Posted June 14, 2007

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Bonus columns:
· The myth of over-funded pensions
· Missing the bull's-eye

Hounding the Fat Cats

Public pension funds throw their weight around in private boardrooms.

My column last month about "Spiking the Pension Punch" brought a wave of e-mail from both sides of the political spectrum. Interestingly, the strongest reactions to my views on pension abuse come from public employees who are middle managers. They tell me that pension scams are a drop in the bucket compared to the profligate abuses they see in corporate executive compensation. "Leave us little guys alone," they say, "and go chase down those Fat Cat CEOs."

This is not an unusual human reaction. Everybody wants to put an end to abusive pay practices, as long as it's the other guy's wallet that suffers.

What grinds public employees, I believe, is the growing gap of income inequality. They see wages rising slower than the cost of living, while corporate CEOs and hedge fund managers rake in the dough. Since they feel powerless to do anything about it, they want somebody to put a lid on executive compensation.

Enter (stage left) the public pension funds. They can flex power. Big public pension funds, with trillions of dollars to invest, hold proxy votes that count inside the boardroom. They own enough shares of the blue chip companies to defeat proxy proposals and director nominations, join forces with corporate raiders in hostile takeovers, and embarrass company leaders in public.

The California public employees retirement system (CalPERS) and other large state plans have led the charge with some controversial corporate governance and compensation activism. CalPERS has even created a robust web site "forum" on corporate governance with a section specifically on executive compensation policies. CalPERS votes its megamillions of shares at annual meetings accordingly. In addition to transparency and disclosure of compensation, CalPERS advocates a non-binding shareholder vote on executive compensation plans.

Just for fun, turn the tables for a second and imagine a state where the governor, cabinet and legislators must submit their pay plan to the voters. Likewise, how many city managers and municipal department heads would pull up stakes to find a new employer if their compensation were subjected annually to a public vote?

This brand of pension fund activism drives the U.S. Chamber of Commerce crazy. The Chamber's leadership absolutely hates the idea that 75 public pension fund trustees have so much clout that they can turn (or even roll) heads in America's largest corporate boardrooms. The Chamber even issued an anti-union policy statement on this topic in 2004.

And this attitude spills over into other realms of public policy. For example, the Chamber opposed the idea of prudently investing some of the Social Security trust funds in the stock market where it will support American capitalism and earn higher returns than Treasury bonds. It did so because it fears that the Social Security fund trustees would start telling CEOs how to run their companies, just like the pension funds.

So, is shareholder activism by public pension funds really just a disguise for creeping unionism? Are the pension fund trustees abandoning their fiduciary duty to focus foremost on investment returns? Should pension funds just "butt out?"

Here, the CalPERS experience is quite illuminating. They keep score on their corporate activism program, and thus far their data show that their intervention in company governance has paid off financially. By focusing their energy on bad management and pressuring the corporate boards to turn things around, they seem to be getting results that Wall Street respects in the form of higher share prices as the targeted companies straighten up and fly right. Although some of this could just be the "Dogs of the Dow" syndrome of rebounding from the bottom, their out-performance warrants the benefit of the doubt.

Good job, CalPERS. Score one for the good guys. Other pension fund managers, take notice.

Now, does any of this excuse CalPERS or any other public pension fund for failing to sweep its own doorstep first with respect to pension spiking by public employees? You be the judge.

Last month:
· Bring on 401(x)!
· Stop Spiking the Pension Punch

Index of recent columns

Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net.
More biographical information.

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