American International Group (AIG), based in New York, tops the list following allegations of widespread accounting fraud and other corruption that cost CalPERS more than $240 million in losses.
Also on the list are AT&T of Bedminster, New Jersey; Delphi in Troy, Michigan; Novell in Waltham, Massachusetts; and Weyerhaeuser in Federal Way, Washington.
“These five companies are now on our radar screen for their poor corporate governance and in many cases poor performance that has economically damaged shareowners,” said Rob Feckner, President of the CalPERS Board. “We will press for needed reforms to restore long-term profitability and investor confidence.”
CalPERS’ Focus List is selected from the pension fund’s investments in more than 1,800 U.S. corporations, and is based on the companies’ long-term stock performance, corporate governance practices, and an economic value-added (EVA ®) evaluation.
By using EVA ® and stock performance, CalPERS has pinpointed companies where poor market performance is due to underlying financial performance problems as opposed to industry or extraneous factors alone. EVA ® measures a company’s net operating profit after tax, minus its cost of capital.
AIG made CalPERS’ list after its stock dropped more than 21 percent in the one year period ended March 31, 2005, and investigations began into accounting misstatements, bid-rigging and the use of questionable insurance products.
“Potential fraud and corruption at AIG have cost working families millions of dollars and threatened the security of their pensions,” said Charles Valdes, CalPERS Investment Committee Chair. “We are going to do everything in our power to seek corporate governance improvements to prevent further economic damage. A good start for AIG would be to strengthen the independence of its board.”
The pension fund filed a shareowner proposal requiring an independent Chairperson at AIG and at least two-thirds of the Board be independent directors.
While AIG has recently appointed Frank G. Zarb, as Chairman of the Board and Martin J. Sullivan as CEO, CalPERS’ proposal would require a bylaw change to ensure that these changes are permanent.
AT&T is on CalPERS’ list despite SBC’s acquisition announcement to acquire the company earlier this year. The pension fund believes the company and its directors warrant greater attention after change in control agreements were approved that could pay out $41 million in cash to executives and additional millions on the immediate vesting of stock options and restricted stock.
“These severance payouts are obscene,” said Valdes. “AT&T’s leaders ran this company into the ground, sold it, and were the architects of compensation plans that will pay many of them millions. CalPERS will strongly consider withholding support for these AT&T directors should they land on the SBC Board or other corporate boards to prevent a repeat of the egregious AT&T severance payouts.”
AT&T’s stock price is down more than 74 percent for the five-year period ended March 31 according to a CalPERS staff analysis.
A shareowner proposal filed by CalPERS at AT&T’s 2005 annual meeting seeks to require shareowner approval of any severance payout that exceeds 2.99 times the sum of the executive’s base salary and bonus.
CalPERS elevated Novell from its 2004 Monitoring List to its Focus List after the Company’s stock price fell 47 percent during the one-year period ended March 31, and Novell failed to design a true performance-based executive compensation plan tied to operational performance following months of negotiations with the pension fund.
CalPERS officials believe the Company’s current plan fails to use meaningful operational or capital metrics consistently across top management.
Specifically, the plan relies upon weak premium priced options, does not include multiple performance metrics consistent with long-term sustainable operating performance and fails to establish real vesting hurdles.
Delphi and Weyerhaeuser made the list because of their poor response to multiple shareowner proposals that have been approved by shareowners but not implemented by their Boards.
CalPERS also put Delphi on the list because the company overstated cash flow from operations by $200 million in 2000 and pretax-income by $61 million in 2001, significant executive turnover, and is the focus of investigations by the Securities and Exchange Commission and FBI.
Proposals to declassify the Delphi Board and change to annual director elections have passed for the last four years, and proposals to redeem the Company’s poison pill have passed for the last five years.
Similar proposals to declassify the Weyerhaeuser Board were approved by a majority of shareowners in 2000, 2002 and 2003.
“These directors sat on their hands and ignored the wishes of their owners,” said Feckner. “They should immediately declassify consistent with the demands of their shareowners.”
CalPERS has filed a shareowner proposal this year seeking to amend Delphi’s bylaws that would ban any current or former director from being re-elected if the director opposed declassifying the Board following last year’s annual meeting.
The pension fund has also filed a proposal to declassify the Weyerhaeuser Board at its April 21 annual meeting.
For more information on CalPERS’ Focus List, visit the pension fund’s press room at www.calpers.ca.gov.
CalPERS is the nation’s largest public pension fund with assets totaling approximately $182 billion. The System provides retirement and health benefits to 1.4 million State and local public employees and their families.
