Corporate raiders have changed in many ways since the 1980s but one of the key differences is their growing use of the shareholder activism banner. Take Bennett LeBow and Carl Icahn, who have laid down corporate governance as one plank in their battle to break up RJR Nabisco. LeBow and Icahn are backing this strategy with one of America’s foremost activists: should their bid to spin off the Nabisco food business succeed, Dale Hanson will be chief corporate governance flag-bearer on their proposed new board.
The former CEO of California Public Employees Retirement System (Calpers), Hanson made his name changing the way shareholders deal with investments. But when he first took up the post in 1987 he admits: ‘I had no clue about corporate governance. I was neither a flaming radical nor a corporate governance crusader. I had to learn everything on the job.’
Along the way, a score of US corporate executives learnt some lessons too. During his seven years at Calpers, the pension fund waged what has been called a ‘corporate governance revolution’, fighting for boardroom reform and management accountability. Time after time, Calpers, along with other investors, ousted CEOs or voted in other changes at companies running amok.
‘We were phenomenally successful,’ Hanson says. ‘I think of companies Calpers was actively involved in changing – Sears, Texaco, Amex, Avon, ITT, GM, IBM and many others. All are now excelling. It’s no small satisfaction to see them at the top. These companies now have a symbiotic relationship with shareholders. They need each other to generate that kind of performance.’
One of those companies was the scene for a showdown involving Hanson and Icahn. In 1988, Icahn made a run at Texaco and CEO James Kinnear looked to shareholders for support. Hanson voted with management to deflect Icahn, then pushed for shareholder input on directors. When nothing came of meetings with Kinnear, Calpers came up with a Texaco shareholders’ advisory committee. Kinnear raised a fuss, but finally agreed to consult with shareholders on director qualifications.
‘Texaco was one of our first corporate governance targets, and will always be one of my favourites,’ says Hanson. ‘Everyone hated the shareholder committee idea, but that was the point: get their attention. I shudder to think what would have happened if one of those proposals had passed. With 2,000 companies in the portfolio, we couldn’t participate in an unlimited number of shareholder committees.’
Hanson had first grasped the corporate governance challenge just a year before the Texaco showdown. Surprisingly, its inspiration came from the enemy. Just a week into his new job at Calpers, Hanson heard a speech by New York attorney Ira Millstein at a meeting of the Council of Institutional Investors . ‘There were clear lines of demarcation between the so-called ‘crazies’ and corporate America,’ Hanson recounts. ‘Millstein was from the enemy camp. Yet his speech chided us for focusing on the wrong things – poison pills, greenmail and staggered boards. Instead, he told us to target the board, since it represented shareholders’ interests. Everything else was a by- product of the board’s action or inaction.’
More tutelage came from Bob Monks, the shareholder activist who went on to set up the Lens fund. Hanson learned that as far back as 1934 Graham & Dodd had published research declaring that as much care and attention should go into stock ownership as stock selection. Over the years, the firm became increasingly frustrated with shareholders’ lack of monitoring. ‘The owners got what they deserved,’ says Hanson. ‘If you don’t monitor your investment, there is potential for mischief. Even in the 1960s and 1970s, equity ownership did not produce adequate returns. Then the raiders of the 1980s started unlocking value at companies that had long been built for size, not speed. While everybody deplored the advent of raiders, they did more for stock owners than many corporate managers.’
Hanson’s chief accomplice at Calpers was its general counsel Richard Koppes, who is still the top gun shareholder activist there. ‘We were the Butch Cassidy and Sundance Kid, the yin and yang of corporate governance,’ muses Hanson.
Koppes had triggered the Calpers revolution following a frustrating McDonald’s annual meeting. Everyone had ignored his anti-poison pill proposal amid announcements of record earnings and a stock split. It was fruitless to target high fliers, Hanson and Koppes concluded: they should focus instead on poor performers.
‘Surprisingly, very few of Calpers’ investment staff knew the performance of individual companies,’ says Hanson. ‘We started calculating total shareholder return over a five year period, and were amazed to find that companies like IBM were doing poorly. That marked the turnaround for Calpers in terms of support. People became very interested when we drew attention to companies which performed badly.’
