Sean Harrigan has made powerful enemies. As president of Calpers, the United States’s largest public pension fund, he is a thorn in the side of corporate America, taking on some of its best-known and biggest egos.
Earlier this year Calpers led the call for the resignation of beleaguered Walt Disney boss Michael Eisner. It was also pivotal in ousting former New York Stock Exchange chief Dick Grasso over his eye-popping salary.
In April the fund pressed other investors to back its campaign against Sanford Weill, the boss of Citigroup, the world’s biggest bank. Weill, Calpers said, ”should be held accountable” for its role in Wall Street’s scandals. With Citicorp’s profits returning, few agreed — he remains chairperson.
Calpers has filed against Time Warner alleging fraud and withheld votes for the re-election of Warren Buffett to Coca-Cola’s board. The list, a who’s who of US business, goes on.
The California Public Employees’ Retirement System has a long history of shareholder activism. It cites studies showing active share ownership improves long-term performance and share prices. With $170-billion under management, it wields power directors take note of. In the year to June 30, it earned a return of 16,7%.
Calpers has redoubled efforts in response to an unprecedented wave of financial scandals. Amid the accounting woes of Enron, MCIWorldCom, Tyco and Adelphia, fraud in mutual funds and widespread sleaze at Wall Street’s biggest banks, it has emerged as corporate America’s self-styled moral compass.
Says Harrigan: ”If we don’t do it, who will? We’re the largest in the US, and have a responsibility.”
During the row over the $188-million compensation package paid to Grasso, Calpers waded in. Grasso had resisted intense pressure to quit; Calpers demanded he step down at a media conference, and in 24 hours he was gone.
”It was outrageous,” Harrigan says. ”The world’s largest stock exchange should set the example. The pig was in the trough and our job was to get him out.”
The other tangible success this year was Disney — led by Calpers, frustrated shareholders withheld an unprecedented 43% of the vote for Eisner’s board re-election. Disney, after stubbornly defending Eisner, stripped him of the chairmanship but left him chief executive.
Harrigan describes Disney as ”work in progress”. ”I was disappointed the board was naive enough to believe splitting the roles of chairman and chief executive would satisfy our concerns. Eisner is the problem, and there’s only one way to correct it.”
The fund’s attention has recently turned to Royal Dutch Shell, whose board it wants reformed. Like Disney, Shell is on Calpers’s annual ”focus list” of biggest problem companies.
Shell was rocked earlier this year by a series of downgrades to its oil and gas reserves, prompting the departure of several top executives. Calpers, however, is dissatisfied with the pace of change and the transparency of the review process. The company has not been ”particularly responsive”, Harrigan says.
Now corporate America is pushing back, as part of a wider business retreat from the rules installed to improve corporate governance after Enron’s collapse.
The Business Roundtable, a powerful coalition of US chief executives, and the national chamber of commerce have bitterly attacked Calpers, arguing that the corporate governance movement is out of control. Roundtable head John Castellani recently said: ”This is hysteria driven by union-dominated pension funds. They wrap themselves in a corporate governance cloak to gain power and influence.”
California’s Republican Party has also accused the Democrat-dominated Calpers board of political grandstanding. Most pension funds backing Calpers, including New York and New Jersey, are from Democratic states.
Harrigan, a blunt union boss, says detractors are trying to ”protect the status quo” by discrediting the fund. ”Executive compensation was 40 times a production worker’s average wage in 1980 and 520 times that last year. I think the average American lines up with us.
”Look at fraud and its impact on workers and pension funds. Criticism of Calpers comes predominantly from individuals who have benefited from the excesses and the lack of accountability.”
Critics have seized on Calpers’ stance on auditors. The fund last year decided to withhold board re-election votes for audit committee members who 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 too much in their clients’ thrall.
Votes were withheld from directors at 90% of the companies Calpers owns shares in, including Buffett at Coke and Steve Jobs at Apple, provoking ridicule. The Wall Street Journal said it was taking governance reform to ”absurd new lengths”.
Harrigan responds: ”We weren’t suggesting those members be removed from the board. We were making a statement about the importance of drawing a bright line between audit and non-audit related services.”
The fund’s next focus will be on the incendiary issue of executive compensation. Calpers is planning a list of the most egregious cases of excessive pay, to be published later this year or early next.
Harrigan believes a key imminent issue is ”access to the proxy”. US shareholders cannot currently oust directors — but under a rule being considered by the Securities and Exchange Commission, they 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.
He describes as ”bunk” arguments that it will be a Trojan horse, allowing special interest groups on to boards.
”This has the potential to create an environment where we don’t see the fraud we saw at Enron and WorldCom, and to ensure executive pay is reasonable and tied to performance. It is the one issue I believe could align the interests of shareholders and management.” — Â