TIAA-Cref, the US pension scheme for teachers and college professors, is known for spearheading institutional activism. Peter Clapman, chief counsel in TIAA-Cref’s corporate governance unit, says the institution’s involvement with corporate governance began 30 years ago with an article in the New York Times. ‘Then chairman Bill Greenough was quoted as saying investors have a responsibility as corporate watchdogs and that it’s wrong for stakeholders to simply sell stocks when they think management is poor,’ he says. According to Clapman, that was the seminal statement describing institutional activism at a time when the term corporate governance had yet to be invented.
In the late 1970s, TIAA-Cref took part in the SEC’s hearing on the role of investors, where it was cited favorably for its views on voting rights. Later it became the first institution to file a shareholder resolution to remove a poison pill takeover defense in the mid-1980s.
Today, Cref is setting its sights abroad, with over $260 bn under management including $40 bn invested outside the US, along with slightly over $1 mn earmarked for an international corporate governance campaign.
International governance
Clapman, who sits on the board of the International Corporate Governance Network, began thinking about the broader governance picture seven years ago and noticed certain abuses of power in European boardrooms. ‘A shareholder would be unfairly treated in a merger or some capitalization would occur which took away shareholder rights, and it was time to get involved,’ he says. After several meetings with European regulators and market professionals to discuss his concerns, Clapman is pleased. ‘We have had good receptivity on the part of European exchanges which recognize that perceptions of their markets matter a great deal in terms of the success of their economies.’ Specifically, Clapman notes positive developments in France, the Netherlands and the UK.
Corporate governance on the world stage is more complicated than the behind-the-scenes approach TIAA-Cref has traditionally taken in the US. ‘With Europe, you have 18 different national markets where attitudes towards shareholders vary widely,’ says Andrew Clearfield, an international portfolio manager at TIAA-Cref who began working on the international corporate governance campaign in early 2001.
As in the US, many of the issues addressed in the corporate governance realm fall under arcane securities regulations, Clearfield says. Also, some continental European countries still have a strong cadre of family-owned companies while others tend to favor the model of a publicly-traded corporation without controlling shareholders. ‘This is partly the result of historical accidents and partly the result of their tax systems,’ he explains.
Making waves
It isn’t surprising that TIAA-Cref’s international campaign began in Europe since at least half its $40 bn worldwide investments are placed there. So far, Cref has won one decisive victory in France. In 1996 the pension fund filed a shareholder resolution demanding Eramet, a largely government-owned mining company, sell a mine instead of allowing the government to give it away. Cref argued that the government was ignoring the rights of minority shareholders by giving away assets that essentially belonged to all of Eramet’s stakeholders. The resolution won strong support from other investors including Societe Generale. ‘With Eramet,’ Clapman boasts, ‘we found out two things: You can file shareholder resolutions in France and you can rally shareholder support.’
Cref learned it is more effective to get individual companies to make changes than to persuade regulators that poor governance practices affect the credibility of their market. ‘In some countries, like France, there is a sense that you can accomplish more if you go about opposing management privately rather than standing up against it in public,’ says Clearfield. ‘And in other countries, individual shareholders may be very concerned about their rights but there is still a general feeling of hopelessness that minority investors will ever make their voices heard.’
For now, TIAA-Cref’s corporate governance team is continuing to build alliances with regulators and market professionals around the world. Clearfield recently met with Switzerland’s economiesuisse – a new business federation there – to discuss their drafting of the country’s first corporate governance guidelines.
Clearfield would also like to direct some of his efforts to emerging markets in Asia and Latin America. ‘One feels one’s way cautiously at first and tries to see where the climate is right for this sort of initiative,’ he explains. ‘My guess is there may be some stirrings in Japan.’ Clearfield notes the somewhat inhospitable attitude towards minority shareholders in Japan where ‘it’s rude to disagree with the chairman, and annual meetings are all held on the same day so that it’s impossible to really attend or provide adequate coverage.’
Ongoing efforts
In the US, Clapman continues to initiate new corporate governance efforts. One of the causes he has been championing is shareholder approval of compensation and stock options for officers and directors. ‘There are many people both on the corporate side and within the exchanges who genuinely think shareholders should have the opportunity to vote for these plans,’ reports Clapman, who is part of a task force at the NYSE concentrating on this issue. ‘We’ve used the expression that executive compensation is a window into the corporate governance of the company and I think that’s really true.’
Logically, the NYSE does not want to force the issue of shareholder approval for options unless Nasdaq does so as well. Currently, Nasdaq is accepting letters for comment on the topic, and has received one from Clapman. As it stands, according to Clapman, ‘Either Nasdaq will agree with the NYSE or the Securities and Exchange Commission will apply its jawboning to try and make this happen.’
When it comes to international corporate governance, Clapman argues that shreholders are not in the boardroom and therefore have no way of knowing whether boards are doing their jobs correctly. ‘You identify objective issues like board independence in order to assess whether a board is really doing the job that the shareholders can reasonably expect,’ he says. The overall goal of TIAA-Cref’s international corporate governance campaign is to improve the global economic climate and facilitate transactions between markets. ‘We are generally improving the environment and making it a friendly place for us to invest,’ Clearfield claims. Still, companies that find themselves the target of Cref’s international corporate governance initiatives may not find the environment quite so ‘friendly’.
Practice what you preach
A group of 25 protesters was outside TIAA-Cref head John Biggs’ residence on a cool April night, handing out flyers to neighbors and passersby. ‘Get out of the bad and into the good,’ read one sign in front of the midtown Manhattan apartment.
‘If TIAA-Cref starts investing in socially responsible investments like low income housing, there will be a roll-over effect with other large institutions as well,’ claims Paul Sheridan, a photography professor at Brooklyn College. Sheridan is an active member of Social Choice for Social Change, which represents a group of roughly 400 academics who are members of the TIAA-Cref pension scheme.
Social Choice for Social Change was founded by Neil Wollman and his partner Abigail Fuller, both college professors, in 1984. The group lobbied TIAA-Cref to create a socially responsible fund so they could feel as if their money was making a positive social impact.
In 1989, the pension fund followed their wishes and created a social choice account which now boasts some $4 bn in assets. Now, the group wants TIAA-Cref to use a positive screening procedure as well. In other words, rather than use a negative screening process to weed out tobacco or weapons-related investments, for example, the group wants Cref to actively target companies that are models of laudable social or environmental responsibility.
However, Peter Clapman, chief counsel of TIAA-Cref’s corporate governance unit, argues that it is legally impossible to meet this demand. ‘The Social Choice account is a registered account under the 1940 legislation and therefore can only invest in securities,’ says Clapman. ‘Therefore, the types of investments they are proposing – like low cost housing – are unlawful investments for us to make.’ Clapman and Biggs have both met with Neil Wollman on a number of occasions. ‘We have asked Wollman to file a shareholder proposal if he thinks our constituency wants us to do what he is asking,’ adds Clapman.
Neil Wollman asserts that he has a team of legal experts who have offered to explain the feasibility of positive screening for the social choice account to Biggs and Clapman. Talks have since broken down with the pension fund, however, and Wollman claims this was one of the reasons the group decided to protest outside Biggs’ home. Social Choice for Social Change has scheduled a second protest in front of the home of another TIAA-Cref officer sometime this summer.
