Six Companies in Calpers Cross-hairs

Annual focus list urges improvements including a requirement of majority voting for directors, removing excessive takeover defenses that prevent shareowners from amending company bylaws, and accounting for their performance.

The California Public Employees’ Retirement System (Calpers), the nation’s largest pension fund, announced its annual focus list of companies that it says must improve their financial performance and governance practices.

“The stock performance and governance of these companies is unacceptable to us and other shareowners,” said Calpers board president Rob Feckner, in a press release.

This year’s list includes Brocade Communications, Cardinal Health, Clear Channel Communications, Mellon Financial, OfficeMax, and Sovereign Bancorp. Office Max and Sovereign have also recently been targeted by activist investors.

To select the companies on its focus list, Calpers examines the more than 1,800 U.S. corporations from its internal equity portfolio, then narrows the list based on long-term stock performance, corporate governance practices, and an evaluation of economic value-added, or EVA, which measures net operating profit after tax, minus cost of capital.

Feckner said that Calpers is urging these companies to make a number of governance improvements, including requiring majority voting for directors, removing excessive takeover defenses that prevent shareowners from amending company bylaws, and accounting for their performance.

“In the coming months, we will continue to work with these companies to find ways to turn them around,” said Charles Valdes, chair of Calpers’s investment committee, in a statement. “We know that this kind of engagement leads to higher returns, positive leadership changes, more transparency, and much better accountability to shareowners and regulators.”

According to Calpers:

• Brocade has a 67 percent supermajority requirement for amending key portions of the company’s charter and bylaws; it lost 68 percent of its stock value in the past five years.

• Cardinal Health has excessive severance benefits and a 75 percent supermajority requirement to change bylaws; its stock also has significantly underperformed its peers over the past five years.

• Clear Channel has excessive executive compensation and severance agreements; it lost 42 percent in stock value over the past five years compared with a 26 percent decline for its industry peers.

• Mellon is the target of a shareowner proposal to remove the company’s requirement of a 75 percent majority vote to amend company bylaws; its share price fell by 2 percent compared with a 58 percent gain for industry peers over the past five years.

OfficeMax was singled out for its “excessive” takeover defenses, including an 80 percent supermajority requirement to amend bylaws.

• Sovereign also was deemed to have excessive takeover defenses, including 80 percent supermajority requirements to amend specific charter and bylaw provisions, limited shareowner rights, and the rare provision of severance agreements for directors.

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