California’s two big public pension funds, CalPERS and CalSTRS, are taking steps to break up the old-boy club at the top of corporations, pushing for more women and minority directors on boards some say tend to be “male, pale and stale.”

For several decades the pension funds, sometimes working with other institutional investors, have used their clout as major shareholders to push for reforms in corporate “governance,” usually with the broad goal of increasing the value of their holdings.

CalPERS famously screens hundreds of companies before placing five on its annual “focus list” targeted for management improvement, producing on average increased performance, that some studies have called the “CalPERS effect.”

Now CalPERS officials cite studies, including one of their own, that conclude companies with women and minorities on their boards generally produce more value for investors than companies run by boards of directors that are virtually all white males.

State Controller John Chiang, who sits on the CalPERS and CalSTRS boards, got a laugh at a Stanford University conference last week with a line, repeated by others during the day, reportedly uttered by a British official who examined corporate boards.

“He said of corporate boards, ‘There is nothing wrong, simply that they are male, pale and stale,’” said Chiang.

The conference, “Diversity on Corporate Boards: When Difference Makes a Difference,” was sponsored by CalPERS, CalSTRS, Stanford Law School and The Rock Center for Corporate Governance.

More than 100 participants heard four panels during the one-day (Sept. 10) conference that included federal regulators, business executives, consultants, nonprofit groups and others.

Officials said the California Public Employees Retirement System and the California State Teachers Retirement System have already begun their push for more diversity on corporate boards.

“We have successfully collaborated with a number of corporations to improve diversity as a criteria in their board selection,” said Peter Reinke, a CalSTRS board member.

CalSTRS filed a number of shareholder proposals for increased diversity. After changes were made, CalSTRS withdrew the proposals at Hansen Natural, Waddell and Reed, Kirby Corp. Digital River, Eagle Material and Helix Energy.

CalPERS officials said they also are negotiating with corporations for more board diversity and seeking ways to nominate directors, perhaps from a pool of women and minority candidates.

“We are also looking at ways to establish a pool of diverse directors, either on our own or through a network of other pension funds,” said Henry Jones, a CalPERS board member.

Jones and the CalPERS board president, Rob Feckner, said they expect corporate board diversity to be one of the topics at a three-day meeting of the Council of Institutional Investors in Los Angeles, Sept. 30 through Oct. 2.

The council is a coalition of public employee, union and corporate pension systems with investment portfolios valued at more than $3 trillion, making them major shareholders in many companies.

“This is a good first step,” Feckner said of the Stanford board diversity conference as he gave the concluding remarks. “It shows our commitment. We have a long way to go.”

Chiang said the timing of the Stanford conference is important because a proposed federal rule change puts shareholders “potentially on the brink” of being able to nominate directors, a step toward more accountable corporate boards.

“We have told members of the SEC (U.S. Securities and Exchange Commission) that we will approach this responsibility with great care and discipline,” said Chiang. “But we also recognize that proxy access will open an avenue to ensure diverse board membership.”
It was at the request of Chiang that CalPERS commissioned a white paper from Virtcom Consulting, “Board Diversification Strategy: Realizing Competitive Advantage and Shareowner Value,” that Jones said will be presented at the Los Angeles conference.

On the boards of Fortune 100 companies, the white paper found, women held 17 percent of the seats, blacks 10 percent, Hispanics 4 percent and Asian-Americans 2 percent.

“Researchers found that selected companies with diverse boards exceeded Dow Jones and NASDAQ average returns over five years,” Jones said of the white paper, “and companies not with diverse boards appeared to be at a competitive disadvantage.”
The white paper describes a report by Catalyst in 2007 showing that having women in the board room improves the financial performance of companies, particularly when there are three or more women.

The report by Catalyst, an international nonprofit organization that pushes for more opportunities for women in business, was mentioned at a conference sponsored by CalPERS and CalSTRS in February to encourage women investment managers.

A Catalyst vice president on a panel at the Stanford Conference, Deborah Soon, was asked by a member of the audience why having women on a corporate board improves performance.

Soon said Catalyst does not have information on the cause of the improvement. She mentioned “team theory” and anecdotal reports that being around women improves the behavior of men.

“Unfortunately, we don’t have analytics on that,” Soon said.

A paper done for the conference by Deborah Rhode and Amanda Packel, both of the Stanford Center for the Legal Profession, looked at the “cottage industry” of studies done on corporate board diversity by dozens of researchers.

“In sum, the empirical research on the effect of board diversity on firm performance is inconclusive, as the results are highly dependent on methodology,” said the Rhode-Packel paper.

The moderator of the final panel, Joseph Grundfest, a Stanford law and business professor, warned against emphasizing inconclusive statistics about improved financial performance to make the case for gender and minority board diversity.

“There is other literature out there suggesting that other forms of diversification, such as adding financial experts, are more likely to lead to a stock price return,” he said.

Grundfest said gender and minority diversity on boards should be pursued for a number of reasons — among them reflecting the workforce, a broader range of viewpoints and a better chance of understanding consumers, markets and suppliers.

What he did not say is that pension board members, who have a fiduciary duty to further investment returns, may need the rationale of improved financial performance to feel comfortable about staying within their own guidelines as they push for corporate board diversity.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com.