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Commentary: CalPERS: Too Fierce?


At Progressive Corp.'s (PGR) shareholder meeting in April, CEO Glenn M. Renwick was up for reelection to the board, but the California Public Employees' Retirement System wasn't going along. The giant pension fund withheld support for him, citing a "business relationship" that could impair his judgment.

A sweetheart deal? Lucrative consulting contract? Not quite. Progressive last year bought software from Fiserv Inc. (FISV), where Renwick is a director. The cost: $3,595 -- a measly 0.0001% of Fiserv's revenues.

If Renwick is miffed, he's not saying; he declined comment. But he's in good company. At 2,400 companies this year, 90% of its portfolio, CalPERS is withholding support for directors -- many whose sins are exceedingly small.

Most are audit committee members who let auditors consult -- which can be an incentive to overlook problems. Others have attendance gaps or minor conflicts. CalPERS wants to bring such issues to the fore. Says spokeswoman Patricia K. Macht: "Our way to vote our conscience is to cast our protest vote against those directors."

If CalPERS wants the attention of wayward directors, it has it. But if it wants lasting change, targeting the worst would be better. By faulting everyone, CalPERS risks marginalizing its voice -- becoming the pension fund that cried wolf.

What's more, CalPERS' approach could backfire. The Securities & Exchange Commission is considering making it easier for shareholders to nominate board candidates. Business interests are furious, saying the move would cause chaos. CalPERS' no-vote campaign confirms their worst fears and gives them a potent argument against one of the most important reforms to come along in decades. Says John J. Castellani, president of the Business Roundtable: "It's a broad-based agenda that has gone too far."

Moreover, Castellani and others say that reflects CalPERS' pro-labor agenda. They point to its attack on Safeway Inc. (SWY), right on the heels of a bruising supermarket strike. Union-dominated CalPERS withheld support for CEO Steven A. Burd and two directors with business ties to the grocer, all of whom won reelection anyway. CalPERS acted after Safeway had already agreed to replace three other board members, leading some to conclude that the attack was payback for Safeway's tough strike stance. Says Kevin A. Hassett, director of economic policy studies at American Enterprise Institute: "This is shareholder activism designed to further labor's ends."

In theory, CalPERS' position on auditors who consult is right: They shouldn't. But not every company that permits it is equally wrong. It makes sense for auditors to do some nonaudit work, such as tax services. That's why Congress made that exception in the Sarbanes-Oxley Act, subject to many safeguards. And while consulting fees that exceed audit fees are a problem, that's not the case at every company cited by CalPERS. At Coca-Cola Co. (KO) and BusinessWeek parent McGraw-Hill Cos. (MHP), CalPERS targeted audit committee members even though consulting fees at both companies declined in 2003, represented less than half of all fees, and were mostly for tax services.

CalPERS' tough stand on director conflicts also makes sense -- except when they no longer exist. At Verizon Communications Inc. (VZ), CalPERS targeted Sandra O. Moose, citing the company's relationship with her former employer, Boston Consulting Group. But that relationship ended more than three years ago, which eliminates the conflict under New York Stock Exchange rules. At Lockheed Martin Corp. (LMT), CalPERS had James R. Ukropina in its crosshairs because the company gets legal services from his former law firm. He left the firm in 2000.

CalPERS says it wants errant companies to change; 50 already have or are mulling improvements, including Gap (GPS) and American Express. Exceptions for some directors would weaken the campaign, argues Macht: "We'd be accused of having sacred cows."

True, CalPERS isn't alone in its hard-nosed approach. And with thousands of companies to evaluate it's tempting to let the data decide. But a dogmatic approach weakens CalPERS' credibility and tars companies that are making progress. A targeted approach can work just as well. Consider that building-trades union funds raised the consulting issue at 33 companies, and 21 agreed to changes -- all without a single protest vote.

Teddy Roosevelt would call that speaking softly and carrying a big stick. It's a lesson CalPERS would do well to learn.

By Louis Lavelle


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