California Public Employees' Retirement System has kicked some serious butt in the name of good corporate governance policies at major companies recently, and it has definitely turned up the heat in the past year. However, CalPERS may have to prove it can eat its own cooking when it comes to serving up prudent organizational policies.
The watcher ...
CalPERS has applied plenty of pressure for shareholder-friendly policies at major companies this year. For example, it tried to remove Massey Energy (NYSE: MEE) CEO Don Blankenship from the chairman role after the company's mining disaster this year. It has pushed for majority voting standards at Apple (Nasdaq: AAPL), Google, and Comcast (Nasdaq: CMCSA), among others. Joining dozens of other pension funds, CalPERS also urged Bank of America (NYSE: BAC), Citigroup (NYSE: C), Wells Fargo (NYSE: WFC), and 14 other financial companies to adopt say-on-pay policies.
CalPERS has also been a vocal contributor of feedback to the Securities and Exchange Commission: When the SEC considered proxy access rulemaking, CalPERS pointed out that onerous requirements for shareholder ownership thresholds would make it difficult for activist shareholders to have any sway against large companies like Goldman Sachs (NYSE: GS), where even top pension funds own less than the 3% threshold for proxy access.
CalPERS deserves credit for pushing for prudent, shareholder-friendly policies and pushing against corporate excess. Checks and balances are essential when too many shareholders have taken an apathetic approach to issues like runaway executive compensation for too long.
Watch this!
Recent news may make it a bit harder for CalPERS to emphasize the "righteous" part of righteous indignation against big corporations' policies, though. It may have more in common with its philosophical adversaries than one might think.
The Associated Press recently dug into CalPERS, which is the largest U.S. public pension fund. The AP found that CalPERS has shelled out big bucks to its own top brass, with six-figure bonuses and fat raises, despite the fact that the fund's holdings had plunged in value.
For all that many publicly traded corporations made some risky bets prior to the financial crisis, apparently CalPERS did, too. According to The Economist, "its woes are striking because they stem from racy investment bets, poor risk management and a lax attitude toward potential conflicts of interest at an institution that was supposed to be a model of modern fund management," as CalPERS "loaded up on real estate, private equity and other illiquid assets in the years before the crisis."
Meanwhile, to emphasize on the "Cal" part of CalPERS: The fund is for California public employees, and that state is in notoriously dire financial straits these days. Look no further than that state's threatened public sector furloughs, which could affect 150,000 state employees. If CalPERS is unable to increase returns on its funds, workers' benefits could be cut, or the fund may call for a state taxpayer bailout that California's cash-strapped citizens can ill afford.
Gov. Arnold Schwarzenegger (R) has called the state's pension system "unsustainable," and while CalPERS claimed its unfunded liabilities were $38.6 billion in 2008, a study commissioned by Schwarzenegger and Stanford University actually calculated the unfunded liabilities at an alarming $239.7 billion.
Add that up, and it sounds an awful lot like an unsustainable economic model destined for failure, complete with long-suffering worker bees and handsomely paid top managements at corporations around the nation. Just like in corporate America, reason and prudence may be sorely lacking.
CalPERS defends the pay and bonus criticisms by saying that it judges performance on a five-year timeline to encourage long-term strategies, pointing out that bonuses in 2008-2009 were 50% lower than in the 2006-2007 time frame. In another parallel to what often transpires in corporate America, CalPERS board member Tony Olivera was quoted as saying CalPERS tried to reduce bonus amounts, but that contractual obligations stymied those efforts.
Fair is fair
When one is criticizing someone else, it can be a nice exercise to count to 10 and do some quick soul-searching, asking if similar behavior may be just a bit closer to home. You could say CalPERS has made a high-profile gadfly, but avoiding any implication it may not quite live up to some of the rules it condones would be better.
Solid corporate governance policies include pay for performance and other compensation issues, and given indications that CalPERS has similar bonus structures and made similar risky gambles that vilified so many corporations, it may become a little harder to take the high road.
It's funny how sometimes folks who are arguably on opposing sides of an issue exhibit the same behavior. Hopefully going forward more folks will be on the same page in a more positive way -- advocating for fiscal responsibility, reasonable pay structures for top brass, and long-term thinking and performance across the board. Fair is fair, after all.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.
