Angelides Leads Charge against Executive Comp

August 16, 2004 ( - The nation's largest public pension fund might soon have another target in its corporate governance sights - executive compensation.

California State Treasurer Phil Angelides – joined by California Public Employees’ Retirement System (CalPERS) Board members George Diehr, Rob Feckner, Sean Harrigan, Priya Mathur, and Charles Valdes – has launched an effort aimed at reigning in corporate “golden parachute” agreements – asking the other members of the investment committee at the nation’s largest public pension plan to “take the lead in setting tough new executive severance policies.”

Additionally, the members want to “enlist other institutional shareholders to adopt those policies; and join with other investors to mount a national shareholder campaign in 2005 against a targeted set of executive compensation and merger plans that do not meet these policies.”   

Activist Streak

CalPERS, which has long demonstrated a storied streak of corporate governance activism, was even more outspoken than customary this past proxy season, with a focus on auditor independence, the independence of audit committee directors, and separating the CEO and chairperson roles.   Along with other large public pension systems, those moves grabbed headlines and the attention of companies such as Disney, where Michael Eisner was forced to relinquish half his chairman/CEO role.   However, CalPERS’ apparently blind adherence to principle also resulted in a much-critiqued challenge to the presence of Coca-Cola board member Warren Buffett on the soft drink giant’s audit committee (see  Clear Conscience? ).

The latest move was spurred by the proposed merger between Anthem Inc. and WellPoint Health Networks Inc. to create the nation’s largest health insurer, a $16.5 billion merger approved by the shareholders of both firms, and thus far stymied only by California Insurance Commissioner John Garamendi’s refusal to approve the deal.   

Payout Peeve

CalPERS opposed the merger in part because of what Angelides called the “outrageous executive payouts” that could cost shareholders more than half a billion dollars. Executives there negotiated the severance packages before announcing the merger plans, and defended the packages as common practice (see  ISS, CalPERS at Odds on Anthem-Wellpoint Combo ).  

The board members had a harsh response to that argument.   “First, when egregious golden parachute awards are judged acceptable simply because they are common, it is a sign that the market has spun out of control. Second, such practices can be corrected only through concerted action by shareholders to restore common sense and balance to severance pay,” according to the  letter directed to the remaining members of the board , and posted on the California Treasurer’s web site.

The officials said they specifically want to lower the amount of severance pay in such circumstances and end the practice in which executives can immediately cash in on stock options instead of waiting to see if the merger succeeds. If the severance pay is enough to trigger federal excise taxes, the tax should be paid by the executive and not the company and its shareholders, they said.   They also called for new policies that would require executives’ unvested options to be converted into options in the new company, to link their interests with those of shareholders.

In a  response letter to the CalPERS board, WellPoint Chief Financial Officer David Colby said the board “is clearly engaging in an important and relevant discussion on compensation issues associated with mergers and acquisitions.”   Colby also noted, however, that WellPoint executives can cash in their stock options only if they are fired, and that the company’s 13 top executives have agreed they won’t immediately cash in even if they are terminated.   He also said the company will not pay federal excise taxes for its employees.