Good evening. Thank you for that kind introduction.

I'm pleased to speak before the International Forum and to the Corporate Directors of San Diego. I applaud the International Forum for hosting this event.

It's vitally important to have forums of this type to foster dialogue, such as I hope we will engage in tonight.

Before I discuss the CalPERS perspective on shareholder rights and corporate governance, I'd like to tell you about who we are and what we do.

Cal PERS is the nation's largest public pension fund, and the third largest in the world. Our mission is to provide for the financial and health security of over 1 million public employees and their families by providing for their retirement and health benefits.

One third of our members are state employees and their families. Another third come from the ranks of classified school employees. And the rest are local government employees.

We were established in 1932 as a defined benefit plan. Cal PERS is a prefunded system, and one of the few that is nearly fully funded.

We manage assets of over $98 billion. Our earnings from investments contribute the lion's share of funding needed to pay out 4.5 billion dollars in benefits yearly. Nearly 70 cents on every dollar in our fund comes from investments, with the remaining 30 cents coming half from the taxpayers and the other half from contributing members.

We own stock in over 1,500 American companies and over 750 foreign companies. And for those of you who read Holman Jenkins' column last week (April 16, 1996) in the Wall Street Journal about public pension systems investing in takeover funds, let me set the record straight. CalPERS is not among those who do so, nor have we ever invested in LBOs because it is questionable whether they stimulate long term growth.

Our pension trust fund is managed by a 13-member Board of Administration. The Board consists of elected and appointed members and also includes the State Treasurer and Controller.

CalPERS operates under an investment policy designed to generate the best total returns on a long-term basis at an acceptable level of risk.

In this effort, we are assisted by staff, as well as external managers, advisors and consultants.

As I'm sure you are aware, we are long-term investors. Because of our size, 80 percent of our equity assets are managed passively, in a way that is structured to mirror the movements of the market as a whole.

And while much of our portfolio is indexed, that doesn't mean we put our portfolio on auto pilot and wait 10 years for healthy returns.

One way we add value to our index is by exercising our voice in corporate governance.

Our interest in this area began in 1984, when we and a few other shareowners began to object to the infamous series of corporate management's anti-takeover devices of the 1980s -- greenmail, poison pills, golden parachutes, and so on.

As corporate governance evolved, we began getting into other areas, such as executive compensation and decision-making concerning the viability of a corporation. In late 1989, CalPERS began working closely with the Securities and Exchange Commission. This relationship led to the 1992 reform of executive compensation disclosure and proxy solicitation reforms. These later reforms also allowed us to more easily communicate our concerns to other shareholders and to work together to bring appropriate pressure on management.

Ultimately, we moved away from a specific-issues approach to focus on company performance. And we only target the poorest performers in our large portfolio.

And the approach has been effective. A study performed for us by Stephen Nesbitt of Wilshire Associates, which was published in the Journal of Applied Corporate Finance in 1994[1], and updated in 1995, demonstrated that targeting underperformers pays off. These were companies that trailed the S&P index by 75 percent prior to our efforts, and which ended up outperforming the index by more than 54 percent in the five years following our involvement. And it is adding approximately $150 million in excess returns annually.

Probably the most satisfying of all is that corporate governance has become such an important part of the corporate culture of major U.S. companies. So much so, some folks argue we should declare victory, fold up our tents and move on.

Last year, our Board of Administration studied that question and agreed, after consulting with a wide variety of people in the investment, academic and corporate world, that it probably was not a good idea to fold up our activism tent. Rather our Board agreed to move it down field -- to bring the message of better performance and better corporate governance to the mid-size companies of America, the stragglers, if you will, who haven't followed in the footsteps of many of their enlightened Fortune 200 counterparts.

Our focus, however, remains the same -- we work with those underperformers whose relative 3-year performance lag that of their industry peers.

And in March of 1996, our Board formally expressed its intention to assert our influence abroad -- in the four countries where we have our greatest equity exposure: Japan, Germany, France, and Great Britain.

Earlier I referred to the evolutionary nature of corporate governance -- an evolution in terms of what's transpired in the balance of power between boards of directors, management, and shareowners -- short-term holders and 'patient' long-term investors such as CalPERS.

When we first began corporate governance activism, management firmly held the balance of power of the corporation when compared to rather passive Boards of Directors and shareowners. Note today's (April 18, 1996) column by Roger Lowenstein, entitled "Corporate Governance's Sorry History."

As corporate governance activism grew, the influences of shareowners took hold, both the short-term Wall Street traders and the long-term investors, such as CalPERS. In that process the balance of influence began to tilt in shareowners' favor, with some companies' management willing to sacrifice even its human assets to boost stock prices.

Some folks -- politicians and some members of the media-- are arguing that this is wrong. What is happening in a country where corporate profits are up 64 percent[2], executive compensation is up 360 percent (since 1980)[3] , but 3.1 million people have been laid off (in the last six years alone)[4].

There is no denying that workers have lost jobs and that in many companies, pay scales have stagnated. In some cases, it's because companies had fat payrolls and needed to trim down; Look at IBM which cut its payroll by 180,000. It was terribly bloated and had to make up for years of lazy management in order to survive.

But what is disturbing, to us as long-term investors, are the cases where management has the attitude of "what is the absolute minimum number of workers it can get by with," the practices that show a near-abandonment of the growth-oriented side of adding wealth, i.e., shrinking sales forces or cutting research and development. Will those companies, which have ratcheted down expenses to get near immediate results on their stock prices, survive in the long term?

