CalPERS: Corporate Reformer Under Fire

Lon

g before Eliot Spitzer achieved national renown by attacking corporate misdeeds as New York's attorney general, there was the California Public Employees' Retirement System, or CalPERS. For years, CalPERS used the leverage of its enormous investment portfolio to rail against companies that it believed were badly run or acting irresponsibly. When the Enron debacle ushered in an era of scandals, CalPERS's leadership made it an instant star of the corporate-reform movement.

But the times may be changing. After a bruising annual-meeting season during which CalPERS wielded its $166 billion portfolio like a bludgeon, members of its board gathered in Lake Tahoe, Nev., in July to take stock. One invited speaker, Richard Koppes, a former CalPERS general counsel, delivered a blunt message. "Your friends think you're unfocused and too political," Koppes said. "They say you're beginning to damage the corporate-governance movement." CalPERS president Sean Harrigan, a grocery workers' union boss and an architect of the institutional investor's bare-knuckle strategy, got a more pointed message two weeks ago from the state personnel board he represented at CalPERS: it replaced him with Republican real estate developer Ronald Alvarado.

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Harrigan and his Democratic allies blame a G.O.P. cabal backed by business interests for trying to slow CalPERS's shareholder activism. "This is payback by the big corporate special interests who fight our reform efforts and their ally Governor Schwarzenegger," asserts Democrat Phil Angelides, the state treasurer and a CalPERS board member. The Governor, state Republicans and business groups all deny conspiring to oust Harrigan. But his demise shows just how much harder Schwarzenegger's rise has made it for even the state's most powerful Democrats to throw their weight around.

Not that Harrigan and CalPERS didn't open the door to criticism. During most of the post-Enron era, CalPERS was above reproach, suing to hold WorldCom executives accountable for investor losses and helping lead popular, triumphant crusades for boardroom and executive-suite overhauls at the New York Stock Exchange and Disney. But earlier this year, CalPERS moved from the spotlight to the hot seat when it withheld support from Coca-Cola director and shareholder hero Warren Buffett because Coke's independent-auditor policy was allegedly too lax. At the time, John Castellani, head of the prestigious Business Roundtable, said the CalPERS attack on Buffett was "an absurdity." Then, when CalPERS targeted management at Safeway Inc., the grocer that took a hard line against Harrigan's union during a strike last year, conflict-of-interest charges rained down. "Harrigan overreached," says Karen Hanretty, spokesperson for the state Republican Party, which has publicly criticized him and CalPERS all year.

Detractors point to the $27 billion drop in portfolio value between 2000 and 2003 as evidence that the CalPERS board has been distracted. However, the portfolio has gained $32 billion since 2003. Dr. Keith Richman, a Republican legislator, last week proposed privatizing the state-employee pension system and gradually abandoning the defined-benefits fund that CalPERS oversees.

CalPERS is adjusting. Board member Steve Westly, the Democratic state controller, urged colleagues to give their strident reform policies "an extreme makeover." They agreed to focus on executive compensation instead of more controversial issues. But Angelides plans to continue the CalPERS fight. "We won't be silenced," he says. "There's too much at stake."