May 2004

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Dan Walters is a columnist for The Sacramento Bee. This May 5, 2004 column is copyrighted by The Sacramento Bee and is reprinted with permission.  Mr. Walters can be reached at dwalters@sacbee.com. Back columns: www.sacbee.com/walters

State Treasurer Phil Angelides and other members of the union-dominated board of the California Public Employees' Retirement System have been conducting a noisy crusade in recent weeks for what they portray as improving the governance of corporations in which the $166 billion pension fund has investments.

The public rationale for the reform drive, which targets specific companies and directors, is that cozy relationships between corporate management and directors lead to Enron-like accounting scandals that drive down the value of stock holdings and thereby damage the interests of investors.

Were that the crusade's only motive, it would be praiseworthy. But it's becoming increasingly clear that Angelides and CalPERS' leadership have other motives that are just as self-serving as the corporate governance practices they decry.

What's happening with CalPERS, the nation's largest pension fund, is part of a larger, nationwide effort by labor unions to gain leverage with corporations by wielding the investment power of public pension funds. For Angelides, who is positioning himself to run for governor in 2006, the crusade is a two-fer. He can simultaneously burnish his credentials as a corporate reformer, thus exploiting public dismay over the recent spate of accounting scandals, and build relationships with the unions that wield huge influence within the Democratic Party.

By selecting specific corporate targets, meanwhile, unions can cause problems for the corporations with which they are conducting contract negotiations. And a case in point is Safeway, the Pleasanton-based supermarket chain that CalPERS singled out, demanding not only changes on its board of directors but the ouster of Chief Executive Officer Steven Burd.

In response to public complaints from CalPERS and four other public pension funds (which collectively own about 2 percent of Safeway's stock) about too-close ties between Safeway and its directors, the company this week replaced three directors and announced that Paul Hazen, a former chairman of Wells Fargo Bank, was named as "lead director" to lend more credence to the independent members of the board. Pointedly, however, Burd refused to step down, and CalPERS was not mollified.

"Safeway's actions are a thinly veiled attempt to mollify shareholders," Rob Feckner, head of CalPERS' investment committee, said in a statement. Feckner went on to call the board change "a manipulative action" aimed at diverting attention from Safeway's performance.

What makes the Safeway situation especially contentious is that under Burd, the firm took a very hard line with striking grocery store clerks in Southern California during the recently settled strike/lockout (Safeway also owns the Vons and Pavilions chains), and the head of the CalPERS board, Sean Harrigan, is a high-level official with the striking grocery clerks union. And with contract negotiations pending in Northern California, it's obvious that Harrigan has a vested interest in inflicting some damage on Safeway (he did not respond to requests for comment on the situation).

Two ironies attach themselves to the Safeway-CalPERS imbroglio.

One is that while CalPERS' official reason for naming the firm as a corporate governance target is its financial performance, the grocer's hard line on contract negotiations was aimed at reducing costs and therefore protecting its bottom line. If Safeway were to sign the kind of contract Harrigan's union wants, its profits would plummet and it could be criticized by investors such as CalPERS for being too soft.

The second is that while CalPERS attacks the financial performance of Safeway and other targeted firms, its own investment performance has been less than stellar in recent years, running below national pension fund averages - and that's why taxpayers are now being hit hard to pay for the inflated pensions that CalPERS urged former Gov. Gray Davis, the Legislature and local governments to adopt.

The overriding issue is this: Should those who control public pension funds concentrate on improving investment returns and thus serve the interests of pensioners and taxpayers, or should they pursue other agendas that have little or nothing to do with their primary duties?