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Has 'Greed' Supplanted 'Shareholder Value?'

February 19, 1996|TOM PETRUNO

Two weeks ago the state's giant CalPERS pension fund announced its annual "hit list," 10 American companies whose stocks have been such dogs that the fund intends to bully them into action "to enhance performance for the benefit . . . of all shareholders."

It was an ironic scene-setter for last week's political free-for-all: A motley crew of major Democratic and Republican figures who agree on little else attacked the "greedy corporation" that focuses excessively on making money and boosting its stock price--at workers' expense.

Even allowing for the inevitability of strange bedfellows in politics, hearing Labor Secretary Robert Reich, Sen. Edward M. Kennedy (D-Mass.), and Republican presidential hopefuls Sen. Bob Dole and Patrick Buchanan all lash out at corporate greed sent a chill down Wall Street.

Because if corporate America is avaricious, what does that make powerful institutional shareholders like the $95-billion-asset California Public Employees' Retirement System--which for the last 10 years has been actively pressuring laggard companies to take whatever steps necessary to boost "shareholder value"?

Indeed, institutional shareholder activism has been a key force behind the restructuring wave that has swept American business since the mid-1980s, leading to dramatic upheaval at such corporate icons as IBM, Eastman Kodak and Sears, Roebuck.

CalPERS brags that its interventionist policies have turned underperforming companies into stock market stars: Of 53 CalPERS targets studied by Wilshire Associates last year, the average company's stock rose 54% more than the blue-chip Standard & Poor's 500 stock index in the five years after CalPERS got involved.

In fact, CalPERS says that it and other institutional activists have been so successful in pushing the nation's largest companies to focus on stock performance that the fund is "moving down the corporate food chain," in its words, targeting smaller, non-blue-chip companies.

But if shareholder value has been well-served by institutional demands in recent years, there also has been a high cost. To enhance earnings and boost stock prices, many companies targeted by shareholder activists have hacked tens of thousands of jobs and have kept wage increases for remaining workers to a minimum--exactly the behavior now assailed by Reich and Buchanan both.

The human cost of restructurings hasn't gone unnoticed among big investors, of course. Some high-profile public pension funds, which have routinely used their clout to effect social change, say they are increasingly focusing corporate evaluation efforts on how companies treat workers, not just on the bottom-line results.

Yet the political debate already seems to be framed, and it is a devilish one for pension funds whose first responsibility is to their beneficiaries: How much profit is enough? And how can shareholders know for certain that the corporate managers they are continually hounding for performance aren't producing better results by "hollowing out" their companies, sacrificing human talent and long-term investment just to raise earnings in the short term?

As the spectacular 1990s stock bull market has powered ahead over the last 13 months, in no small part fueled by corporate earnings that have been far stronger than most analysts thought possible, some big investors admit they have been nagged by worries over how those profits have been achieved.

"I think this is something we all have to come to grips with," says Jon Lukomnik, New York City's deputy controller for pensions, who oversees $60 billion in assets. Referring to still-widespread corporate cost-cutting, he says, "You can shrink your way to profitability [in the short run] but not to greatness" in the long run.


Yet judging whether an individual company gives the correct weightings to short-term and long-term shareholder concerns is no simple task, if what is "correct" can even be defined.

The stock market, Lukomnik notes, is quick to reward good short-term surprises, while steps taken for a company's long-term health often aren't immediately quantifiable by the market.

For their part, public pension funds such as New York City's and CalPERS, whose size gives them enormous influence on Wall Street, insist they are only interested in a company's long-term performance.

Typically, major pension funds are buy-and-hold investors that, by virtue of their size, end up owning nearly every major U.S. stock. That is what drives institutional activism: The funds can't vote with their feet by selling stocks they don't like. So they believe that their only option with laggard stocks is to pressure the companies' managers to do better.

But the funds say the decision to bring pressure is never made lightly. CalPERS, for example, says its annual corporate hit list comprises only the worst stocks in its 1,500-stock portfolio and that performance is judged over a five-year period.

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