According to press reports, a series of recent, unrelated events may deal a big blow to the activist investor movement.
In just the past few weeks, Sean Harrigan was ousted as president of the California Public Employees' Retirement System; Roy Disney and Stanley Gold decided not to further pursue their aggressive tactics toward Walt Disney; TIAA-CREF disclosed it was being investigated by the Securities and Exchange Commission for possible auditor independence violations involving two former trustees; reports began to surface that William Donaldson would be replaced at the SEC; and New York State Attorney General Eliot Spitzer—who has almost single-handedly altered the way the financial services industry operates—has decided to run for New York governor.
But those involved in the process claim that the current emphasis on corporate governance is not likely to dissipate soon, largely due to the institutionalization of processes that outshine the impact of any single individual.
Bottom Line
“That’s a broad array of events,” acknowledges Abe Friedman, chief policy officer of institutional research firm Glass Lewis. “I would not describe any of them as a broad blow to the corporate governance reform movements or concept. It will continue to see investors look out for investor interests.”
Elson
Charles Elson, who heads the University of Delaware’s Weinberg Center of Corporate Governance, agrees with Friedman. “I think they are side issues,” he asserts. “I don’t think they will have a big impact.”
Indeed, even Harrigan himself said as much when it became clear he would not be retained by CalPERS, which runs the country’s largest pension fund. “You can continue to expect that our initiatives will go on uninterrupted, sadly without me, but with as much might and courage as my colleagues will muster,” said Harrigan. “CalPERS, with or with or without me, will press on to push on for the crown jewel of corporate reform.”
Indeed, Brad Pacheco, a spokesman for CalPERS, points out that the pension system recently adopted a comprehensive plan to crack down on executive compensation, and last week CalPERS reaffirmed its proxy voting guidelines related to the issue. He adds that board members like California State Treasurer Phil Angelides have been vocal about continuing CalPERS’ corporate governance campaign. “Bottom line,” says Pacheco, “our efforts will not be interrupted by these events, but we will certainly miss Mr. Harrigan's vision and leadership.”
Push Back And Compromise
Even so, there is still grudging acknowledgment that Harrigan’s departure will still have some residual effect on efforts for corporate or board changes.
Indeed, Sarah Teslik, founding executive director and general counsel for the Council of Institutional Investors who recently left to become chief executive officer of the Certified Financial Planner Board of Standards, reportedly said at a Dec. 2 conference—sponsored by the American Law Institute, the American Bar Association and the Columbia Law School—that Sean Harrigan’s departure from CalPERS “marks a recognition by the corporate world that a push back is possible.”
And while the corporate lobby has so far been unable to stop or overturn the most challenging new governance requirements—including the FASB’s new stock option expensing rule—companies have shown an interest in working closely with institutional investors’ proposals. In 2004, for example, the number of withdrawals of shareholder resolutions by proponents almost doubled from 2003, according to the Investor Responsibility Research Center. A large number of the withdrawals can be traced to negotiations between labor funds and companies.
Case in point: Roy Disney and Stanley Gold have decided not to run an alternate slate or proxy battle at the next Disney annual meeting. In a recent letter posted on their Web site—dramatically named “savedisney.com”—Roy Disney stated that the Disney board has promised to do what he and Gold pressed them to do; namely, replace CEO Michael Eisner, and do it by mid-2005. He added that they intend to hold Disney to these promises. However, Roy Disney adds that, “With the stock price up in the short term and promises to select a new CEO on the table, we were convincingly advised—by many—that proxy support would not favor us at this time.”
Carrying The Banner
About four months ago, Ernst & Young informed The Teachers Insurance and Annuity Association-College Retirement Equities Fund and the SEC that a non-auditing unit of E&Y had a business relationship with a company owned, in part, by two of the pension fund's trustees. According to reports, E&Y invested $1.3 million in Compensation Valuation, a firm that TIAA-CREF trustees Stephen Ross and William Waltrip established to help companies with new option expensing requirements. The relationship violated SEC auditor-independence standards, and the venture has since been terminated.
But the damage had been done; Waltrip and Ross resigned, and TIAA-CREF—an outspoken advocate of both auditor independence and stock-option expensing—was suddenly open to criticism that had hidden objectives in supporting the FASB proposal. “TIAA-CREF is now vulnerable to charges that trustees harbored a direct conflict of interest when the fund advocated expensing,” wrote governance expert Stephen Davis in the Dec. 10 edition of Global Proxy Watch.
McGurn
But shareholder experts expect that the pension fund may be down, but not out. “The absence or temporary incapacity of a large player is not a death knell, says Institutional Shareholder Services special counsel Patrick McGurn. “CREF will get introspective, but CalPERS and CREF are not going to jump off the map all of a sudden.”
In fact, McGurn thinks the business community would have preferred Harrigan to remain at CalPERS, as he was a lightening rod for the anti-activist set; his mere existence assisted the fundraising efforts of groups like the Business Roundtable, McGurn asserts.
And although Spitzer has had a major impact on corporate reform, observers expect he has established an infrastructure through which the New York attorney general’s office can push forward on current and future initiatives. “He’ll continue to press for reform if he becomes governor,” asserts Friedman. “He may have a broader platform.”
In addition, Spitzer has encouraged other attorneys general to flex their muscles, and many have stepped into the limelight, including California Attorney General Bill Lockyer. Both Lockyer and Massachusetts attorney general Thomas Reilly have also initiated investigations into the insurance industry. The Massachusetts' Division of Insurance has also opened a "market conduct examination'' of fee arrangements between insurers and brokers, and Washington Insurance Commissioner Mike Kreidler is also probing industry practices in his state.
The influx of state and regional commissions and watchdogs has led industry watchers to conclude that governance is not likely to fall off the radar screen any time soon.
“These days, there are so many players coming on board,” says ISS’ McGurn. “There were only a handful of players a decade ago carrying the banner.”
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