Human Capital & Careers

Revenge of a Pension Fund

Calpers says Xerox board's a paper lion; Gemstar criticized for excessive severance packages.
Stephen TaubMarch 28, 2003

The California Public Employees’ Retirement System (Calpers), the nation’s largest pension fund, added six companies to its corporate governance focus list. These businesses will be on the receiving end of recommendations from Calpers’ during the upcoming proxy season.

The hit-list includes Xerox, Gemstar-TV Guide International, Inc., JDS Uniphase Corp., Manugistics Group, Inc., Midway Games, Inc. and Parametric Technology.

In a letter sent to Xerox Chairman and CEO Anne Mulcahy, Calpers asked the copier company to take immediate steps to add three independent directors. Calpers also wants Xerox to split the position of chairman and chief executive officer.

“It is time for Xerox to bring in new blood,” said Sean Harrigan, president of the Calpers board. “It’s disconcerting that the same members that oversaw Xerox during its worst period are still there. Investor confidence in Xerox is extraordinarily low, and these steps are overdue and critical for restoring investor confidence and improving corporate governance.”

Calpers officials said the targeted companies were selected from the fund’s investments in more than 1,800 U.S corporations. The criteria for making the dishonor roll? Poor long-term share price performance (versus peers), questionable corporate governance practices, and subpar economic value-added (EVA) figures.

EVA measures a company’s net operating profit after tax, minus its cost of capital. By using EVA and stock price performance, Calpers insists it has pinpointed companies where poor market performance is due to underlying financial performance problems, as opposed to industry or extraneous factors alone.

Calpers singled out Xerox for having one of the most ineffective boards. The document company was fined by the SEC and forced to restate earnings from 1997 though 2000.

“We were shocked to learn that Xerox has a policy that its board members are ‘strongly recommended’ not to communicate directly with institutional investors,” said Rob Feckner, chairman of Calpers investment committee. “This is reason enough to ensure that a fresh perspective is added to this board.”

Calpers cited Gemstar for granting severance packages of $22 million and $7 million, respectively, to out-going CEO Henry Yuen and CFO Elsie Leung. Calpers wants Gemstar to commit to a majority of independent directors on its board, audit, compensation and nominating committees.

Calpers also said it wants Gemstar to develop and seek shareowner approval for an executive compensation policy that includes performance-based stock options.

JDS Uniphase scored the worst out of the companies Calpers screened in terms of EVA. The pension fund’s officers believe the poor EVA score is a direct result of a lack of financial discipline in JDS Uniphase’s acquisition strategy during the late 1990s. The company’s EVA fell by $11.5 billion between 1999 and 2002, Calpers noted.

The pension fund’s directors want JDS to eliminate its co-chairman structure in favor of a separate chairman and CEO. It also wants the company to declassify the board and seek shareholder approval for the company’s poison pill.

Calpers criticized Parametric Technology for ignoring repeated requests to meet and discuss performance and governance concerns. It added it is concerned that each Parametric board member was paid 100,000 options or more “in recognition of extensive work during fiscal year 2001,” at a time when Parametric’s stock price declined by 41 percent.

Calpers believes that game maker Midway has not been able to capitalize on the rapid growth of the entertainment software industry because of inadequate execution of its business plan. The pension fund’s officers also claim Midway’s board lacks a lead independent director. Calpers noted that only 27 percent of Midway’s 11 directors are independent (according to Calpers’ definition of independence).

Calpers said it wants Midway to add two new independent directors in the next year and separate the positions of its chair and CEO.

Manugistics also was criticized for not separating the CEO and chairman posts. The pension fund also noted that Manugistics’ nominating committee is less than 100 percent independent. In addition, Calpers says three of the nine board members at the software maker have affiliated relationships with the company.

Calpers added that seven other companies have been put on its monitoring list for poor corporate governance. Possible actions regarding the companies will be disclosed throughout the proxy season and the rest of the year.

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