The Wall Street Journal-20080114-Corporate Governance -A Special Report-- The Change Agent- For Dennis Johnson- improving corporate governance isn-t just a mission- It-s a job
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Corporate Governance (A Special Report); The Change Agent: For Dennis Johnson, improving corporate governance isn't just a mission; It's a job
Sacramento, Calif. -- Last winter, the California Public Employees' Retirement System and UnitedHealth Group Inc. wrangled for months over a controversial stockholder resolution.
Calpers, the biggest U.S. public pension fund, wanted to make it easier for major investors to nominate directors to UnitedHealth's board. But the health-care giant wanted to block the controversial measure from the ballot at its May 29 annual meeting.
Dennis Johnson, Calpers's head of corporate governance, lobbied UnitedHealth hard behind the scenes -- including Chief Executive Stephen J. Hemsley over breakfast at a Washington hotel. The company finally backed down. The "proxy access" proposal won an impressive 45% of votes cast. Hours after the vote, Mr. Johnson called Jim Hale, a UnitedHealth governance adviser, and thanked him "for giving share owners a vote on this issue."
The efforts impressed Mr. Hale. "Dennis is a reasonable and rational voice on corporate governance," Mr. Hale says. Mr. Johnson, a former Citigroup Inc. money manager, evokes a similar reaction when he deals with other big businesses, including Coca-Cola Inc., Schering-Plough Corp. and Home Depot Inc.
"He knows what it takes to work with companies to make change possible," says Diane Dayhoff, senior vice president for investor relations at Home Depot.
The tall and stately Mr. Johnson walks softly but carries a big stick for Calpers, long considered the nation's most influential institutional activist. The fund, headquartered here, manages about $245 billion of assets for about 1.5 million government workers and retirees. Calpers rose to prominence during the 1980s by publicizing the shortcomings of corporate boards that didn't govern well. It later spearheaded fights against excessive executive pay.
Since Mr. Johnson joined Calpers in September 2005, the 47-year-old senior portfolio manager has helped mend fences with directors and executives disturbed by its aggressive tactics. The pension system came under attack in 2004 after deciding to withhold support for the re-election of certain directors at 90% of the U.S. corporations in its portfolio.
"We are trying to do corporate governance quietly, but no less assertively than we have in the past," says Calpers CEO Fred Buenrostro. "Dennis has been able to advance that profile very well."
Indeed, Mr. Johnson pulls no punches when he mounts extensive drives for significant stockholder measures and pursues strict governance changes at portfolio companies with poor returns. "We are standing our ground on the important issues," he says. "I'm committed to getting results."
Calpers proposed 33 resolutions last year -- more than twice the number filed in 2006. A record six came to a vote, snaring an average of nearly 63% of votes cast, according to ISS Governance Services, the proxy-advisory unit of RiskMetrics Group Inc. Calpers expects to file as many resolutions this year as it did in 2007. Mr. Johnson broke another record by hanging 11 companies out to dry on Calpers's 2007 "Focus List," a tally of underperforming companies that the fund has put out annually since 1992.
The UnitedHealth situation epitomizes Mr. Johnson's low-key but forceful brand of diplomacy.
Calpers sued UnitedHealth in July 2006 in U.S. District Court in Minneapolis, claiming the insurer inflated its stock price by failing to disclose backdated stock options for then-CEO William McGuire and other insiders. Mr. Johnson initially thought "litigation didn't seem to represent the most effective approach," but later changed his mind. UnitedHealth unsuccessfully tried to get the suit dismissed.
Mr. McGuire left in 2006 after an independent probe found that many of the largest options grants made over several years likely were backdated to increase their value. UnitedHealth subsequently reduced past financial results by more than $1 billion to account for backdated options. It also embraced various governance initiatives, including the creation of a board advisory committee giving long-term shareholders a more formal voice in recommending certain types of directors and possible candidates.
But Mr. Johnson and his colleagues preferred greater assurance that investors could place their nominee choices on the UnitedHealth ballot. In December 2006, Calpers proposed amending the company's bylaws to let individuals nominate two directors if they had held at least 3% of UnitedHealth's shares outstanding for more than two years. The company's lawyers sought Securities and Exchange Commission approval to keep the binding measure off the ballot because it allegedly broke Minnesota law, among other things.
Mr. Hemsley and other UnitedHealth officials urged Calpers to kill its proxy-access measure during a Feb. 23 meeting at the pension fund's office. They described their recent governance changes in a PowerPoint presentation, then invited Calpers to join the new advisory panel. Mr. Johnson says he spurned the offer, adding that "providing input into the director-selection process is not as valuable as share owners putting forward candidates."
At Mr. Johnson's suggestion, Calpers switched the proposed bylaw change to a nonbinding resolution. Yet when he and Mr. Buenrostro had their March 21 breakfast with Mr. Hemsley, UnitedHealth was still fighting the proposal. Mr. Johnson admitted to the CEO that Calpers had overlooked state law. Nevertheless, UnitedHealth directors needed "to hear from share owners about where they stood on direct election to the board," he argued.
"Steve Hemsley was very receptive to Dennis's comments," recalls Donald Nathan, a UnitedHealth spokesman. The insurer dropped its SEC request two days later.
