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 In an effort to enhance shareowner value for CalPERS' members, CalPERS uses an annual three-prong approach, which includes the following process: 1) a quantitative screen, 2) a qualitative review, and 3) an engagement process. The process is designed to identify and positively reform undervalued companies in the internal portfolio that produce the lowest long-term value relative to peers and lack good governance practices. The success of the program is measured on the basis of excess shareowner returns to the internal portfolio and improved governance practices market-wide. I) Quantitative Screen The quantitative screen identifies companies that exhibit both poor economic performance and corporate governance structures that do not ensure full accountability to shareowners. CalPERS utilizes three measurements in the screening process:
II) Qualitative Review CalPERS performs additional qualitative analysis on each company selected from the quantitative screen to assess other concerning issues not captured in the quantitative screen, which include the following (at a minimum):
III) Engagement Process Those companies that perform poorly in the quantitative screen and qualitative review are then individually analyzed to determine whether CalPERS, through engaging in governance discussions with the company's board and management, could potentially add value and improve performance. CalPERS considers the engagement process to be a crucial component of the overall Focus List Process. CalPERS makes a persistent effort to meet with the management and directors to discuss performance and governance issues. CalPERS will focus on reforming the company's governance practices with an emphasis on accountability, transparency, independence, and discipline. Depending on the responsiveness of the company to the program, CalPERS will identify and execute the appropriate shareowner tools and resources necessary to positively reform the company in an attempt to improve long-term value. As a part of the engagement process, CalPERS will generally file a shareowner proposal to seek change in the company's bylaws, articles of incorporation, and (or) charter.
I) Excess Shareowner Returns Good corporate governance
works: More evidence from CalPERS This study concludes that the publication of the Focus List has a significant impact on shareowner wealth. To summarize, on average, a public company that is placed on CalPERS' Focus List earns a return over and above its risk-adjusted rate of return that is 59 percentage points greater than the risk adjusted rate of return that shareowners would normally expect to receive for their investment. These excess returns are statistically significant at the one percent level. Additionally, Wilshire Associates' study of the "CalPERS Effect" examined the performance of 128 companies targeted by CalPERS’ Focus List from beginning of 1987 through the fall of 2006. According to the study, “For the five years prior to the “initiative date”, the Focus List companies produced returns that averaged 86.7% below their respective benchmarks on a cumulative basis, which is equivalent to an excess return of -13.3% per year on an annualized basis. For the first five years after the “initiative date,” the average targeted company produced excess returns of 12.2% above their respective benchmark return on a cumulative basis, or 2.3% per year on an annualized basis.” II) Governance CalPERS' Focus List Program has experienced many positive and shareowner friendly corporate governance successes, which include the following (at a minimum):
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