Responding to dismal stock performance and poor governance practices, the California Public Employees’ Retirement System (CalPERS) today released its annual Focus List -- naming 11 underperforming companies in such sectors as retail, electronics, pharmaceuticals, and media.
Companies called out this year for lackluster efforts include food industry giant Sara Lee; Eli Lilly, the big drug company; Tribune Company, a media titan; and the Marsh & McLennan insurance firm.
Also on the 2007 Focus List were International Paper, Tenet Healthcare, data company EMC, Dollar Tree Stores, Corinthian Colleges, the Kellwood textiles and apparel company, and electronics-maker Sanmina-SCI.
"The long term performance of all 11 companies is at least 20 percent behind their peers, and they have resisted appeals to change corporate practices that make their boards unresponsive to shareowner interests," said Rob Feckner, CalPERS Board President. "In several cases, their entrenched boards refuse to discuss our grievances."
Sara Lee and Eli Lilly allow shareowners no opportunity to amend bylaws by employing restrictions used by only 4 percent of S&P 500 companies.
CalPERS is pursuing shareowner proposals at four 2007 Focus List companies. One proposal, at Eli Lilly, would allow a simple majority of shareowners the right to amend bylaws. At Kellwood, CalPERS seeks to declassify the board whose staggered terms for directors impedes upon accountability to the shareowners. Other proposals at Dollar Tree and Marsh & McLennan address supermajority voting rules for bylaw changes and excessive severance pay agreements.
Corinthian Colleges, International Paper and Tribune Company have classified boards and other objectionable governance practices. International Paper would not declassify its board after 79 percent of shareowners voted in favor of the amendment at its 2006 Annual Meeting.
Tenet Healthcare would not remove supermajority voting requirements for articles of incorporation. Sanmina-SCI would not agree to adopt a clawback policy to recapture bonus and incentives payments in the event of officer fraud or misconduct, and EMC has resisted efforts to change excessive pay practices.
"Unless these companies make changes, we'll pursue shareowner proposals to address our concerns," said Charles P. Valdes, CalPERS Investment Committee Chair. "The outcome depends on our dialogue with them as we try to improve their stock performance, shareowner rights, and executive compensation and severance policies."
To select Focus List companies, CalPERS begins by screening underperforming companies in the pension fund's largest equity portfolio – the CalPERS 2500 Index Fund. Its objective is to engage publicly traded companies to improve their business models and governance practices to gain positive investment returns. It uses the Focus List to call attention to companies that at the end of the engagement process have failed to make CalPERS' requested changes.
To assess financial performance, CalPERS uses stock performance and economic valued-added (EVA) evaluation to identify companies where poor market performance is due to underlying company specific operating problems as opposed to industry or extraneous factors alone. EVA ® measures a company’s net operating profit after tax, minus its cost of capital.
CalPERS used the same methodology of performance screens and metrics analysis to develop this year's list as it did in 2006, when six companies were named to the Focus List. As many as 10 companies were cited in 1992, when CalPERS issued its first formal public list.
Research shows that improved corporate governance leads to performance gains, over time. A Wilshire Associates study of the "CalPERS Effect" of corporate governance found that the stock values of companies on the Focus List companies subsequently outperformed the Standard & Poor’s 500 Index by 3.1 percent, per year, over five years.
For Fact Sheets about the companies, visit the CalPERS press room at www.calpers.ca.gov.
CalPERS is the nation's largest public pension fund with assets totaling more than $230 billion. The System provides retirement and health benefits to approximately 1.5 million State and local public employees and their families.
