Investors, large and small, are taking on a more activist role in boardroom matters that can impact the long-term performance of the companies they own.
No group is more involved in issues than the California Public Employees Retirement System -- CalPERS -- on behalf of the 1.6 million state and local employees and retirees who own $211 billion in retirement assets.
Rather than simply make investments in company stocks and hope things work out, CalPERS has been proactive in trying to use its influence in corporate governance matters including the nomination and duties of boards of directors.
It played an important role in the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 recently signed into law by President Barack Obama. In particular, it supported a provision that allows long-term investors the opportunity to nominate candidates to company boards.
"We believe that proxy access is one of the most important tools we have to improve corporate governance in America's boardrooms. When necessary, long-term investors now have an opportunity to propose for election to a board of knowledgeable individuals who can bring fresh ideas and new perspective to a company's operations," said Joseph Dear, CalPERS chief investment officer.
The rule adopted by the Securities and Exchange Commission gives shareholders who own three percent of a company's stock for at least three years the opportunity to nominate a board candidate.
To be sure, the retirement fund has never been shy about flexing its investment muscles. Since 1987, CalPERS has assembled an annual Focus List of companies that have underperformed industry peers based on returns and corporate governance practices.
In the past 23 years a total of 142 companies have been targeted and, as a result of the efforts, have resulted in enhanced long-term stock performance.
A report from the CalPERS Investment Committee released earlier this month documented the results. It found in the five years prior to their placement on the Focus List, the companies produced average annual returns that were 30.1 percent below their market industry benchmarks. However, in the five years following their inclusion on the list, the companies beat the benchmarks by an average of 2.4 percent a year.
"This report validates our efforts to improve the governance and performance of portfolio companies. It also shows a strong positive connection between sound corporate governance practices and long-term share value," said George Diehr, chairman of the CalPERS Investment Committee.
Over the years the Focus List has varied from five to 11 companies and the targeted concerns of the fund have evolved from anti-takeover measures that protected companies from corporate raiders at the expense of share value, to long-term corporate performance and practices that undermine it.
Actually, 2010 is the first year that CalPERS has not compiled such a list of targeted companies. It turns out 14 of the 15 companies that were being considered for the Focus List actually responded to the concerns and made adjustments to improve stock performance and governance policies.
However, CalPERS remains involved with issues at La-Z-Boy, saying the furniture company's board has been unresponsive to shareholder concerns, in particular, the annual election of directors.
CalPERS has a lot at stake. On behalf of its retirees, the retirement fund owns 135,561 shares of La-Z-Boy stock
But, if successful with La-Z-Boy as it has been with other companies of the Focus List, the results will be worth the effort. According to the report prepared by Wilshire Associates, "CalPERS good governance campaign has added value to the share prices of targeted companies."
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