Enhancing Corporate Governance at CalPERS: Strategies and Impact on Financial Performance

1. California Public Employees’ Retirement (CalPERS)Corporate Governance Mr. Bill McGrew, Portfolio Manager – Corporate Governance March 2005

2. CalPERSAdvancing Financial & Health Benefits • 1.4 Million Members: State – School – Public Agency • 1, 687 Employees • 13 Member Board: 6 Elected, 3 Appointed, 4 Statutory Designated • Monthly Board Meetings

3. CalPERSInvestment Office • 5 Units: Global Equity – Fixed Income – Private Equity/Alternative Investments – Real Estate – Risk Management • $181.2 Billion (Jan. 31, 2005) • 140 Member Investment Office

4. Corporate GovernanceWhat is Governance? • Corporate governance refers to the RELATIONSHIP between investors and corporate management in determining the direction and performance of a corporation. • Purpose of corporate governance is to have a demonstrable IMPACT on a corporation’s FINANCIAL PERFORMANCE.

5. Corporate GovernanceWhy Do We Do Governance? • In a sense, we are a PERMANENT investor; we do not consider selling out of a stock as a desirable option. • At the same time, we have a FIDUCIARY DUTY duty to maximize the value of our investment. • There is a “Corporate Governance PREMIUM” that can be captured to increase shareholder value.

6. Corporate GovernanceHow Do We Do Governance? Education and Influence Program; Active Management; Proxy Voting; and Focus List & Executive Compensation Program.

7. Education & Influence • Executive Compensation Program • Board Accountability Program • Environmental Strategy • U.S. Governance Core Principles and Guidelines • Global Governance Principles (market specific) • CalPERS’ web site & Shareowner Forum • www.calpers.ca.gov

8. Active Management • Current strategy allocation: $3 billion • In FY 03-04, the governance strategy returned 53%. • CalPERS currently invests in seven active external managers that employ a governance strategy: • Relational Investors (US) • Hermes Focus Asset Management (UK/Cont. Europe) • Active Value Advisors (UK) • Sparx (Japan) • Taiyo (Japan) • Shamrock (US) • KVIP (Cont. Europe)

9. Active ManagementInternal Portfolio as of 9/30/04 Inception Date: October 2002. SSB performance methodology is CFA Institute compliant. Net of fees.

10. Active ManagementExternal Portfolio as of 09/30/04 Inception Date: December 1998. SSB performance methodology is CFA Institute compliant. Net of fees.

11. Proxy Voting • Voting process - review/analyze, research, discuss, vote, and release • 7,000 Global Proxy Votes • CalPERS’ Shareowner Forum: Web site postings (approximately 350 companies) and Guest Book inquiries

12. Focus List Program • Annual selection process • Quantitative & qualitative analysis • Stock performance, EVA, & governance profile • Company engagement & governance agreements • A three-year monitoring process: follow-up

13. Executive CompensationStrategic Plan 3-Year Approach: 1) SEC Engagement 2) SRO/Exchange Engagement 3) Comp Consulting Industry Engagement 4) Reform – Focus On Largest Companies 5) Reform – Comp Committee Accountability 6) Recognizing Pay-For-Performance Leaders

14. Executive CompensationProxy Voting Guidelines CalPERS will vote against any plan that: 1) Does not prohibit re-pricing without shareholder approval. 2) Includes evergreen provisions. 3) Provides reload options. 4) Does not require a significant portion of equity grants to include performance based components. 5) Does not include vesting periods of at least 4 years for a significant portion of overall grants. 6) Provides greater than 5% of awards to top 5 executives for broad based plans. View full document at: http://www.calpers-governance.org/alert/exec-comp/default.asp

15. Executive compensation programs should be: Designed to ensure alignment of interest with long-term interest of shareowners. Comprised of a combination of cash & equity-based comp; direct ownership should be encouraged. Transparent to shareowners; contracts fully disclosed with adequate information to judge the “drivers” of incentive components. Executive compensation policies should contain (at a minimum): Desired mix of base, bonus, & long term incentive comp. Intended forms of incentive & bonus, including measures to “drive incentive comp” (ROIC, ROA, ROE). Intended distribution of equity-based comp. Philosophy relating to the dilution of existing equity owners. Parameters of severance packages (if used at all). Executive CompensationPolicy Guidelines and Specifics View full document at: http://www.calpers-governance.org/alert/exec-comp/default.asp

16. Executive CompensationAnalytical ModelAnalytical Model • Developing better alignment of Board, mgmt & shareowners interests; • Tool to evaluate compensation vs. performance; • Influencing long-term value added to portfolio; • Providing company specific performance relative to peers; • Re-affirming with qualitative analysis; • CalPERS clout- establishing pay-for-performance practices. Example of poor pay-for-performance discipline in comparison to industry. Confidential

17. Board AccountabilityAccountability to the Owners - Shareowners Enhancing Board/Committee Accountability • Open Access – Proxy Access • Majority vs. Plurality • Committee Responsibility

18. Environmental StrategyImproving Data Transparency & Disclosure Objective: To encourage adequate, accurate and timely environmental data disclosure and transparency. • Carbon Disclosure Project: Global • Improving Auto Industry Disclosure • Utilities Industry Reporting Project • Recognizing disclosure: Best Practices