The “CalPERS effect” on targeted company share prices

CalPERS’ approach to improving portfolio returns by engaging management of poorly performing companies to rethink governance and strategy has had a substantial endorsement, with analysis by Wilshire Associates demonstrating that the fund has had a dramatic effect on the performance of the companies placed on its Focus List.

Wilshire measured the performance of 139 companies placed on the focus list, which targets publicly listed companies chosen for their poor performance and governance, between 1987 and 2007.

Relative performance was measured by examining the total return for targeted companies for the five years preceding the “initiative date” and the total return for these same companies for the subsequent five years.

For the first five years prior to the initiative date the focus list companies produced returns that averaged 84.2 per cent below their respective benchmarks on a cumulative basis, which is equivalent to an excess return of -30.9 per cent on an annualised basis. For the first five years after the date, the average targeted company produced excess returns of 15.4 per cent above their benchmarks, or about 3 per cent on an annualised basis.

“The data strongly shows that CalPERS’ involvement has generally stopped the rapid erosion of performance results,” the report says. “Wilshire’s examination shows that CalPERS’ good governance campaign has added value to the share prices of targeted companies.”

The analysis, presented to the investment committee this week, goes on to conclude that the CalPERS’ approach to improving portfolio returns by engaging management of poorly performing companies to rethink governance and strategy continues to work.

Further, the report shows that the expanded corporate governance resources and program undertaken by the fund in the past seven years, has had an effect on performance. The companies targeted in the past 10 years have on average, produced cumulative excess returns of 37.4 per cent in the five years post initiative date versus 15.4 per cent for the total composite focus funds.

Wilshire’s analysis concludes that resources spent on identifying and rectifying corporate assets that are poorly managed, can create substantial opportunity and premium returns for active shareholders.

“CalPERS has been an active corporate governance investor for many years and the continued success of the Focus List is proof that good corporate goverance can improve shareholder returns.”

In measuring the CalPERS’ effect, the report also considers other influences on stock prices such as management changes, scandals, and new business. It also considers that the methodology used to select companies on the Focus List has changed over time.