CalPERS sharpens company engagement

The $US206 billion CalPERS will review the methodology of its investee company ‘focus list’ in the coming months as the latest study by Wilshire Associates, its asset consultant, shows the turnarounds from companies have generated an average return of 32.5 per cent in the past 23 years. The Wilshire review looked at the companies’ performance in the five-year period before and after CalPERS’ attention and found they retuned 12.7 per cent above their benchmark for the five years after their “initiative date”, or 2.4 per cent on an annualised basis, compared with 83.3 per cent below benchmark for the five years before CalPERS focus, or -30.1 per cent annualised.

Since the focus list began 23 years ago, the fund has targeted 142 companies, with the number of companies on the list in any one year ranging from four to 11. The review will consider new engagement opportunities for shareowner intervention and is triggered by a belief that now is an opportune time to complete a comprehensive review due to recent market developments and regulatory reform. As part of the review, input will be sought from academics, external managers, governance data providers and staff. According to a paper to be presented to the investment committee next week, the annual Wilshire study of CalPERS’ corporate governance program has shown the “CalPERS effect” on targeted company share prices persists and that the fund’s “involvement has generally stopped the rapid erosion of performance results”.

Wilshire conducts an annual analysis of CalPERS corporate governance effectiveness by measuring the stock returns of companies placed on the focus list. At the moment the focus list process involves an initial screen which includes a 40 per cent weighting to stock performance, 30 per cent to return on invested capital, and 30 per cent to corporate governance criteria. From the worst-performing 50 companies, 15 preliminary focus list companies are selected and put to the investment committee for approval. The companies on the focus list in 2009 were Eli Lilly, Hill-Rom Holdings, Hospitality Properties Trust and IMS Health, while 2008 saw Cheesecake Factory Inc, Hilb Rogal & Hobbs Company, Invacare Corporation, La-Z-Boy and Standard Pacific Corporation named.