Academic Research on CalPERS

• Shareholder activism by institutional investors: Evidence fromCalPERS Smith, M. P. (1996). Shareholder activism by institutional investors: Evidence from CalPERS.The journal of finance,51(1), 227-252. This study examines firm characteristics that lead to shareholder activism and analyzes the effects of activism on target firm governance structure, shareholder wealth, and operating performance for the 51 firms targeted by CalPERS over the 198793 period. Firm size and level of institutional holdings are found to be positively related to the probability of being targeted, and 72 percent of firms targeted after 1988 adopt proposed changes or make changes resulting in a settlement with CalPERS. Shareholder wealth increases for firms that adopt or settle and decreases for firms that resist. No statistically significant change in operating performance is found.
• Monitoring the monitor: EvaluatingCalPERs' activismBarber, B. M. (2006). Monitoring the monitor: Evaluating CalPERs' activism.Available at SSRN 890321. Many public pension funds engage in institutional activism. These funds use the power of their pooled ownership of publicly traded stocks to affect changes in the corporations they own. I review the theory and empirical evidence underlying the motivation for institutional activism. In theory, the merits of institutional activism hinge critically on two agency costs: (1) the conflicts of interest between corporate managers and shareholders, and (2) the conflicts of interest between portfolio managers and investors. This leads to two types of institutional activism: shareholder activism and social activism. While portfolio managers can use their position to monitor conflicts that might arise between managers and shareholders (shareholder activism), they can also abuse their position by pursuing actions that advance their own moral values or political interests at the expense of investors (social activism). Which of these effects dominates the actions of portfolio managers will determine the value of activism and is an empirical issue. Perhaps the most high profile activism has been pursued by CalPERS with their annual focus list. I document that CalPERS has pursued reforms at focus list firms that would increase shareholder rights and (imprecisely) estimate the total wealth creation from this shareholder activism to be $3.1 billion between 1992 and 2005. Unrelated to the focus list program, CalPERS has also pursued social activism (e.g., the divestment of tobacco stocks). In general, I argue that institutional activism should be limited shareholder activism where there is strong theoretical and empirical evidence indicating the proposed reforms will increase shareholder value. At times, institutions will be forced to take engage in social activism and take positions on sensitive issues. In these situations, I argue portfolio managers should pursue the moral values or political interests of their investors rather than themselves.
• The CalPERSeffect revisited English II, P. C., Smythe, T. I., & McNeil, C. R. (2004). The CalPERS effect revisited.Journal of Corporate Finance,10(1), 157-174. Institutional investors have become more active in corporate governance with the relaxation of Depression Era securities laws. The California Public Employees Retirement System (CalPERS) is a leading institutional activist. In this paper, we examine the relationship between CalPERS' public targeting and both short- and long-term stock returns to address what has been dubbed the CalPERS effect. Our results indicate evidence of an announcement effect and that, while there is also evidence of some long-term improvement, it is limited to 6 months from the announcement of the target list in theWall Street Journalwhen more consistent empirical methodologies are employed.
• Honey,CalPERS shrunk the boardWu, Y. (2000). Honey, CalPERS shrunk the board.Calpers Shrunk the Board (June 13, 2000). This paper attempts specifically to answer the question: whether there is any influence of shareholder activism on changes in board structure. I have used 8 years of directors data from 1988 through 1995 of the Forbes 500 corporations of 1987. I document that board sizes decreased during 1991-1995, that the inside directors decreased over time, and that the emergence of active institutional investors, at least CalPERS, seems to be associated with the increased tendency of firms to reduce their board sizes, primarily the number of inside directors. This conclusion is based on 4 documented facts: (1) In 8 of 61 cases in which at least 3 directors were removed, CalPERS seems to be associated with the increased tendency of firms to reduce their board sizes. (2) Based on the SUR estimates, changes from firms not targeted by CalPERS to firms targeted by CalPERS are associated with changes of board sizes from 1.25% to ?6.9% and changes from firms not targeted by CalPERS to firms targeted by CalPERS are associated with changes of insiders from 5.47% to ?6.14%. (3) The inside directors serve at the request of the CEOs and would never withdraw voluntarily unless they were leaving the companies or the CEOs asked them to withdraw. In the Forbes 500 corporations targeted by CalPERS, the fractions of replaced inside directors who remained as employees are larger than those of the Forbes 500 corporations not targeted by CalPERS (the fractions of replaced inside directors who remained as employees are 43% and 8%, respectively). (4) In the two constructed samples consisting of firms that might be free from being targeted by CalPERS, the variation in the board sizes does not follow the patterns suggested by CalPERS' corporate governance movements.
• Shareholder wealth effects ofCalPERS'activismCrutchley, C. E., Hudson, C. D., & Jensen, M. R. (1998). Shareholder wealth effects of CalPERS'activism.Financial Services Review,7(1), 1-10. In the past decade, institutional investors have become more active in monitoring management and voting the shares they control. The California Public Employees' Retirement System (CalPERS) was a leader in this wave of activism. This study investigates the long-term returns an investor with public information could earn by buying a portfolio of firms targeted by CalPERS and whether the success of CalPERS' activism depends on the aggressiveness of the targeting. The evidence supports the idea that visible and aggressive activism leads to substantial increases in shareholder wealth while a quieter activism does not.