What CalPERS Wants

Speaking to an audience of board members, advisers, and corporate governance experts, Fred Buenrostro, the chief executive in charge of the country’s largest public pension fund, delivered a call to action: good corporate governance is essential for aligning the interests of investors with management. Perhaps more importantly, healthy capital markets require good corporate governance, he says, if they are to serve the needs of investors and customers. His conclusion: “Good corporate governance improves share price and ultimately reduces the cost of capital.” Buenrostro, who has led the California Public Employees’ Retirement System (CalPERS) since being named its seventh CEO in 2002, is responsible for overseeing retirement and health benefits for more than 1.4 million current and retired California public employees and their families.

The $260-billion pension system isn’t afraid to throw its significant weight around. Written into its “Core Principles,” CalPERS advocates director accessibility and supports the idea of “one share, one vote.” The pension heavyweight also has been effective at putting executive pay on the boardroom agenda and has taken companies to task for poor governance practices. Its annual “Focus List” of underperformers is not where you want your company to end up.

What follows are excerpts from Buenrostro’s keynote address at the first Directorship 100 event to recognize those individuals who made our list—topped by CalPERS—of the most influential players in corporate governance.

Core Values

Even foreign investors are seeking American companies with good corporate governance. We believe the best way to instill it is to identify and promote core principles which are readily understood by the capital markets.

Not surprisingly, these include proxy access and pay for performance, not mismanagement and failure. These also include majority voting requirements and the separation of the CEO from the board chairman or lead independent director.

You know, when you’re as large and as vocal as we are, you get called a lot of things, and not all of it is good. Of course, that all comes with the territory. There was a European magazine a few years ago that gave us a rather left-handed compliment for our corporate governance activism. I think it said something that could be easily said about a lot of activist investors. It referred to CalPERS as “a meddler, a nanny, and an activist.” The magazine also wrote that CalPERS is still probably one of the best friends investors have in the world today.

I think investors have a lot of friends, but our hope is that through our efforts we’ve been able to play a role in the dramatic improvement of good corporate governance across the American corporate landscape over the last two to three decades.

A Legacy of Activism

CalPERS has been engaged in corporate governance for 25 years. We began fighting “green mail” in the early 1980s and our activities evolved to include subjects like executive compensation, auditor independence, separation of board chairman from management, proxy voting, and our Focus List program of engagement, education, and influence.

In the late 1990s, activism became an alpha generator for us. We have relationships with other activist investors including Ralph Whitworth and Richard Breeden. They do a great job of improving the governance and value of their portfolio companies. In fact, CalPERS activist corporate governance funds posted a 24 percent annual return this past fiscal year. And we’ve enjoyed consistent double-digit returns on our investment since inception. We also have equity stakes in Europe and Japan.

Today, our commitment in the global activist markets is $6 billion. And we’re going to keep increasing those investments in the coming year. We’re also adding emerging-market activist managers and we have activist hedge funds.

The Duty of Investors

Now on all of these efforts, here’s where we’re coming from as an investor. Investors have a duty, a fiduciary responsibility, to protect their assets. We don’t want to run companies, but we want to make sure we have governance structures that are accountable and offer the best long-term returns to shareowners. We want transparency, accountability, and proper alignment of interest between management, directors, and shareowners. And where it’s necessary, shareowners should have effective access to the direct nomination process, and the right to sponsor resolutions, and elect directors annually.