Risk & Governance Weekly

In Brief

CtW Opposes Two Directors at Washington Mutual

The CtW Investment Group plans to withhold support from two directors at Washington Mutual’s April 15 annual meeting.

Washington Mutual has said it plans to shield the variable pay of CEO Kerry Killinger and more than 100 other executives from the consequences of the financial company’s subprime losses, according to news reports. The Seattle-based firm announced a fourth-quarter loss of $1.87 billion in January. (For more on Washington Mutual, please see the March 7 and Feb. 15 issues of Risk & Governance Weekly.)

The California Public Employees’ Retirement System (CalPERS) has named five U.S. companies that it plans to target this year.  

The pension fund’s 2008 “focus list” includes homebuilder Standard Pacific, the Cheesecake Factory restaurant chain, insurance brokerage Hilb, Rogal & Hobbs, health care equipment firm Invacare, and furniture maker La-Z-Boy. CalPERS, the largest public pension fund in the nation, releases an annual “focus list” after ranking hundreds of public companies based on stock returns, capital efficiency, and corporate governance. CalPERS will urge investors to vote against all the directors up for re-election at each of the companies this year. All five firms have classified boards.

“The companies that we announced earlier today are the poster children for bad performance and bad corporate governance,” Ben Baggesen, CalPERS’ acting senior investment officer for global equity, said during a March 25 press conference.

Elyria, Ohio-based Invacare and Calabasas Hills, Calif.-based Cheesecake Factory have underperformed their peer companies by greater margins than the other firms on the list over the past five years--122.7 and 140.5 percent, respectively, according to CalPERS.

All five companies also have problematic governance practices, CalPERS claims. The pension fund objects to the supermajority requirements for passing certain bylaw changes at Cheesecake Factory; Irvine, Calif.-based Standard Pacific; and Hilb, Rogal & Hobbs, which is headquartered in Glen Allen, Virginia.

CalPERS says it would like to see Cheesecake Factory and Hilb, Rogal & Hobbs adopt “clawback” policies to recoup management bonuses in the event of a restatement or fraud. The pension fund is also pushing for a majority vote standard in director elections at all of the firms except Monroe, Mich.-based La-Z-Boy, according to a CalPERS press release.  

The list of five companies was chosen from among 15 firms exhibiting the worst performance, financial metrics, and corporate governance, Dennis Johnson, CalPERS’ senior portfolio manager, said at the press conference. The five firms chosen were those that refused to engage in dialogue with the pension fund, Johnson said.

Companies on the “focus list” annually have shown higher stock returns after being targeted by CalPERS. A 2007 report by asset management company Wilshire Associates, released on the 20th anniversary of the first CalPERS focus list, showed that firms on the list outperformed the S&P 500 index by an average of 12.2 percent in the first five years after making the list.

Johnson said during the press conference that the pension system is still in dialogue with most of the 11 companies that made the focus list in 2007, including Corinthian Colleges and Sanmina-SCI, though he characterizes them as “works in progress.” CalPERS is opposing three directors at one of the 2007 focus list firms, drugmaker Eli Lilly, which Johnson said has failed to satisfy the pension fund’s requests for dialogue or corporate governance changes. CalPERS filed a proposal at Lilly to allow shareholders to amend company bylaws by a majority vote. –L. Reed Walton