May 09, 2006
Confirming the CalPERS Effect: Academic Study Links Shareowner Activism to Financial Gain
by Bill Baue
Examining companies targeted for governance reform by the CalPERS Focus List, the study presents
data correlating activism to increasing shareowner value as well as cautionary notes.
Every spring, the California Public Employees' Retirement System (CalPERS) issues its "Focus List" of companies it intends to
engage in shareowner activism over corporate governance problems, with the implicit expectation of
reversing financial underperformance. A recent academic study by University of California at Davis Finance Professor Brad Barber
presents empirical evidence confirming that CalPERS' shareowner activism does indeed pay--to the
tune of $3.1 billion in the short run and an estimated $89.5 billion in the long run. This link
between activism and financial performance has been dubbed the "CalPERS Effect" elsewhere.
However, Prof. Barber distinguishes between activism intended to improve shareowner
value and activism seeking to advance political agendas.
"Institutional activism is a
double-edged sword," writes Prof. Barber in the study, entitled Monitoring the Monitor:
Evaluating CalPERS' Shareholder Activism. "When prudently applied, activism can provide
effective monitoring of publicly traded corporations."
"When abused, portfolio managers
can pursue their personal agendas at the expense of those whose money they manage," he adds.
"Institutional activism designed to improve shareholder value should be well grounded in scientific
evidence--either theoretical or empirical (preferably both)."
Prof. Barber lays out both
theoretical and empirical evidence supporting prudent shareowner activism. From a theoretical
perspective, he posits two "agency costs"--on one side of the coin is the conflict of interests
between shareowners and corporate management, and on the other is the conflict between shareowners
and portfolio managers.
One example of the first problem is when corporate managers seek
to line their own pockets at the expense of shareowner value. This is precisely what CalPERS
targets with its Focus Lists by filing shareowner resolutions on governance problems such as boards
that lack independence. Shareowner activism aimed at curbing such agency costs meets with Prof.
"All shareholder proposals at focus list firms sponsored by CalPERS
were designed to improve shareholder rights," Prof. Barber states.
Before considering the
second agency cost, it makes sense to examine Prof. Barber's own empirical evidence documenting the
financial impacts of shareowner activism. Prof. Barber tracks the financial performance of the 115
Focus List companies for the 14-year period ending 2005 (while CalPERS initiated its Focus List
activism in 1987, it did not start publicly announcing the list until 1992, hence the starting
point of the study.) These companies include, for example, AT&T (ticker: ATT) and Weyerhaeuser () in 2005, Disney (DIS) and Shell (RD) in 2004, Xerox
(XRX) in 2003,
Gateway (GTW) in
2002, and Advanced Micro Devices (AMD) in 1993, 1998 and 2000.
Prof. Barber breaks his results into two batches, looking first at short-term results, and then
at long-term returns.
"My short-run analysis indicates that CalPERS activism yields small,
but reliably positive, market reactions of 23 basis points (bps) on the date focus list firms are
publicly announced," Prof. Barber says, noting this amounts to $224 million annually or $3.1
billion over the 14 years. "My long-run analysis yields intriguing, but inconclusive results."
"Portfolios of focus list firms earn annualized abnormal returns ranging from 2.4 to 4.8
percentage points annually at holding periods ranging from 6 months to 5 years," he continues. "If
these abnormal returns are causally linked to the activism of CalPERS, the wealth creation is
enormous--as much as 20 times greater than the short-run benefits and as large as $89.5 billion
through December 2005."
However, Prof. Barber cautions that such a causal link is tenuous,
as other factors almost certainly contribute. By the same token, however, Prof. Barber notes that
the Focus List companies are only the "tip of the iceberg" of CalPERS' activism, and that it almost
certainly reaps similar financial benefits from its less publicized activism.
Counterbalancing these potential financial benefits are potential financial pitfalls of
activism. Returning to the second agency cost, Prof. Barber characterizes it as misdirected
shareowner activism--or activism that is not directly linked to improving shareowner value. He
cites the example of CalPERS' 2000 decision to divest from tobacco, which was not rooted in any
empirical evidence of financial benefit.
Prof. Barber does not insist that all activism
must improve shareowner value--but he does suggest that activism unlinked to financial gain
should at least align with the interests of beneficiaries.
"When institutional activism
cannot be reasonably expected to maximize shareholder value, the preferences of investors should be
given top priority," Prof. Barber explains. "Institutions must open lines of communication with
investors; they must understand how investors stand on moral issues that might affect investment
"Most institutions simply ignore moral considerations when investing," he adds.
"Unfortunately, ignoring these considerations is not necessarily in the best interests of
Last month CalPERS released its 2006 Focus List, which includes Cardinal
Clear Channel (CCU), Mellon Financial (MEL), and OfficeMax
others. It remains to be seen whether these companies will experience the CalPERS Effect.
|To the Editor:
Barber's admonition (in "Confirming the
CalPERS Effect: Academic Study Links Shareowner Activism to Financial Gain,” May 9, 2006) that the
preferences of investors should be given top priority is good.
Those who invest in SRI
mutual funds frequently do so because their values are aligned with those of the portfolio
managers. If they turn out to have serious disagreements, they can take their investment funds
elsewhere. CalPERS members don't have the same choice.
There is one perception if the
president of CalPERS appears to be using their influence to support striking members of their own
union through proxy power; quite another if members demand they do so.
Shareowner Forum website could provide a mechanism for member feedback and for debating the issues.
Instead, readers are presented with largely ageing material and no meeting place for open
Barber final point is also not highlighted enough. Because CalPERS owns only
about 0.5% of any one company, its corporate governance activities accrue mostly to others.
directly to CalPERS.
By working more closely with Council of Institutional Investors,
Investors for Director Accountability Foundation, and the Social Investment Forum, CalPERS could
reduce "free rider" issues.
These organizations could, for example, coordinate by
proposing replacement corporate directors under the SEC rules that took effect on January 1, 2004.
Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and
Boards of Directors, requires corporations to disclose if their nominating committees have received
a recommended nominee from a 5% shareholder or group and the disposition of that request.
To my knowledge, that provision has only been used twice. Both times shareholders have met with
Publisher, CorpGov.net and
Elk Grove, CA