Obviously management prospers by cutting, because they realize greater bonuses for rising stock prices, but are they harming prospects for the long-term wealth of the corporation?

The cost of all this is the enormous expense of this country's greatest asset - human capital. (What is left if you cut thousands of jobs from a successful company?)

So the question of the day is: which way is the balance of power tilting now? And (while this question may surprise you, coming from such a large investor) has this balance swung so far toward shareowners, in pursuit of the immediate share price, that this part of the corporate paradigm is causing the "hallowing out" of some corporations?

Some politicians and members of the media are raising this question. In fact, there has been a journalistic "indictment" of investors recently.

Columnist Tom Petruno noted in an LA Times[5] column just two months ago that pressure to keep stock prices rising has created tremendous upheavals.

But let me set the record straight: what I believe is causing the hollowing of corporations is not this (CalPERS') institutional investors' pressure for performance. Indeed, we're a corporation's "patient" capital -- holding our positions for 10 plus years.

However, some Wall Street money managers -- the short-term investors of America react swiftly and positively as layoffs are announced. Now, that is not to say that there aren't many companies which deserved to off load fat payrolls, a byproduct of unchecked management of years past.

Nevertheless, I think Mr. Petruno has a point. A point about companies that are surrendering their futures by failing to resist "short-termism".

So how does a company resist Wall Street traders? Certainly Chrysler did it. Look at what transpired when Kirk Kerkorian wanted to distribute more of Chrysler's $7.5 billion cash to shareholders.

Robert Eaton[6], Chairman and CEO of Chrysler Corporation, recently addressed this issue before the Economic Club of Detroit just last month.

His recipe was a strong, independent board, strategically focused, with the depth of understanding about the business to be able to stand up for what's right.

To accomplish this, his company opened up, engaged directors, management, and investors in debating what was best for the company. When they did that, he noted, "none of our institutional owners asked us to change directions. Not one of them told us to compromise the future for the sake of today." And in the last five years, Chrysler has added more than 15,000 hourly workers and today it is a much more competitive company.

The recipe we see for preventing the hollowing out of corporations is stronger, independent Boards of Directors, who should be asking questions about proposed layoffs to satisfy themselves that the layoffs are motivated by a strategic plan for long term growth and not just a desire to boost the stock price.

And that's a possible next stage of corporate governance for CalPERS -- measuring the performance of companies not simply by looking at earnings and share price rises, but by how well the corporation is positioned for the long term. Part of that screen could be evaluating, for example, whether executive compensation is rewarding "short-termism" and evaluating the value the company has placed on its workers.

We shouldn't let the underperformers with bloated payrolls off the hook, by any means. But we need to pursue changes that will provide that anchor necessary to ensure long term success: a quality, independent board of directors. In our opinion, that's the key to maintaining the healthy balance between management and shareowners.

We have historically examined the structure of boards (are they sufficiently independent?) and we've looked at whether management and owners' interests are sufficiently aligned, and if there exists procedural impediments to effective board oversight.

And we're certainly going to continue our focus on board structural issues, with an expansion into board performance -- both individual and collective. Here are some of those key issues:

1. Is the position of Chairperson of the Board separate from that of the CEO? (Again, reference the April 18 Wall Street Journal article by Roger Lowenstein.)

2. If the positions are combined, is there an independent director as "lead" outside director to act as a counter-balance to the power held by the CEO?

3. Are all of the corporation's key committees (e.g., audit compensation nomination committee) made up of independent (a.k.a. disinterested) directors?

4. Do directors own enough stock to make them meaningful owners?

5. Is there strong board oversight of executive pay and the sufficient involvement of the Board in strategic oversight?

When we meet with directors, we'll be asking "what have you done to add value to this company?" We will look at issues that affect the director's objectivity and ability to devote sufficient time to Board work --the number of other boards they serve on, whether they represent cross-directorships.

Ultimately, it is our strong belief that the key to balancing short-term profits with long term growth is the job of an active, independent Board of Directors. Institutional investors, whose assets are now over $10 trillion[7], recognize it is not our job to manage the companies, but we will benefit, and management will benefit, if the balance of influence is equally distributed and if the Board of Directors -- an independent, focused, knowledgeable Board of Directors -- makes informed decisions.

I'd like to close by re-assuring you that we will continue to serve as a voice for growth in the long term, advocating real growth, not short-term stock price increases. And we will listen to quality Boards of Directors who commit to actively pursuing long-term wealth, passionately but objectively.

I am confident that with this structure in place, we will see an end to the looting of American corporations' working capital, and a restoration of the value of the experienced worker -- a corporation that is judged not so much on stock price but on the way in which it creates value and sustains it for the long term.

As one pension fund official put it: "you can shrink your way to profitability in the short term, but it isn't the road to greatness in the long run."

Thank you. I'd be happy to answer any questions.

1 - Nesbitt, Stephen L., Long-Term Rewards From Corporate Governance, Journal of Applied Corporate Finance, January, 1994.

2 - Sweeney, John, Speech before the Council of Institutional Investors, April 2, 1996.

3 - Ibid.

4 - Ibid.

5 - Petruno, Tom, A Question of Who Gains, and at What Cost, Los Angeles Times, February 20, 1996.

6 - Eaton, Robert, Speech before the Economic Club of Detroit, Detroit, Michigan, March 18, 1996.

7 - The Brancato Report on Institutional Investment, March 1, 1996.