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Originally published Tuesday, January 5, 2010 at 9:43 AM

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Businesses rein in activist pension funds

After three years of harsh criticism from public pension funds, corporate America is fighting back. Since late 2001 and the collapse of energy giant Enron and other high-profile...

The Associated Press

SACRAMENTO, Calif. — After three years of harsh criticism from public pension funds, corporate America is fighting back.

Since late 2001 and the collapse of energy giant Enron and other high-profile businesses, corporate interests have been on the defensive as the public and politicians clamored for reform. Now, big business is saying "enough," lobbying against the pension funds and opposing a big item on the funds' agenda: their attempts to nominate directors to corporate boards.

Companies and business groups are making their case in editorials in business publications, in reports critical of pension-fund policies and in proposed legislation that would dramatically change the nature of some funds, such as California's $182.8 billion California Public Employees Retirement System, known as Calpers.

Business interests scored a major victory Dec. 1, when an obscure California agency removed Calpers President Sean Harrigan, a leader in shareholder activism, as its representative on the Calpers board. His ouster was welcome by voices at conservative think tanks, the Republican Party and The Wall Street Journal, which called the funds "disasters waiting to happen."

"It's just clearly a pendulum that has swung too far," said David Hirschmann, senior vice president of the U.S. Chamber of Commerce.

The state pension funds, which control more than $2 trillion in assets, became more active after Enron and other businesses failed, wiping out about $300 billion in investments. The funds and the politicians associated with them, most of them Democrats, pushed for smaller executive salaries, sued the New York Stock Exchange (NYSE) for alleged fraudulent trading and pulled $5 billion in investments from a mutual fund accused of fraud.

The funds called it a way to protect their investments by promoting better business practices.

But some analysts say the pension funds' activism is much more. It's the new face of management-labor relations, with organized labor using its ownership of companies through pension investments to regain influence, said Jarol Manheim, a political-science professor at George Washington University in Washington, D.C.

A game in midstream

As funds try to redefine corporate responsibilities to focus on broader social goals, corporations feel they have to fight back, Manheim said. The push-pull between the two is "a game that's kind of in midstream," he said.

California state Controller Steve Westly, a Democrat and former executive with the online auction house eBay, said he's seeing "a push back from corporate America."


That reaction gained momentum in April after Calpers' board voted "no" in 84 percent of the shareholder votes for corporate board members, Westly said. "I think people realized we had gone a step or two too far."

Such activism, said Hirschmann, "makes it very difficult to take risks, grow companies and make jobs."

So business has become more vocal in its criticism of funds, including:

• Published comments by officials at the American Enterprise Institute, a conservative think tank, that public pension funds shouldn't get voting rights with their stock holdings and that their "intrusions" must be stopped with possible legal action.

• A report by the Center for Security Policy, a group of former Reagan administration officials and conservative business interests, that raised questions about the practices of the nation's top 100 public pension funds. It said they've invested $188 billion in foreign companies that do business with "terror-sponsoring" nations.

• The Business Roundtable, a group of chief executive officers, many of them major financial supporters of President Bush, helped block a proposed Securities and Exchange Commission rule change giving pension fund and other shareholders rights to nominate corporate directors.

Some state legislators are also siding with business. California Republican Assemblyman Keith Richman recently introduced a bill that would eventually weaken Calpers' clout over time, requiring new state employees after 2007 to use individual retirement accounts. Aides deny it's an attack on Calpers' influence nationally.

"Assemblyman Richman is trying to reform California's pension system because we are making commitments to employees now that we cannot pay for in the decades ahead," said Dan Pellessier, Richman's chief of staff.

Alongside such moves, The Wall Street Journal dubbed Calpers, a national leader in corporate governance activism, a "corporate scold," while Business Week called it "the pension fund that cried wolf."

A dedicated agenda

None of this surprises an unapologetic Calpers, which has weathered a decade of criticism for publishing lists of underperforming companies and recruiting other retirement funds for campaigns from global warming to the 2003 firing of then-NYSE chairman Richard Grasso.

"The closer the movement gets to getting real power, the harder and more pervasive will be the push back," said Patricia Macht, a Calpers spokeswoman. "If Calpers can't speak out, what chance does the small shareholder have to express their voice?"

Officials at Calpers and other funds said they're acting to protect their investments, not to push an organized labor agenda, which some business groups claim.

Those assertions are simply a tool to discredit unions in the battle for public opinion, said business professor Paul Lapides, who runs the Center for Corporate Governance at Kennesaw State University in Georgia.

"It gets people worked up and it's a good rallying point," Lapides said.

Richard Ferlauto, director of pension and benefit policy for the 1.5 million member American Federation of State, County and Municipal Employees, said state pension funds will eventually win the rights to nominate corporate board members.

"That's an issue that corporate America doesn't want to see happen and the push back is around that," Ferlauto said.

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