By Ed Mendel
Monday,November 20, 2011

The nation’s two largest public pension funds will urge corporate boards to disclose political campaign contributions, a response to a court decision lifting the lid on some donations that do not have to be reported.

The California Public Employees Retirement System adopted the policy last week on a split vote. An opponent, board member Dan Dunmoyer, said “this has more political overtones than policy benefit.”

The California State Teachers Retirement System adopted the policy early this month. The California Chamber of Commerce warned that public companies who report contributions might be at a competitive disadvantage to private firms who do not report.

The pension boards acted at the request of state Treasurer Bill Lockyer. He cited a U.S. Supreme Court decision last year that allows unlimited corporate and labor union political contributions to independent campaigns, but not directly to candidates.

The ruling in the Citizens United suit also upholds federal rules requiring the reporting of political contributions. But the disclosure requirements do not apply to trade associations and nonprofit groups.

“Increasingly, corporations are using such groups in an attempt to cloak massive political spending in secrecy through ‘independent expenditure’ campaigns, many of which are notorious for making unfair and unfounded personal attacks with which no company or its investors would want to be publicly associated,” Lockyer said in a letter to the pension boards last June.

“When such contributions are uncovered, public backlash often follows, and the economic and reputation risks to such companies are significant,” he said.

The pension funds added the reporting of political campaign contributions to their wide-ranging corporate governance policy, which began in the 1980s as a response to “greenmail” payments to prevent hostile takeovers and other problems.

Pension fund corporate governance expanded to pushing reforms aimed at correcting poor performance. With their large stock holdings, institutional investors have the means to represent shareholder interests and some say the responsibility.

Academic studies have suggested that investment returns may be improved and risk reduced by pushing corporations on environmental, social and governance issues, often referred to as ESG.

Pension funds and other big investors pursue these goals through a number of organizations. Among them: Council of Institutional Investors, International Corporate Governance Network and United Nations’ Principles for Responsible Investing.

Both of the big California pension funds have corporate governance units that engage corporations, pushing for reform. CalPERS decided last fall to stop publicizing an annual “Focus List” of poorly performing corporations.

Some said it was a needlessly heavy-handed “name and shame” tactic. A Wilshire consultant analysis given to the CalPERS board this month said that “privately engaged companies outperformed the publicly engaged companies.”

A big governance issue is the selection and composition of corporate boards. A pension fund-backed provision in federal legislation last year allowed shareowners holding 3 percent of company stock for three years to put board candidates on corporate ballots.

But in a business-backed lawsuit, a Securities and Exchange Commission rule allowing “proxy access” was overturned by an appeals court. The two California pension funds and others urged the SEC to issue new proxy access rules.

Some studies suggest that diversity can improve corporate board performance, particularly by adding women. CalPERS and CalSTRS created a listing of potential board candidates this year, the Diverse Director DataSource.

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