Anecdote CalPERS Top10 List

The most visible corporate governance activist in the United States is the California Public Employee Retirement System. CalPERS publishes an annual list of worst corporate governance companies (in its portfolio). Among its 2003 winners were Gemstar (GMSTE), JDS Uniphase (JDSU), Manugistics (MANU), Midway Games (MWY), Parametric Technology (PMTC), and Xerox (XRX). The detailed corporate governance shortcomings make interesting reading.

But even CalPERS rarely takes on Fortune-100 companies (which are most prone to suffer from agency conflicts). The reason may not only be political, but the fact that CalPERS' ownership share in Fortune-100 companies is too low to make much of a difference.

Only large shareholders have an incentive to control agency problems.

But even the power of large shareholders is limited. Large shareholder influence is limited.

1. Even if large shareholders have some incentives to control management, it is usually not profitable. A shareholder who owns 5% of a firm suffers 100% of the cost of any effort to influence the management, yet reaps only 5% of the benefit.

2. Votes are not secret: managers know exactly how their shareholders vote and can seek retribution later on.

3. If the large shareholder is a mutual fund, it cannot actively seek to influence corporate behavior. If it does, it could run into insider trading laws when it wanted to divest itself of its stake upon learning negative information. Therefore, many large institutional shareholders abstain from actively seeking corporate influence.

However, many passive institutional shareholders still can and often do tend to vote their shares against management if a third party were to seek an active influence, e.g., in a proxy contest. The presence of large blocks of shares, even passive shares, which could potentially overwhelm the voting power held by management and their allies, is therefore a low-level, but constant restraint on management.

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