KEITH BISHOP, Attorney with Pettis, Tester, Kruse & Krinsky
Recently, officers of the California Public Employees’ Retirement System bluntly warned business leaders: Oppose Gov. Pete Wilson’s plan to use part of CalPERS’ $63.5 billion in assets to balance the state budget or face “economic sanctions.” The letter awakened the public to a sleeping giant, said Keith Bishop, an Irvine attorney who was appointed recently to the state Senate’s Commission on Corporate Governance. He discussed his concerns about the growing power of pension funds with free-lance writer Anne Michaud.
Q. What danger do you perceive for corporations?
A. The issue is the role of large public pension funds. Their wealth, right now, means that they have to be taken into account. Are we going to go down the path of a backdoor state ownership through public pension funds?
Q. What do you mean by “backdoor state ownership”?
A. It’s what you see in other countries like Germany, where banks hold most of the equity with public corporations. They see the banks as watch dogs for corporate performance and long-term investors.
In the midst of a budget battle, Gov. Wilson had proposed to reorganize CalPERS so that it would come more under his control. CalPERS responded very angrily.
This is clearly a message that (CalPERS is) going to use its share of ownership for political advantage. Right now there’s no brake on their ability to do that.
Q. Why do you think CalPERS is so powerful?
A. Every day CalPERS has to invest about $10 million. It owns about 1% of 458 publicly held companies in the United States.
In the last four years, it has become more active. The officers have started going to management, (urging them) to include (CalPERS’) proposals for votes by the stockholders.
Q. What about other pension funds?
A. Well, the other really large one is CalSTERS, which is California State Teachers Retirement (System). Together, they control about $100 billion in assets.
Then, in various counties, there is the University of California System.
Q. You objected to another of CalPERS’ recent actions.
A. Yes. CalPERS went to Sears (Roebuck & Co.) with a proposal to set up a shareholder advisory committee that would meet with the management of Sears and advise Sears on various issues.
The majority of the committee was going to be elected or appointed by the 50 largest shareholders, so this was clearly going to be a committee of the large shareholders monitoring corporate performance.
Sears subsequently negotiated with CalPERS, and it backed off. But I saw in that attempt a move toward a different model of corporate governance.
Q. So that’s your main objection?
A. Well, while CalPERS is being very active, they can’t explain whether their activity is in fact going to benefit the assets they hold. Basically, their reason for existing was to provide retirement benefits to public employees.
Q. You have also objected to off-market trading by the pension funds, which is trading among the big institutions rather than through the stock exchange. Why?
A. There is a (state) Senate resolution calling for public hearings on whether off-market trading by CalPERS, specifically, was in the best interests of California. And that resolution--they haven’t had any hearings yet--brought an immediate and angry response from CalPERS.
(The pension funds) save money (in commissions) trading off-market, and that may be well and good. But, is it necessarily good for the entire investing public? When they trade off the market, will the information be immediately available to the whole investing public? Knowledge on the stock market is very important to people’s decisions whether to buy or sell.
Q. It sounds like you think CalPERS is up to no good.
A. I don’t think there’s anything sinister per se about CalPERS. I just think that it has grown to have an enormous amount of wealth, and it is going to be able to use that to affect a lot of changes in the corporate governance area.
I think the issue of accountability at CalPERS needs to be looked at. CalPERS is really there for one purpose, and that’s to provide retirement benefits. It really shouldn’t be there to pursue social agendas that aren’t related to maximizing the value of their assets.
Q. Another issue that concerns you is the potential for a federal law regulating corporations, whereas laws are now made state by state. And the debate is beginning in California with Senate Bill 935?
A. Yes. SB 935 would greatly expand the application of California laws to corporations that are not incorporated in the state. Corporations that do a substantial amount of business here or have a substantial number of shareholders in the state would be affected.
No other state has tried to do this, and the bill is being used by the large institutional investors as leverage to force a federal law.
Q. So what is wrong with a national standard?
A. I think that there should be an influx of experimentation, and not centralization. When you go up to such a big place like the U.S. Congress, a lot of the fine-tuning and sort of real-world aspects that you can explain to the state Legislature will be lost.
Q. So what advice would you give someone who wants to get involved in these debates?
A. Pay attention to the leaders on both sides of the issue. On one side is CalPERS and an organization called the United Shareholders Assn., which is an organization dedicated toward advancing shareholder rights. On the other side is the Business Round Table and other business organizations.
On ownership of American companies. . .
“In the United States, we’ve always been populist capitalists. Anybody can go out and own two shares of General Motors or IBM.”
On the idea that the federal government, not states, should regulate corporations. . .
“You know it’s going to be a lot more politicized than it is now. There just won’t be any freedom to experiment.”
On activism by public pension funds. . .
“It’s been a sleeper. It’s been building over the last four years, but it’s really coming to public attention now.”
On California Senate bill 935. . .
“The threat of California creating standards that would apply to corporations incorporated in other states may lead to the argument that we need a national corporate governance standard.”
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