Taking It To The Board Room

States are continuing to use the power of the investment purse to challenge the way corporations do business.
by | February 2003

It's not just the Enrons and WorldComs and their accounting practices that have states now throwing their weight around corporate boardrooms. It's also the practice of setting up a mailbox in Bermuda, Barbados and other offshore locations so that a company can avoid paying state and federal corporate income taxes.

In December, the treasurers of 10 states sent a letter to Standard & Poor's requesting that it remove 10 "expatriate" companies from its prestigious S&P 500 index. That followed several moves in California, where Treasurer Phil Angelides froze out the expat companies from doing business with a $46 billion state fund he controls. California's massive pension funds for public employees and teachers, known as CalPERS and CalSTRS, also voted recently to ask expatriates they own stock in--such as Tyco International and Ingersoll-Rand--to come home and pay their U.S. and state taxes.

There's nothing illegal about what these companies are doing, which amounts to setting up shell headquarters in foreign countries while thousands of their employees go on doing business as usual in the United States. But in the wake of the many recent corporate scandals, the moves offshore are seen as unpatriotic and a tax dodge. "This corporate practice to most Americans seems odious and offensive," Angelides says. "They see it as akin to what Enron and WorldCom were doing--figuring out how to game the system rather than build an effective business."

The states involved in the effort are being realistic about their goals. If they can't persuade these companies to repatriate, they at least hope to create enough negative publicity to stop others from moving offshore, too.

The crusade against expatriates is the states' latest show of force in a nationwide push for corporate reform. States are using their clout as institutional investors: Public pension funds collectively hold $2 trillion in assets. In the past, pension funds were reluctant to meddle in corporate affairs, but last year's tide of scandals changed all that. Now, pension funds in California, New York and North Carolina are requiring investment banks that do business with them to adhere to a set of disclosure and conflict-of-interest rules. In addition, CalPERS called on the U.S. Securities and Exchange Commission to require that mutual funds disclose how they vote in shareholder matters. CalPERS also asked the federal government to identify which companies are doing business in nations that support terrorism and to deny them access to U.S. capital markets.

While these moves all made headlines, public pension funds are also exerting pressure behind the scenes. The biggest change is that they're asking more questions of their money managers. "No longer do they just want to know a manager's performance record," says Fred Nesbitt, executive director of the National Conference on Public Employee Retirement Systems. "They also want to know how they're making decisions, what kinds of companies they are investing in and how they are making sure the information they get from Tyco or Enron is accurate."