Hanson says that one of the biggest victories Calpers won was board empowerment. ‘Today, few directors would be willing to serve on a board that is not empowered,’ Hanson says. ‘We helped give directors a meaningful job. The role of the board is to hire, evaluate and fire management. In the end, firing is what it all boils down to.’
The foundation of Calpers’ new strategy was dialogue with corporations. If that failed to produce the changes being sought, shareholder resolutions and battles for legislative changes followed. Finally, as a last resort, Hanson would use litigation.
The other tool of Hanson’s strategy, the media, turned out to be one of the most effective. ‘When I joined Calpers, it was a $40 bn pension fund and no one knew about it,’ Hanson recalls. ‘I was given a mandate to raise the profile. It took time to get the media on our side, but eventually they helped us become bigger than life. We may at times only have held 1 per cent of a company, but we had the initiative and that gave us a disproportionate amount of influence.’
The zenith of Calpers’ media success came when Hanson was named one of the 25 most fascinating people in business by Fortune magazine, an early supporter of the fund. ‘It was flattering,’ admits Hanson. ‘I was just a pension fund administrator – not very glamorous. But the recognition helped move the occupation up a notch or two. We started to get long overdue attention for actions that were themselves long overdue.’
He may have eventually become a household name in the business world but Hanson recalls, early in his career with Calpers, a disgruntled telecom CEO saying, ‘What the hell does Dale Hanson know about the telecoms industry?’ From then on, knowing the businesses Calpers invested in became a top priority. ‘We would study the companies closely,’ Hanson says. ‘In 1989, we started engaging consulting firms to do complete case studies.’
One such study was awaiting James Preston, then the newly appointed CEO of Avon Products, when he came to visit. He read that Avon had lost its way by diversifying into areas it knew nothing about and should return to its core business. Hanson remembers taking comfort in the fact that Preston agreed with everything. ‘The rest is history,’ he says. ‘Avon went on to do as we suggested, and the stock has done very well.’
But Calpers’ most famous victory began with an offhand remark. In 1988, the Business Roundtable began inviting Calpers and other pension fund managers to talks on corporate reform. The meetings produced few results until the fall of 1989, when Koppes asked if there was any company everyone agreed was poorly run. ‘General Motors’, came the response.
That was the beginning of the end for the old guard at GM. Koppes wrote to CEO Roger Smith who told the pension fund to mind its own business. When GM’s inflamed board ordered Smith to meet with Hanson, he pounded the table and blamed GM’s problems on the Japanese, lawyers and unions. Smith retired. His replacement was fired and Jack Smith became CEO while John Smale filled a new chairman’s spot. In March 1994 GM’s board issued a 28-point governance credo, which Calpers quickly fired off to the CEOs of 200 top companies.
Leaving Calpers last summer was no easy decision for Hanson. Initially he had agreed to a five-year appointment, but stayed for seven. ‘After 27 years in the public sector, it felt like time for a change,’ Hanson admits. ‘In a way, I was following in the footsteps of my father who was a dry cleaner and entrepreneur all his life. It was time for me to become an entrepreneur too.’
Hanson, along with partners Tom Stickel and Byron Georgiou, set up American Partners Capital Group, with offices in Sacramento and San Diego, to provide financial products and services to institutional investors. His focus now is alternative assets, primarily limited partnership vehicles. This is an area in which Calpers grew strong under Hanson, becoming number one in the alternative asset arena.
Once seen as a ‘crazy’, Hanson is now regarded with respect in American boardrooms. He is on the board of ICN Pharmaceuticals and on the advisory board of Connecticut-based Directorship Inc, which advises corporate boards on directors’ legal responsibilities, pay and other issues. ‘Now I get to practise what I preached,’ Hanson says. ‘I have no illusions about being a potential target with shareholders who think we are not doing our job as directors.’
As for 1990s governance, Hanson says he is encouraged. But he offers a note of caution, quoting Ralph Whitworth, past head of United Shareholders Movement, who said: ‘The corporate governance movement is a mile wide and an inch deep.’
‘There’s a lot of truth in that statement,’ concurs Hanson.
