw its weight around. This spring, for instance, Clapman launched a major initiative to ditch "dead-hand" poison pills, a particularly oppressive antitakeover defense that can be removed only by incumbent directors. Seven of 10 targeted companies revoked the pill, and the fund is still waiting to hear from one more corporation. Two companies, however--Lubrizol Corp. and Bergen Brunswig Corp.--decided to fight. To gather support, the fund telephoned or met with other large investors and sent letters to 4,000 or more individual shareholders at each company. At Lubrizol, some 68% of the shares voted in favor of CREF's resolution to redeem the pill. At Brunswig, the fund won support from 74% of the shares voted.RANKLED CHIEFTAINS. Generally, though, CREF has found that the diplomatic approach works. A recent study carried out by three professors at the University of Arizona showed that CREF wrested governance concessions from 42 of 45 targeted companies from 1992 to 1996 on such issues as poison pills, confidential voting for shareholders, and board diversity. About 32 of the settlements were negotiated without the issues coming to a shareholder vote. "They are the Teddy Roosevelts of corporate governance," says Thomas H. Paris III, manager of shareowner affairs at Coca-Cola Co. "They speak softly but carry a big stick."
What rankles some chieftains, however, is that the fund doesn't hesitate to raise governance issues even when a company is performing well. That has been a sore point with some executives, from Walt Disney Co. CEO Michael D. Eisner to Heinz's O'Reilly. They have argued that shareholders shouldn't be overly concerned about governance practices in the absence of poor stock performance. But CREF's Clapman was among the first to counter that good-governance procedures are key because they can cause a board to act more quickly to prevent a corporate meltdown.SOFTBALL. Disney may not agree with CREF's approach--but it hardly seems to be ignoring the fund either. Since CREF tried to get the company to put more independent directors on its board and voted against a new pay package for CEO Eisner in 1997, the entertainment giant has made substantial changes. Disney has agreed to annual elections of all its board members, allowed a poison pill to expire, and replaced two insiders on its board with independents. A Disney spokesman said the changes were in the works before CREF showed up on its doorstep. "We're not 100% happy," says Clapman. "But you don't expect everything to be accomplished in one year, and we don't want to take an unreasonable, hardball attitude."
The fund's softball approach, however, sometimes lets companies maintain egregiously bad governance practices. Consider EMC Corp., a Hopkinton (Mass.) maker of computer-storage devices. Its eight-member board includes Chairman Richard J. Egan's wife, brother-in-law, son, and nephew, yet the Egans own just over 2% of the company's shares. The board also includes the CEO of a company on whose board Egan sits, as well as a former EMC consultant.
Alarmed by the board's lack of independence, West visited Egan. The chieftain told West that his company met 62 of some 63 guidelines laid out in the fund's 20-page policy statement on governance and had no plans to remake the board. Surprisingly, Egan persuaded West not to make a fuss. "He convinced me that the board is behaving very well despite its lack of independence," said West. "There is no such thing as a perfect formula. What works for some doesn't always work for others."
In the future, Clapman and his crew plan to do a better job of scrutinizing executive compensation, as well as governance practices at companies based outside the U.S. But don't expect them to be anything but the diplomats of governance they have become.By John A. Byrne in New YorkReturn to top