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Richard Koppes has seen corporate governance issues from different perspectives. For 10 years he was general counsel of the California Public Employees’ Retirement System, at a time when the giant institutional investor was redefining the role that public pension funds play in shaping corporate policies. Eight years ago Koppes left CalPERS for Jones Day, where he is of counsel. Koppes now advises directors and management on a range of governance issues. He is also co-director of Stanford Law School’s Executive Education Programs and serves as a director on two boards: Apria Healthcare Group Inc. and Valeant Pharmaceuticals International. Last year Koppes was pulled back into a controversy at CalPERS. The board of the $177 billion pension giant asked Koppes and two others — former Securities and Exchange Commission Chairman Arthur Levitt and fund manager Ralph Whitworth — for their advice in light of criticism that the group had become too political. Critics pointed to CalPERS’s pressure on the Safeway Inc. grocery chain to settle a labor strike. Also, in several instances, CalPERS voted against an entire slate of directors if the company used its auditing firm to do nonauditing work, asserting that this creates a conflict of interest for the auditor. In December CalPERS board President and labor leader Sean Harrigan was voted off the 13-member board. An executive at the United Food and Commercial Workers Union, Harrigan lost his seat when the California Personnel Board voted to remove him as its representative. Harrigan claimed he was targeted for challenging business interests. In the wake of the dismissal, The American Lawyer talked to Koppes about CalPERS and the state of institutional investing. Q. What was your role in the recent CalPERS events? A. This all comes from a session they had last July in Lake Tahoe. The board was concerned about the negative press they were getting and falling support in the investment community. They asked three outside experts, me and Arthur Levitt and Ralph Whitworth, to meet with them. [Before this meeting] I had talked to 18 people, good governance people, and almost to a person they said the organization had gotten too political. They said it did a great job with Disney and [the Richard Grasso pay dispute], but had gone over the line with Safeway and WellPoint. I said to them — which they didn’t like — that some of their actions had damaged the corporate governance community. I was treated like the skunk at the garden party. � They were frankly stunned when I was done. I had wisely decided not to join them for cocktails afterward. Q. What happened in WellPoint? A. WellPoint and Anthem planned to merge to create the largest HMO. This was a problem of an outrageous severance payment. The CalPERS investment office recommended a vote for the merger, with concerns expressed about the severance payments. Some members of the board jumped on [the severance issue], and it became a political issue. The board switched its vote against the merger, and said it would urge others to do so. [The merger was approved by 97 percent of shareholders.] Q. How is WellPoint different from Disney, where CalPERS objected to the large severance payment given to former President Michael Ovitz? That decision was generally supported in the investment community. A. In Disney, there was a long history, 10 years at least, discussing governance issues with the company. When I was there, we were dialoguing with Michael Eisner about governance. In WellPoint, they were switching votes without a lot of analysis. The deal was good for shareholders, although the severance package was outrageous. Q. Do you think Harrigan’s removal was related to the advice you and the others gave the board last summer? A. It’s hard to say. That was several months ago. Q. Any signs that CalPERS has taken that advice to heart? You’d have to ask them. [Koppes is not continuing to advise the system.] We’ll see when new leadership emerges. They have such a good professional staff and [the board was] kind of overriding them on occasions. Q. Have you been surprised by anything you’ve seen since you’ve moved from CalPERS and started advising corporations? A. How individualistic this can be. So much depends on personalities. Good governance guidelines and the independence of a board are very important, but you can have all that and a board can still come together and fail because of personalities — either no leadership or too dominant a CEO. Q. What are your observations on the Disney trial going on in Delaware? A. I think the challenge will be for Chancellor [William] Chandler [III] to write a decision that says, “This is not proper,” but does not scare the wits out of corporate America. How to do that — without throwing the baby out with the bathwater — without getting rid of everyone who wants to be on boards. Q. Are you concerned about some of the choices companies make to boost profits and satisfy large shareholders, such as decisions to outsource jobs and cut pension benefits? A. Yes. This is where I really think the long-term investment community I come from — the pension funds, some of the big mutual funds — need to work together to lessen this quarterly pressure. I hate it, the pressure to always beat the analysts. They’re too powerful. I almost would do away with quarterly reporting. Q. What is your practice like at Jones Day? A. I advise boards and management on corporate governance and shareholder issues. Many of my views are surprising to our clients. Jones Day has never asked me to modify my views. Sometimes I’ll get funny e-mails from partners. They’ll write, “You must have been misquoted [in the press].” I’ll say, “No, I was not.” They’ll then say, “You must be a communist!” Sometimes clients listen and do the right thing and don’t treat shareholders as the enemy, and sometimes they don’t. Q. What is the state of corporate governance today? A. The good news is that the corporate governance evolution has become a revolution in the last two to three years. The good news is that boards are really doing their job and are independent for the most part. There are exceptions, but I’m amazed how concerned directors are. The thing that pleasantly surprised me when I left CalPERS and went to the dark side, as others say, is how many people in the corporate world want to do the right thing. Susan Beck is a San Francisco-based senior writer for The American Lawyer. Her e-mail address is [email protected].

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