Much, much more than investors.

• Author: Hanson, Dale M.
• Position: California Public Employees Retirement System - Includes related article - Coporate Governance

Why does CalPERS do what it does? "We're activists," CEO Hanson says, short and sweet, and if you own stock you should be, too.

Long before my arrival at the California Public Employees Retirement System, the members of the CalPERS board concluded that they weren't simply investors; they were owners. An analogy we like to use is this: If we buy an office building and the property manager isn't properly maintaining it, we don't sell the building--we change the property manager. In other words, once you select and buy a stock, you should remain diligent.

This certainly isn't a new concept in owning stock. In 1934, Graham and Dodd observed that as much care and attention should go into owning stock as into selecting stock. It's taken some of us a little longer than others to come to that realization, but we're better off because we have.

So what makes CalPERS decide to focus on a company? Each year, we target 12 firms in our portfolio for our "hit list." We make the selection based on total shareholder return over a five-year period and not on return on equity, return on investment or earnings growth because, in the final analysis, total shareholder return is what's most important to us as investors. Then we'll visit those companies that tend to be at the lower end of the spectrum on total return. We used to look at the S&P 500, but now we look at the top 1,000 companies based on capitalization. We'll target 12 of those firms for specific action and communicate with another 50, advising them that we're concerned about their long-term performance.

But shareholder return isn't all we consider in compiling our list. We also study how the companies compare to their peers within their respective industries. If a company is experiencing poor returns and the affliction is industrywide, that company won't necessarily become the subject of our attention. Instead, we focus on the companies that are doing poorly while their peers in the industry are doing well.

We also look for a high level of institutional ownership in companies. Why? Because if we're going to file a shareholder resolution, we know institutions vote their proxies and that becomes very important. We also prefer for CalPERS to have high ownership in the companies we're targeting, which is typically 1 to 3 percent.

One change in CalPERS' focus is that we now concentrate totally on a company's performance and its board of directors. We no longer focus on such "sins" as poison pills, green mail and the lack of confidential voting. A firm's board is our representative to management. I think eventually many activists will make the same shift that CalPERS is making, focusing increasingly on performance.

We've changed some other things at CalPERS since we've become involved in shareholder activism and corporate governance. For instance, we used to publish a press release about our target list. Often, a company on the list found out it was a target at the same time the public did. Now, we write to the company ahead of time, asking to sit down with its leaders and talk about performance. Initially, we ask the CEO and then eventually members of the board.

Five years ago, if I would...