STATE FUND GETS TOUGH\Smaller firms pressed for more accountability.

Byline: Judith H. Dobrzynski The New York Times

These days, when the California Public Employees' Retirement System talks, big business usually listens. After a slow start, the pension fund, with $97 billion in assets and a reformist's fervor to match, has won several breakthroughs as the leader of the decade-old shareholders' campaign to hold poorly performing chief executives' feet to the fire.

So it was with confidence that Calpers, as the fund is known, decided last summer to turn its attention to the nation's small and medium-size companies. It picked eight, all with less than $2 billion in sales, from among the weakest performers in its portfolio of 1,500-plus companies. Last fall, it quietly started seeking meetings to air its concerns with the executives and directors, just as it always had.

Monday, Calpers publicly named its targets and gave a progress report. And, much to the surprise of the fund's executives, it was deja vu. "It's just like it's seven or eight years ago," said Richard H. Koppes, the deputy executive officer and head of its corporate governance program. "Even getting meetings is tough."

That experience, Calpers executives say, speaks volumes about the way thousands of American companies - sizable but not brand-names - still operate. There is little accountability to, or awareness of, shareholders, except through daily changes in stock prices. Corporate managers, as long as they operate companies whose shares are widely dispersed, can run them largely unchecked. Boards may or may not provide independent oversight. But they, too, function without scrutiny.

It is making Calpers wonder where these small and medium-size companies have been since the mid-1980s, when shareholder-rights activists began clamoring for change at America's largest corporations. Through the governance movement, Calpers and others have pushed for truly independent directors and sought to tie the compensation of top executives to the company's performance. They have demanded the adoption of other governance practices, like confidential voting at annual shareholders' meetings, that they consider basic. Many big companies have voluntarily changed their ways.

But Calpers's new targets - The Stride Rite Corp., Applied Bioscience International Inc., Charming Shoppes Inc., Rollins Environmental Services, Bassett Furniture Industries, Edison Brothers Stores, United States Surgical and Venture Stores - did not budge.

The pension fund got no response from two of them. Most of the others stonewalled before agreeing to a simple meeting. Only Charming Shoppes, the retail chain, replied quickly and positively. Dorrit Bern, its new chief executive, is expected at Calpers's headquarters in Sacramento on Valentine's day.

"The corporate governance movement hasn't reached these smaller companies," said Koppes. "They don't understand that shareholders have a right to talk with them."

The runarounds are quite a shock for Calpers, one of the biggest institutional investors in the country. It is used, at the least, to having chief executives and directors agree to discuss performance and board room practices. Otherwise, Calpers is not shy about throwing its weight around. By voting against those who do not respond, filing shareholder resolutions and exerting pressure any other way it can, Calpers has helped tilt the balance of power away from the managers who run companies toward the investors who own them.

Over the years, Calpers and its confreres in the shareholder-rights movement have claimed a string of successes - changes in the executive suites and policies of General Motors, IBM, Sears and Time Warner, among others - while admitting to just a few failures, at companies like Boise Cascade.

Other restive shareholders, like the public pension funds in New York City and Florida and the pension funds of unions like the Teamsters and the Carpenters, have also concentrated on large companies. "We have a resource problem," explained Jon Lukomnik, New York City's deputy controller for pensions. "So we pick companies where we'll get a real benefit."

These investors had hoped that their message was trickling down from the top of the Fortune 500 list. The hard lesson is that it has not.

"The managers of medium-sized companies have less of a sense of public ownership, of institutional ownership, than large companies do," said Stephen J. Friedman, a former member of the Securities and Exchange Commission who is a lawyer at Debevoise & Plimpton. "Most of these companies don't have a full-time shareholder relations officer so there's no one to focus on these issues, and they think it's someone else's issue."

That's wrong, governance experts say. "The message has to go deeper - it's good for the country to have all of these companies performing better," said Ira M. Millstein, a lawyer at Weil Gotschal and Manges who is counsel to GM's board.

Yet institutional investors pursuing a shareholder-rights agenda face a big problem in dealing with smaller companies: Except for major scandals, they usually fly below the media's radar. "You don't get publicity if you don't have brand-name companies," said Nell Minow, a principal of Lens Inc., which invests in companies specifically to spur changes to increase shareholder wealth.

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Chart (1--Color) A Pension Fund's Scorecard Where things stand in the discussions between Calpers and the eight midsized companies it is focusing on this year. The New York Times (2--Color) The average annual performance for the three years ended May 31 of the eight companies Calpers has picked as its targets. While the S&P 500, with dividends reinvested, rose an average of 11.8 percent, these companies, measured by the value of their stock plus dividends, all lost ground. The New York Times