Corporate Governance

By Ed Mendel
February 2, 2015

A bitter breakup of a well-known Ohio company, Timken, approved by shareholders in a battle led by CalSTRS and one of its investment funds, Relational, has become a case study as activist shareholders try to squeeze more profit from companies.

Under the control of the Timken family, the company won praise for repeatedly investing heavily in modern steel-making equipment that keeps jobs in the rust-belt city of Canton, while also being a major donor to local education and arts.

Now some fear the vote to “maximize shareholder value” by splitting Timken into two separate companies, Timken and TimkenSteel, creates two weak takeover targets, more vulnerable to economic downturns and less likely to continue community support.

Suzanne Berger, an MIT political science professor who studied Timken for her book “Making in America,” told the New York Times it’s not “classical greed” but the creation of financial markets that harm long-term investments and industrial companies.

“We’ve got a financial system in the U.S. where California teachers have to protect their pension funds by hurting manufacturing in Ohio,” Berger told the Times, which tracked the Timken split and published a lengthy report in December.

Since the split in September, Relational Investors and CalSTRS (except for an index fund) have sold their Timken shares. Relational bought shares at $40 and sold at $70, a gain of $188 million in about two years, the Times said.

The California State Teachers Retirement System, with investments worth $189 billion at year‘s end, stands by its role in the Timken breakup, seeing no long-term harm to Canton, home of the Pro Football Hall of Fame, which elected its 2015 class Saturday.

“The family remains as involved in both companies as it was in the old one,” Ricardo Duran, a CalSTRS spokesman, said last week. “In fact, the stock appreciation gives them greater wherewithal to make the local investments that have so endeared them to the community.”

Relational, a San Diego firm, targeted Timken after calculating the company might be worth more if it split. (In 1965 the Timken family established the free-admission Timken Art Museum in San Diego, which has a Rembrandt and other masterpieces.)

Both CalSTRS and the larger California Public Employees Retirement System have more than $1 billion invested in Relational. But CalPERS did not join the drive to split Timken.

“Timken was a risky target for Relational’s executives,” said the Times story. “They could be painted as Gordon Gekko types trying to make a fast buck by attacking a well-regarded, family-run company that had outperformed the stock market.

“Getting CalSTRS on board helped neutralize that threat. The pension fund, long a champion of better corporate governance, made the case that Timken’s board was dominated by family members who paid themselves liberally and put their own interests ahead of shareholders’ interests.”

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