The study by finance professor Brad Barber of companies on CalPERS’ annual Focus List reveals short-term benefits of at least $3.1 billion for investors over a 14-year period. Long-term benefits, though difficult to estimate, could be as high as $89.5 billion, according to Barber.
Barber calculated the short-run wealth creation of $3.1 billion by multiplying the market-adjusted return for each listed firm by its market cap. He said the short-run analysis might underestimate total benefits of activism if its announcement is partially anticipated or conveys information about managerial entrenchment. It also misses additional benefits of activism through private negotiations or deterrence of wrongdoing.
Barber estimated the total long-run wealth creation by tracking the performance of Focus List firms for five years after the CalPERS announcement. Though large, Barber noted the long-run estimates of wealth creation are imprecise and cannot be conclusively attributed to the CalPERS activism.
He also noted that CalPERS’ own members enjoy benefits of $1.12 million annually from the pension fund’s activism.
In his working paper, “Monitoring the Monitor: Evaluating CalPERS’ Shareholder Activism,” Barber examined the nature of CalPERS activism and analyzed the gains of such actions linked to the 115 firms named to the pension fund’s Focus List from 1992 to 2005. The paper provides a summary of CalPERS-sponsored proposals on the proxy statements of listed firms.
All CalPERS proposals attempted to expand shareholder rights, most commonly calling on companies to reclassify or to amend bylaws to require a majority of independent directors on their boards. “This evidence provides strong support,” Barber said, “that the nature of reforms pursued by CalPERS, which are clearly designed to expand shareholder rights, should improve shareholder value.”
Barber warned that institutional activism to improve shareholder value should be well-grounded in scientific evidence saying, “Institutional activism is a double-edged sword. When prudently applied, activism can provide effective monitoring of publicly traded corporations. When abused, portfolio managers can pursue their personal agendas at the expense of those whose money they manage.”
Barber said the benefits of institutional activism hinge on two things: the potential conflict of interest between shareholders and corporate managers, and that between investors and portfolio managers. Barber said portfolio managers can also abuse their position by pursuing actions that advance their own moral values or political interests at the expense of investors. He noted two cases of CalPERS activism in which there was not clear evidence that action would improve shareholder value: the divestment from its holdings in tobacco firms in 2000, and when Sean Harrigan, then-president of the CalPERS board and a leader of the United Food and Commercial Workers International Union in Southern California, directed CalPERS to send Safeway a letter encouraging the supermarket chain to end a labor dispute with his union in 2003.
Barber said institutions should open up lines of communication to understand where investors stand on moral issues that might affect investment policy.
The paper and other documents can be downloaded from here .