Insights

The “CalPERS Effect” and the “NPS Effect”

The California Public Employees’ Retirement System, or CalPERS, is widely regarded as a pioneer of shareholder activism.

One of its best-known interventions took place at Walt Disney’s annual shareholders’ meeting in Philadelphia in March 2004. CalPERS helped lead a campaign that ultimately contributed to the removal of Michael Eisner as chair and chief executive, despite his having controlled the company for 21 years with only a 2% ownership stake. Public pension funds in states such as Ohio and New Jersey joined CalPERS in the campaign.

The policy behind such outcomes was CalPERS’ “Focus List.”

At the time, Walt Disney had been placed on the list because of concerns including the increased risk of compromised audit independence arising from the outsourcing of additional services to the company’s external auditor.

The Focus List identifies companies through corporate analysis and screening. Put simply, it is a list of companies selected for enhanced monitoring.

Today, the selection criteria include: 
- Board quality and diversity, including leadership structure, independence, competence and diversity

• - Disclosure, including transparency regarding ESG performance, business strategy and capital allocation
• - Shareholder rights, including voting rights and director elections
• - Risk management concerning environmental and social issues
• - Alignment between executive compensation and shareholder interests

Once the investment committee approves the companies selected for enhanced monitoring, CalPERS undertakes active engagement, including private dialogue with management and shareholder proposals. It may then monitor whether improvements have been made for up to three years.

CalPERS first introduced the program in 1987 under the name “Target List” and began publicly disclosing the list in 1992.

What was particularly notable was that the share prices of companies included on the list often moved significantly following its publication. More importantly, companies that were subject to CalPERS engagement tended to outperform their benchmarks over the long term.

The market came to refer to this phenomenon as the “CalPERS effect.”

Korea’s National Pension Service, or NPS, adopted the Stewardship Code in July 2018 and introduced a similar framework through its Guidelines on Fiduciary Responsibility Activities.

The NPS refers to this framework as its “priority management issues.”

- These issues have included:The establishment of corporate dividend policies

• - The appropriateness of executive compensation limits
• - Matters involving possible violations of laws that could undermine corporate value or shareholder interests
• - Issues on which the NPS has repeatedly voted against management proposals without seeing improvement
• - Companies whose regular ESG assessment results have deteriorated, although this criterion was removed this year
• - Other matters deemed necessary by the chair of the Fund Management Committee

Like CalPERS in the early stages of its program, the NPS does not publicly disclose the names of the companies concerned, but the overall process is similar.

When a company falls under one of these priority management issues, the NPS proceeds through a series of escalating steps:

1. 1. Selection for private dialogue
2. 2. Designation as a privately managed priority company
3. 3. Designation as a publicly disclosed priority company
4. 4. Active shareholder action, including shareholder proposals

In 2021, the NPS sent letters and held private meetings concerning 210 cases involving 80 companies. In 2022, it conducted 183 such activities involving 79 companies.

Until recently, the NPS’s priority management issues were largely focused on governance.

On March 7, however, the National Pension Fund Management Committee approved revisions to the Guidelines on Fiduciary Responsibility Activities that expanded the framework into the environmental and social domains.

Climate change was designated as the key environmental issue, while industrial accidents were selected as the key social issue.

The Principles for Responsible Investment, which the NPS joined in 2009, has emphasized that “climate change is the highest priority ESG issue facing investors.”

From that perspective, the decision to designate climate change as a priority management issue was entirely appropriate.

Korea also has one of the highest rates of workplace fatalities among OECD countries. Each year, roughly 100,000 workers suffer occupational injuries, and around 2,000 lose their lives.

Korea has often been described as a country plagued by industrial accidents. The Serious Accidents Punishment Act was introduced and implemented in an effort to address this problem.

Companies with frequent industrial accidents face not only legal risks but also serious damage to corporate value. Designating industrial accidents as a priority social issue was therefore also a reasonable decision, reflecting both Korea’s specific circumstances and the need to protect long-term corporate value.

In fact, the Korea Sustainability Investing Forum has consistently called for climate change and industrial accidents to be included as priority management issues since the NPS commissioned related research in 2021.

The NPS is reportedly developing detailed guidelines for these newly designated issues, with full implementation planned for next year.

That is too late.

The NPS already has guidelines and practical experience in applying priority management issues in the governance field. Extending the framework to environmental and social issues should not require such a lengthy process.

A system is meaningless if it exists only on paper.

What matters is how actively the NPS conducts engagement in practice. The CalPERS effect emerged from precisely that process.

I hope that one day the market will also speak of an “NPS effect.”

May 30, 2023

Jong-oh Lee
CIO, Korea Sustainability Investing Forum