Cited for lackluster market and corporate governance performance were giant drug-maker Eli Lilly; medical technology provider Hill-Rom Holdings; Hospitality Properties Trust, a real estate investment fund in hotels and trade centers; and IMS Health, which provides intelligence to the pharmaceutical and health care industries, according to a CalPERS announcement.
CalPERS has used the annual Focus List Program since 1987 to identify companies in its domestic internal equity portfolio that resist efforts to adopt governance practices aimed at improving stock performance. A 2008 Wilshire Associates study found that Focus List companies on average had share value increases of 3% above market benchmarks in the five years after they were placed on the list.
The Focus List process begins with the application of performance screens to companies in the Russell 1000 index fund for stock performance, governance practices and return on invested capital, CalPERS explained. This year, the system selected and engaged 13 preliminary Focus List companies that are chronic stock underperformers and have sub-par governance practices.
A majority of those companies met with CalPERS, ultimately leading to agreements to adopt significantly better corporate governance standards covering 14 different governance subjects including the removal of staggered board election terms and supermajority vote requirements; and the implementation of executive compensation advisory votes, majority votes for directors, separate chair/CEO roles, improved diversity/board skill sets, and clawback policies to recapture bonus and incentive payments in the event of officer fraud or misconduct.
“In today’s current economic environment, no company should resist strengthening their corporate governance, but these four companies did,” said Rob Feckner, CalPERS Board President, in the announcement.
CalPERS said Eli Lilly, which also was on the 2007 Focus List, was included in this year's list in part because the Indianapolis, Indiana, drug-maker continues to deny shareowners any opportunity to amend bylaws - a restriction used by only 4% of S&P 500 companies. This year, the pension fund is seeking shareowner support for a resolution to overturn the bylaw amendment provision at the company's scheduled annual meeting on April 20, 2009. In addition, Eli Lilly underperformed industry peers by 64% over the past five years, as of February 27, 2009.
Hill-Rom Holdings of Batesville, Indiana, lagged peers in the health care equipment industry by 84% over the past five years. CalPERS objects to the company's refusal to remove its staggered board structure and to allow shareowners to amend its bylaws, according to the CalPERS anouncement.
CalPERS will bring a shareowner resolution against Hospitality Properties Trust at the Newton, Massachusetts, company's scheduled annual meeting on May 15, 2009, proposing termination of its "classified" board where directors serve staggered terms rather than standing for election each year. Hospitality Properties Trust lagged peer performance by 23% over the past five years.
IMS Health, based in Norwalk, Connecticut, underperformed peers in the health care services field by 63% over five years. CalPERS also cited its denial of the right of shareowners to call a special meeting and/or act by written consent and to adopt annual nonbinding advisory votes on executive compensation practices.
For Fact Sheets about the four 2009 Focus List companies, visit the CalPERS Press Room at www.calpers.ca.gov .