‘80s Takeover Furor Will Pale Next to ‘90s Pension Debate

Fresh evidence last week indicated that pension fund power would be to the 1990s what takeovers were to the 1980s: the big corporate story of the decade.

The top managers of Exxon were called to account by the trustees of public employee pension funds in California, Massachusetts and New York City, who questioned the company’s environmental practices.

But the issue was not really the environment. It was management. The three pension fund trustees, who together control more than 14 million Exxon shares, were asking the hired help whether years of personnel cutbacks and cost-trimming had left Exxon vulnerable to disasters such as the Valdez oil spill, and therefore to public opprobrium and $2 billion of cleanup costs.

The agenda was partly political--trustees Gray Davis, California state controller, and Elizabeth Holtzman, New York City controller and former congresswoman, are ambitious politicians who did themselves no harm defending the environment and criticizing Exxon.

But the bottom line was economic: The trustees were properly concerned that Exxon’s continued foul-ups could affect investment returns to their pension beneficiaries.

Similar concerns about Lockheed’s poor earnings drove some pension funds to publicly back corporate raider Harold C. Simmons in a proxy fight last month. It wasn’t that the funds admired Simmons so much as they wanted a direct voice in Lockheed management’s decisions. And they’ll get it: Management apparently won the proxy fight, but not before pledging to name three fund-approved directors to Lockheed’s board.

At General Motors, pension funds, concerned for the floundering car maker, asked months ago what standards would be used in appointing a successor to Chairman Roger B. Smith. Management reacted huffily, but GM’s outside directors welcomed the funds’ interest and may make a statement this week on the deliberations that chose Robert C. Stempel.

Pension activism won’t be a narrow issue. More than 55 million American workers are covered by pension funds, which have become the largest pool of capital in the world. According to Pension & Investment Age magazine, retirement funds for public and corporate employees hold $2.6 trillion in assets, a sum almost equal to the gross national product of Japan.

With $1.3 trillion invested in common stocks and the rest in bonds, the pension funds control 18% of all corporate stock in the United States and 27% of all corporate bonds. They own more than 50% of the stock in large companies--most of those listed on the New York Stock Exchange or in Standard & Poor’s 500 Index.

From those investments the funds must earn 8% to 9% a year to meet future pension obligations. But if they earn more, it can benefit taxpayers and shareholders because states and companies don’t have to contribute as much each year to employee pension funds.

So great power carries serious obligations. Yet until recently the power went unused. As do many individual shareholders, the pension funds voted their proxies unquestioningly with management at annual meeting time. The attitude was that if a fund disapproved of company policy, it could sell its stock.

Now all that is changing. For one thing, fund holdings are too big to sell--a typical fund sale “can cut 5% to 15% off a stock’s price in one day,” says David Ball, head of pension regulation at the Labor Department. Selling to takeover bids proved counterproductive: Huge sums could be reinvested only with difficulty, and, in the aftermath of leveraged buyouts, cash-hungry companies frequently threatened pensioners with loss of benefits.

Now, “with a decade of debt behind us, more and more attention is focused on using corporate governance as a way to effect change,” says Dale Hanson, chief executive of the California Public Employees Retirement System.

“To effect change . . . “ The truth is, we’re dealing with very big issues here. The pension funds have the potential to be the patient capital that American industry needs. Their new activism will not be a rerun of takeover mania. Note that in the cases so far--Exxon, Lockheed, GM--fund shareholders are striving to advise or chastise management, not merely boost the stock. “As long-term investors, we are interested in long-term performance,” says one pension manager.

Indeed, their new power could fulfill the dream of Charles E. (Engine Charlie) Wilson, the president of GM in 1950 who devised the modern pension fund as a way for American workers to own American business.

In just 40 years, Wilson’s idea has become an enormous resource for industrial progress.

Or for conflict. Big money attracts big plans, and advocates of using pension funds for low-cost housing and other social purposes are already debating those who insist that investment returns take precedence if pensioners are to get their benefits.

The arguments about takeovers that consumed the ‘80s will seem mild in retrospect compared to the debate about pension money and society’s goals that is just beginning.