Mr. Johnson encouraged associates to promote the proxy-access proposal creatively. They began a $200,000 campaign that featured a special Web site as well as newspaper, TV and Internet ads. In response, Mr. Hemsley wrote UnitedHealth shareholders urging them to defeat the resolution because it would "result in disruptive, divisive, and expensive director elections."
Mr. Johnson's close encounters with companies on the Focus List require an equally large dose of delicate negotiations. He says companies land on the list because they're "chronic underperformers in the Calpers portfolio and have below-standard corporate-governance practices."
Flying to boardrooms around the country, he tries to persuade skeptical executives and directors that bolstered governance will enhance their enterprises' value. "There is a long history of research on the improvement of stock returns for companies named to the Calpers Focus List," he often points out.
The face-to-face talks "start out very confrontational," says Bill McGrew, a Johnson lieutenant who has attended almost a dozen such sessions with his boss. "You can see it in the body language and very stern facial expressions.
But within an hour, it changes "from as tense an environment as you can imagine to a cooperative, one-on-one discussion," says Russell Read, Calpers's chief investment officer, who has witnessed Focus List sessions run by Mr. Johnson. These meetings usually finish "with a very different perspective that Calpers is there to genuinely see the companies improve," he adds.
Not everyone buys Mr. Johnson's mantra, however. He concedes he's pushing governance changes that "are the tougher nuts to crack. We are meeting a lot of resistance from these companies."
Consider Dollar Tree Stores Inc., which Calpers put on the 2007 Focus List partly because it requires a supermajority vote to allow annual election of directors, remove a director for cause or let shareholders call a special meeting. Mr. Johnson believes the removal of supermajority requirements would increase board accountability to investors. Calpers also wanted the discount retail chain to elect board members every year.
Thomas A. Saunders III, Dollar Tree's lead director, expected a sympathetic ear from Mr. Johnson because both graduated from the Virginia Military Institute and served on an advisory board there. Mr. Saunders asked his fellow alumnus to drop Dollar Tree from the Focus List when they and colleagues conferred early last year at VMI's Chesapeake, Va., headquarters. But Mr. Johnson refused to give in.
Dollar Tree "is a fantastic success story, and I'm not sure how that gets you onto anyone's focus list," Mr. Saunders says. Though he and other directors expressed willingness to alter some governance practices, "we did not accept their position on the two major issues," he continues. "There was very little room for compromise."
The day after last winter's meeting, which Messrs. Saunders and Johnson agree was very cordial, Mr. Johnson reiterated his stance in a letter to Dollar Tree CEO Bob Sasser.
Says Mr. Saunders: "How is that negotiation? We might as well have been talking to the wall."
Mr. Johnson says his letter merely reflected the fact that "they didn't tell us there was a reason for us to change our position."
A Calpers resolution to repeal the supermajority rules won support from about 69.5% of votes cast at Dollar Tree's June 21 annual meeting. Directors discussed the nonbinding measure during a board meeting in October, but they haven't decided what to do, Mr. Saunders says. Possible action will occur "in the broader context" of the board's overall governance policy, he adds. The issue is likely to come up at a board meeting this Wednesday.
Mr. Johnson warns that inaction by Dollar Tree directors may trigger a Calpers campaign against their re-election this year. "If a board fails to carry out the will of the owners," he says, "it must be held accountable."
Certain companies tentatively placed on the Focus List escape the final lineup because they win over Mr. Johnson. That happened in January 2006 after he met with General Motors Corp. Chief Executive Rick Wagoner and several associates at its headquarters. Among other things, Mr. Johnson questioned GM's use of the same outside auditors for 80 years despite a recent earnings restatement.
"Calpers was satisfied with GM's rationale for retaining them," says a spokeswoman for the big auto maker. Mr. Johnson concurs, citing insights he gleaned about the independence of the board audit committee. GM didn't appear on the 2006 Focus List.
Mr. Johnson doesn't always prevail within Calpers, either. In late 2006, he proposed that his employer become an activist investor in Taiwan because "the need for improvements in corporate governance is just as important in emerging markets."
His supervisor, Christy Wood, turned him down three times. "I was not in favor of picking out isolated countries," she says. "I insisted that he come back with a comprehensive policy" for activist investing in emerging markets. He did. While the new push doesn't specifically exclude Taiwan, Calpers hasn't become an activist investor yet in that relatively small nation.
In turn, Mr. Johnson gives his subordinates a hard time if their governance ideas lack adequate focus on bolstering shareholder returns. "What can we do to improve the performance of the fund?" he asks staffers during their weekly meetings. "How does this [proposal] relate to making money for the fund?"
Mr. Johnson makes more money when Calpers does. His incentive compensation, which accounted for $129,147 of his $339,227 pay in the year ended June 30, largely reflects returns from a $5.6 billion portfolio of external activist funds that he oversees.
Despite his high-pressured position, the former Army Reserve officer never loses his cool. "It's a very hard job," he says, "but it's a very exciting job. There's great opportunity to do good things."
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Ms. Lublin, The Wall Street Journal's management news editor in New York, served as contributing editor of this report. She can be reached at [email protected].
