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When does CalPERS’ activism add value?

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Abstract

The California Public Employees’ Retirement System (CalPERS) is a pioneer of shareholder activism and a leading proponent of governance reform among public pension funds. We examine factors (such as board structure, ownership structure, past performance, and size of target firms, as well as proposed governance reform) that may be associated with the value of CalPERS’ activism. The results can be useful in guiding institutional governance efforts in the future. The results show that poor prior performance, smaller firm size, and a larger board are associated with greater announcement period returns. In addition, there is weak evidence of greater announcement returns when the board includes a greater number of insiders, CEO ownership is high, and director and officer (excluding CEO) ownership is low.

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Notes

  1. William Crist, a former head of CalPERS, states that “as long-term investors, it is our responsibility to be a constructive voice in urging improved corporate governance practices and company performance,” (CalPERS’1998 Focus List press release).

  2. Generally, a CalPERS targeting season runs from June to June.

  3. We expect that, even if obtained, announcement returns could not be estimated for most of the Monitoring List firms because of the confidential nature of the targeting.

  4. For additional discussion of CalPERS’ targeting process, see Nesbitt (1994), Smith (1996), Crutchley et al. (1998), and English et al. (2004).

  5. See Karpoff (2001), Romano (2001), Gillan and Starks (2007), and Bebchuk and Weisbach (2010) for a broader survey of the literature.

  6. While our focus is pension fund activism, and that of CalPERS specifically, activism spearheaded by hedge funds is a recent related topic of interest. Brav et al. (2008), Clifford (2008), Klein and Zur (2009), and Boyson and Mooradian (2011) provide evidence that hedge fund activism produces value gains, although the results of Greenwood and Schor (2009) indicate that the value gains from hedge fund activism arise from takeover activity, as opposed to governance improvements following targeting.

  7. We thank Metrick and Bebchuk for kindly making available their respective databases.

  8. Industries are defined as in Fama and French (1997).

  9. Since the return variables are industry adjusted, return can be less than −100 %, which is the case for Return (5 years) with a bottom quartile equal to −117.10 %.

  10. The 9.15 is an average of yearly figures reported by Gompers et al. (2003) in their Table 2. The 2.35 is an average across years that we computed using Bebchuk et al.’s (2009) Table 2.

  11. Coles et al. (2008) and Hwang and Kim (2009) report average CEO ownership of 1.85 % and 0.94 % for their samples. Average director and officer ownership in Cornett et al. (2007) equals 3.2 %. Dlugosz et al. (2006) document average board size of 9.5 for all firms in the IRRC database. Average board size in Coles et al. (2008) is 10.4.

  12. Outside directors exclude insiders (current or past employees) and “greys” (directors with personal or business ties to the firm or CEO as revealed in the firm’s proxy statement).

  13. For example, Wahal (1996) and Gillan and Starks (2000) report R-squared values ranging from 0.01 to 0.12 in their regressions of abnormal announcement returns.

  14. We do not include CEO is Chair in our analysis, since there is not sufficient variation in the sample for meaningful analysis. CEO is Chair for 71 of the 85 targets.

  15. Outside Block Ownership excludes the block ownership of insiders (i.e., current or past employees) and greys (i.e., non-insiders with a personal or business affiliation with the firm or the CEO, outside of their stock ownership, as revealed in the firm’s proxy statement).

  16. We also use a squared value of CEO ownership to capture this effect. Neither CEO ownership nor its squared value is statistically significant.

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Authors and Affiliations

  1. Department of Business & Accounting, Furman University, Greenville, SC, USA

    Thomas I. Smythe

  2. Walker College of Business, Appalachian State University, Boone, NC, USA

    Chris R. McNeil

  3. Fox School of Business, Temple University, Philadelphia, PA, USA

    Philip C. English II

Authors
  1. Thomas I. Smythe
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  2. Chris R. McNeil
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  3. Philip C. English II
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Correspondence to Chris R. McNeil.

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Smythe, T.I., McNeil, C.R. & English, P.C. When does CalPERS’ activism add value?. J Econ Finan 39, 641–660 (2015). https://doi.org/10.1007/s12197-013-9269-8

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