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Calpers Reconsiders Corporate Engagement, Focus List     

Article published on November 15, 2010

By Marc Hogan

Calpers is reevaluating how it puts together its annual Focus List as it looks to improve its strategy for company engagement. The proposed changes would limit the list to stocks the $221.5 billion pension fund owns, put a greater emphasis on short-term market returns and downplay corporate governance factors.

The Calpers staff has developed a series of recommendations to be discussed by its investment committee on Nov. 15, according to a meeting agenda posted on Calpers’s website.

These recommendations come after Calpers successfully completed its 2010 Focus List engagements without publicly naming a company, the first time that has happened since the list began in the 1980s.

“This outcome provided some insight to the current methodology and initiated an internal discussion in regard to the framework,” the agenda says. “The financial crisis also illustrated the limits of the current program methodology by not identifying any financial sector companies despite severe losses to the portfolio.”

First and foremost, the staff recommends selecting companies for the Focus List where the fund has a larger ownership position. Specifically, that means changing the screening universe from the Russell 1000 to the fund’s top 500 domestic equity holdings.

Next, Calpers proposes that its selection process for the list “should be more reactive to market developments,” according to the agenda. To that end, the staff suggests adding one-year stock returns. The process already takes into account three- and five-year returns, which will continue to have a greater weighting.

As part of these changes, Calpers further recommends excluding corporate governance factors from its initial screen for the list. Where the current screen combines total stock returns, governance and financial performance, the staff proposes considering financial returns first and governance issues in a secondary analysis. The current approach “tends to diminish the emphasis of underperformance in the selection process and allows ‘check the box’ governance to mask opportunities for improvement,” the agenda says.

Under the proposals, there would also be more attention paid to directors. It’s unclear from the agenda whether board characteristics will fall into this second screening, but the staff recommends “a greater emphasis on board quality, skill sets and diversity.”

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