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As lawmakers, stock exchanges and federal regulators confront corporate governance problems, another key constituency, institutional investors, is also stepping up its surveillance of American companies. “Shareholders are so outraged after Enron that I think you are going to see a real change at companies and their reaction to institutional investors,” said Charles Elson, director of the Center for Corporate Governance at the University of Delaware. Elson added that fund managers historically have been discouraged from shareholder activism because of the high costs involved. But recently big investors are realizing that good governance can boost the value of portfolios, he said. Allie Monaco, spokeswoman for the Investor Responsibility Research Center in Washington, D.C., said institutional shareholder activism is rising this year. Pension, mutual and other big funds already have made 490 governance-related proposals this year, compared with 505 in 2001, 600 in 2000 and 520 in 1999, she said. Richard Ferlauto, corporate governance spokesman for American Federation of State, County and Municipal Employees, which represents $1 trillion in assets at 150 U.S. pension funds, said the energy giant’s collapse was a catalyst for tighter scrutiny of the AFSCME’s portfolio companies. “We’ve made a real commitment to do more corporate engagement in the wake of Enron,” he said. This month alone, AFSCME persuaded shareholders to vote to remove the staggered board at Great Lakes Chemical Corp. of Indianapolis and to eliminate a poison pill anti-takeover provision at Ryder System Inc. of Miami. Because the proposals are binding, however, neither company has acted on the shareholders’ request. Ferlauto said AFSCME has been more successful galvanizing shareholder action on a range of governance issues, including director independence, anti-takeover measures and auditor responsibility. The federation is also strengthening the governance guidelines for its member pension funds, particularly on the controversial issue of company auditors providing non-audit consulting services. “If the company in our pension fund spends more money with its accountant on non-audit services than audit services, we vote against bringing it back,” Ferlauto said. Gregory Smith, general counsel for the Colorado Public Employees Retirement Association, a $28 billion pension fund, said his group is vigorously re-examining governance issues such as board and auditor independence and rules requiring companies to better disclose governance principles. “Some of the directors at Enron didn’t come to enough meetings, and we’re taking a harder look at other companies and whether board members have been diligently coming to meetings,” Smith said. He added that Colorado PERA is also considering the voting record of its portfolio companies’ board members to assess the health of their governance. Colorado PERA will take a tough stand against companies whose auditors also consult on mergers and acquisitions, Smith said. “The independence of the CPA firm is in question because, after consulting on the deal, the auditor is also supposed to look at the structure of those deals,” he said. “It lacks the checks and balances.” Another activist pension fund is the Connecticut Retirement Plans and Trust Funds. In 1999 the $20 billion fund used proxy advisory firms to evaluate shareholder proposals of the fund’s portfolio companies. Now the company does it on its own, and this year the fund has submitted 24 shareholder proposals on board independence, board declassification and executive compensation. Meredith Miller, assistant treasurer of CRPTF, said the group is looking at problems associated with “interlocking directors,” board members who sit on a number of the same boards of different companies and trade votes. Among its activities, the fund this year successfully lobbied Mattel Inc. of El Segundo, Calif., and Office Depot Inc. of Delray Beach, Fla., to tie CEO compensation to the companies’ performance. In early May it also convinced shareholders of shoe giant Reebok International Ltd. to vote to eliminate a staggered board. Two of the most active institutional investors, the California Public Employees’ Retirement System and the teachers pension fund, TIAA-CREF, also have taken action this year. TIAA-CREF has completed a three-year effort to compel all 58 companies in its portfolio to revoke so-called dead-hand poison pills, a harsh anti-takeover provision that requires the consent of continuing directors. CalPERS, meanwhile, has earmarked $500 million for a new internal department of fund managers who will buy large stakes in companies and call for strategic acquisitions and divestitures. Some institutions take a more measured route toward governance reform. The State of Wisconsin Investment Board has focused on setting up governance investor conferences as a way to develop awareness among institutional investors. “Institutional investors are just now waking up and realizing their obligation to actively make sure management is responsible to shareholders,” said Raymond Troubh, a corporate governance expert and board member at Enron Corp., StarWood Hotels & Resorts, America West Airlines Inc. and Health Net Inc. But institutions could do much more, said Nell Minow, a governance expert and editor of The Corporate Library. She said institutional investors should disclose their voting records on governance issues at their respective portfolio companies. “America’s shareholders should be able to choose the index fund where they see managers are voting their shares for good corporate governance,” Minow said. Copyright (c)2002 TDD, LLC. All rights reserved.

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