The CalPERS Story: Pioneering and Establishing Corporate Governance in the USA
‘LIKE HELL!’
That indignant outburst came from Jesse Unruh, a seasoned Kennedy politician in California and a powerful trustee of the state pension fund CalPERS in California. The indignant reaction was provoked by Texaco’s management and board, which at that time was entirely dominated by members who were also in the executive management, who had seen off a hostile bid for Texaco by means of a so-called greenmail operation’ in 1984. Bass Brothers, who were the ones considering a take-over, had acquired a significant minority holding in Texaco as the starting point for a bid for the whole company. The Texaco management saw this as a threat to its own position. By exploiting the American Companies Act whereby a company can buy back its own shares from existing owners, and in addition making their offer only to Bass Brothers, they were able to stave off the threat. Nor was there anything to prevent the management from using greenmail (referring to the colour of the dollar bill); in other words offering an exorbitant price – in this case US$55 per share compared with the market price which was around US$35 at that time (1984). What annoyed Jesse Unruh was not just that they were robbing the other shareholders, including CalPERS (the excess being paid in this case corresponded to a total of US$137 million, thus reducing the net value of the company by the same amount and hence the value of the remaining shareholders’ stakes to a similar degree), but also that such goings on were possible at all.
Jesse Unruh was unable to do anything about this particular affair, but one could claim that this incident was the trigger for the whole American Corporate Governance movement.
An Important Resolution The CalPERS’ board immediately adopted a resolution which stated that as long-term investors they would not accept behaviour similar to that of Texaco from companies they had invested in and that they expect these companies to follow practices that are not prejudicial to the shareholders. CalPERS decided to use its power as a shareholder at the general meetings to see through its resolution and also to work in other ways to get to grips with the unsatisfactory state of affairs on the American stock market and in American corporations. Apart from the greenmail abuse, which was one of the worst offences, there were a lot of other issues to tackle, for example the boards’ dependence on the management, the competence and appointment of the boards, the boards’/managers’ salaries, emoluments and incentive system, so-called poison pills (various arrangements to prevent or obstruct hostile takeovers).
The mission and investment policy of CalPERS Before getting on to what happened next, more background information is needed to understand the underlying motives and driving forces behind the actions.
CalPERS, which was among the inner circle of the largest public pension funds even in 1984, is now the largest in the USA, with total assets of more than US$160 billion.
Towards the end of the 1960s legal restrictions on pension funds’ possibilities of investing in share were lifted. Increased requirements for growth in Texaco from companies they had invested in and that they expect these companies to follow practices that are not prejudicial to the shareholders. CalPERS decided to use its power as a shareholder at the general meetings to see through its resolution and also to work in other ways to get to grips with the unsatisfactory state of affairs on the American stock market and in American corporations. Apart from the greenmail abuse, which was one of the worst offences, there were a lot of other issues to tackle, for example the boards’ dependence on the management, the competence and appointment of the boards, the boards’/managers’ salaries, emoluments and incentive system, so-called poison pills (various arrangements to prevent or obstruct hostile takeovers).
The mission and investment policy of CalPERS Before getting on to what happened next, more background information is needed to understand the underlying motives and driving forces behind the actions.
CalPERS, which was among the inner circle of the largest public pension funds even in 1984, is now the largest in the USA, with total assets of more than US$160 billion.
Towards the end of the 1960s legal restrictions on pension funds’ possibilities of investing in share were lifted. Increased requirements for growth in these pension funds, in order to guarantee civil servants’ pensions, have meant that the proportion in shares has been increasing all the time. Table 2.1 shows CalPERS’ total assets as of January 31, 2000 of which the dominant portion consists of shares.
The pension commitments are of the defined benefit type, in other words a certain pension is guaranteed to the beneficiary. With the increasingly tight finances in the state of California, there was increasing pressure on CalPERS to raise the return on its existing funds so the current budget was debited with the lowest possible charges so as to ensure the consolidation of the pension liability. In recent years, CalPERS’ investments have generated a surplus return far above pension liabilities to the extent that it has been possible to raise pension benefits (compare that with the cumbersome state of affairs in most European countries where pension funds covering present and future pension benefits are minimal, if they exist at all).
Since the early 1970s, CalPERS investments in shares have predominantly been made on the basis of an index tracking strategy. This means that the total share portfolio reflects the whole stock market and that the yield is thus expected to follow the development of the general index. There are several reasons why this strategy was chosen. First of all, a pension fund is a long-term investor. It is the long-term yield, which is the decisive factor. It is not exposed to the competition, which unit trusts and personal pension insurance companies are, where the current yield is often an important factor in competition…
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