CalPERS Voting Criteria Altered

SACRAMENTO —  The board of the California Public Employees’ Retirement System on Monday changed its much-criticized criteria for casting protest votes against corporate directors who may have conflicts of interest.

Under the old policy, CalPERS automatically withheld its proxy votes from all members of corporate audit committees that hired outside auditors to do non-audit jobs, such as creating tax shelters.

Last year, CalPERS called for the ouster of directors at 83% of companies held in its $186-billion portfolio. The broad brush brought considerable ridicule to the pension fund after it voted against Warren E. Buffett, the widely respected chairman and chief executive of Omaha-based Berkshire Hathaway Inc.

Under the new system, effective for the upcoming 2005 proxy season, proxy votes will be aimed at withholding support for auditing firms, rather than individual corporate directors. However, CalPERS investment staff would retain power to seek the removal of a director in cases where “egregious” conflicts of interest have occurred.

Switching to the new criteria should lead CalPERS to withhold votes against auditors at only about 5% of the companies in which it owns stock, CalPERS staff estimated. Auditors would be opposed by CalPERS if they were found to violate protocols outlined in proposed audit independence rules being drafted by the Public Company Accounting Oversight Board set up by the Sarbanes-Oxley Act of 2002.

The shift is good for CalPERS and the corporate governance movement, said Nell Minow, editor of the Corporate Library, a Portland, Maine-based research organization. “This is a refinement. They realized that their previous approach was too rigid,” Minow said. “It landed them on what I call a lot of false positives and, therefore, was not the most effective use of their attention and energies.”

The membership of CalPERS’ investment committee is the same as that of the full, 13-member CalPERS board.

In a related move on the corporate governance front, the Investment Committee adopted a staff recommendation to pursue changes in company bylaws, state statutes and Security and Exchange Commission regulations to require that corporate directors be elected by majority votes and not simple pluralities.

“Majority vote will give shareowners the power to hold directors accountable for their actions and their performance, and elect the best person for the job,” said CalPERS Board President Rob Feckner.