Activist investors like Carl C. Icahn, Daniel S. Loeb and William A. Ackman are getting deep-pocketed imitators.
Some of the biggest public pension funds, which have sought to influence companies for years, are now starting to emulate these investors by engaging with, and sometimes seeking to oust, directors of companies whose stock they own.
Anne Simpson, director of corporate governance at the California Public Employees’ Pension Fund (CalPERS), the largest U.S. pension plan with $279 billion in assets, says “board coups” this year that led to the departure of directors at Hewlett-Packard, JPMorgan Chase and Occidental Petroleum show “how shareholder activism is evolving from barbarians at the gate to acting like owners.”
CalPERS is one of several big U.S. public funds that have played roles in shareholder uprisings in recent years at companies that included Chesapeake Energy, Nabors Industries and Massey Energy. Although some of the revolts were led by labor groups or activist investors, CalPERS has often cast its votes alongside them.
Ira M. Millstein, a lawyer who specializes in corporate governance at Weil Gotshal & Manges, says it is significant that “the biggest pension fund in the U.S. is taking an activist role, going to companies that aren’t doing well and saying, ‘You really ought to change.’”
The second-largest public fund, the $176 billion California State Teachers Retirement System, went so far as to co-sponsor a proposal with the activist fund Relational Investors to break up the Timken Co., the maker of steel and bearings, criticizing the outsize representation of the founding Timken family, which held three of 11 board seats while holding just 10 percent of the stock. Four months after the proposal won a 53 percent vote, Timken acquiesced to a breakup in September.
Anne Sheehan, director of corporate governance at CalSTRS, says pension fund “activism and engagement has stepped up quite a bit more as a result of the financial crisis when we all lost a lot of value. As universal owners, how can we not assert our rights and develop a relationship with companies in our portfolio?”
The big public funds have successfully campaigned in the past decade for the right of shareholders to elect each director individually by majority vote on an annual basis, more recently using the procedure to seek the ouster of directors who receive a heavy no vote. While the companies often are not legally bound to replace directors who do not win a majority, some directors have resigned voluntarily.
At JPMorgan, for example, CalPERS and other investors backed the ouster of three directors on the board’s risk committee whose qualifications were questioned after the bank suffered a $6.2 billion loss on what became known as the London whale trades.
After receiving votes of just 53 and 59 percent at the bank’s annual meeting in May, Ellen V. Futter, president of the American Museum of Natural History, and David M. Cote, the chairman and chief executive of Honeywell International, stepped down. The bank also designated Lee R. Raymond, the former chief executive of Exxon Mobil, to be the lead outside director after defeating an investor campaign to separate the jobs of chief executive and chairman, both held by Jamie Dimon.
The adoption of majority voting “has made directors far more willing to engage,” said Ann Yerger, executive director of the Council of Institutional Investors. Nell Minow, of advisory firm GMI Ratings, says there has been “a shift in tactics” among big activist investors “from shareholder proposals to engagement and director replacement.”