Battle for better corporate governance earns cheers for fund.

CALPERS' shareholder activism over the years has led to run-ins with an impressive list of corporate titans, from T. Boone Pickens to Michael Eisner--and most recently, even the venerated Warren Buffett.

This year, in its mission to inject a dose of independence to board audit committees and the audit process in general, the big pension fund withheld its proxy votes from 90 percent of American corporate boards. Seldom a day has gone by during the current proxy season without a news story about the California Public Employees Retirement System withholding its votes for one director or another.

Not surprisingly, shareholder activists have cheered.

"Calpers has gone quite a bit further on shareholders issues than they have in the past," said Robert A.G. Monks, who founded the proxy advisory firm Institutional Shareholder Services and is considered a godfather of the corporate governance movement. "They've held the line on investing their money for pensioners. I think they've really revived some of that with their recent announcements."

Still, there are critics, as well as some supporters, who call into question Calpers' process of delineating corporate governance practices--most recently involving the pension fund's refusal to support the re-election of Buffett to the board of Coca-Cola Co.

Calpers wants Buffett, chairman of Berkshire Hathaway Inc., removed from the auditor committee because of conflict-of-interest issues; Berkshire subsidiaries such as ice cream chain Dairy Queen do business with Coca-Cola. Buffett called the decision "silly'" and "absurd."

Even Stanley Go]d, the former director of Walt Disney Co. who along with Roy Disney has been waging a corporate governance campaign to oust Eisner from the board, couldn't understand the decision. At a meeting of business editors last week, Gold said, "I have a lot of respect for Calpers, but on this one it's nonsense ... nonsense."

Being at the center of controversy is hardly a new role for Calpers. Its first major battle came in 1985 when California Treasurer Jesse Unruh waged a campaign against Pickens, the Texas oilman who launched hostile takeover attempts of Unocal Corp. and Phillips Petroleum Co.

This issue became a rally cry for institutional shareholders in the 1980s when companies began paying "greenmail" to corporate raiders to avoid a takeover.

Unruh became outraged when the Bass brothers of Texas were paid millions to halt their takeover of Texaco, while institutional shareholders like Calpers were not offered the same price.

Unruh responded by forming that Council of Institutional Investors, an activist group that now has 100 pension funds as members, and $900 billion in assets.

That activist role, led in the late 1980s and early 1990s by Dale Hanson, included major reforms of the proxy process that were approved in 1992 by the Securities and Exchange Commission.

The new SEC rules required companies to report the salaries of top executives, including the value of options. Among Calpers' targets were International Business Machines Corp., where then-chief executive John Akers agreed to step down because of concern about the company's sickly stock performance.

A three-year campaign against General Motors Corp. ultimately led to the replacement of former chairman Robert Stempel with an outside director. The fund has also prodded for outside directors at Boise Cascade Corp., Pennzoil Corp., Westinghouse Electric Corp. and Sears, Roebuck & Co.

Shareholder activism has not come easily--of cheaply. Prompted by the state Legislature, the fund was forced to divest $11 billion from companies that did business in South Africa during the aparatheid years--a position that resulted in lost profits estimated at $500 million.

And critics have noted that Calpers had less to say during the bull market of the late 1990s, when alternative asset classes such as private equity and venture capital held sway. Though Calpers lost money in its investments in WorldCom and Enron, it became a limited partner in one of Enron's funds, investing $250 million in Jedi, or Joint Energy Development Investments.

Calpers cashed out in 1997 and pocketed $382.5 million, according to Securities and Exchange Commission filings. It then invested $175 million in a second Enron fund. When it was asked to join an off-balance sheet partnership called LJM, which was managed by Andrew Fastow, Calpers declined because of an apparent conflict of interest.

Monks doesn't fault Calpers for keeping quiet.

"Calpers has been the leader," he said. "I never heard of anyone being morally obligated to alert other shareholders about not investing in a company."

The Scorecard

Target: Cendant Corp., 1998

Issue: Inflated earnings uncovered following the 1997 merger of HFS Inc. and CUC International Inc., which became Cendant.

Outcome: A class-action suit recovered $2.8 billion for shareholders in the largest such win in history. Another $335 million recovered from auditor Ernst & Young. Cendant also adopted reforms that included having a majority of directors replaced by independent directors.

Target: W.R. Grace & Co., 1995

Issue: A $20 million severance package for President and Chief Executive J.P. Bolduc, who resigned amid allegations of sexual harassment 

Outcome: Grace settled a shareholder suit alleging breach of fiduciary duty for nearly $4 million and adopted new sexual harassment and corporate governance policies.

Target: Sears Roebuck & Co., 1990

Issue: Dividing the chairman and chief executive duties and the removal of inside directors.

Outcome: Board was reduced to 10 from 15 directors, all inside directors were eliminated except one.

Target: General Motors Corp., 1985

Issue: Increasing the number of outside directors.

Outcome: The board ultimately agreed to have a majority of independent directors.