Risk & Compliance

Calpers Holds Back More Votes

The pension fund cites conflicts of interest in opposing directors at Genentech, Eli Lilly, and Safeway.
Stephen TaubApril 9, 2004

The California Public Employees’ Retirement System (Calpers), the largest public pension fund, said it will withhold votes from several directors at Genentech Inc., Eli Lilly & Co., and Safeway Inc.

At Genentech and Eli Lilly, one reason for the Calpers action is an auditor that was authorized to perform non-audit work.

The Calpers Web site stated that the pension fund will withhold votes for Genentech directors Herbert Boyer, Jonathan Knowles, Mark Richmond, and Charles Sanders. Boyer, Richmond, and Sanders, added the pension fund, are members of the audit committee that authorized Genentech’s auditor, Ernst & Young, to perform non-audit services. Calpers also plans to vote against ratifying Ernst & Young as the auditor because it has performed non-audit services.

The pension fund also asserted that Boyer is an affiliated outsider on the audit, compensation, and nomination committees, and that Knowles is an insider on the compensation and nomination committees.

In addition, Calpers plans to vote against the company’s 2004 equity incentive plan, arguing that the cost “excessive” and that “no performance goals or hurdle rates have been established.”

Regarding Eli Lilly, Calpers announced that it plans to withhold votes from directors Winfried Bischoff, Franklyn Prendergast, and Kathi Seifert. All three, the pension fund explained, are members of the audit committee that has authorized the auditor — again, Ernst & Young — to perform non-audit services. Here, too, Calpers said it would vote against ratifying Ernst & Young as the auditor for performing non-audit services.

The pension fund intends to vote against a shareholder proposal to limit executive compensation, arguing it is too restrictive. On the other hand, it plans to support a shareholder proposal calling on the company to report on how it will respond to pressure to increase access to and affordability of prescription drugs.

Regarding Safeway, Calpers announced that it is withholding its votes from chairman and chief executive officer Steven Burd as well as directors Robert MacDonnell and William Tauscher. The pension fund cited shareholder losses of $20 billion, conflicts of interest, and lack of responsiveness to shareholders.

Specifically, stated Calpers, the Safeway board ignored a majority shareholder vote in 2003 to expense stock options; MacDonnell and Tauscher sit on the audit committee, which allowed the external auditor (Deloitte & Touche) to perform non-audit work; and MacDonnell’s independence is compromised because he has a conflicting business relationship with Safeway from his affiliation with Kohlberg Kravis Roberts & Co., which took Safeway private in 1986. Calpers added that it would vote against ratifying Deloitte & Touche as the auditor for performing non-audit services.