public records request re tobacco Date: Sat, 18 Oct 1997 Dear Mr. Burton: This is a follow-up to my public records request on tobacco reports which I made on September 23, 1997. I am still waiting for a response. I believe CalPERS' public records policy is to respond within 10 days; it has now been almost a month. The request takes on additional urgency with acting Governor Paul Cellucci signing a ban on state investments in tobacco companies for Massachusetts and two new massive lawsuits being filed to seek recovery of billions spent treating sick smokers by the federal Medicaid, Medicare and veterans programs. For more on these developments see Corpgov.net/news (find: tobacco). Your prompt attention to this request would be appreciated. 2461 Second Avenue Sacramento, CA 95818 e-mail: jm@corpgov.net September 23, 1997 Dear Mr. Burton: Please consider this a public records request under section 6250 of the Government Code. Please provide a copy of any staff or consultant reports prepared analyzing CalPERS' recommended response to three resolutions in 1996 to spin off the tobacco or non-tobacco units, including the effort by Carl Icahn and Bennet LeBow at RJ Nabisco. This should include a record of how CalPERS voted in the proxy fight which this team attempted and lost. I would also like copies of any similar reports and voting for this year's effort at RJR Nabisco and Sara Lee Corp. Has CalPERS developed a policy on how it intends to vote in future breakup initiatives? If so, please include a copy of the policy and any supporting reports. In addition, I would like a copy of any analysis done by staff or consultants regarding the issue of divestiture of tobacco stocks. If all or any part of this request is denied, please provide me with a written response indicating the following: (1) list each document withheld from review; (2) the specific exemption(s) that your think justifies your refusal to release the information for review; and (3) the appeal procedures available to me under the law. While I generally believe CalPERS should work for change through corporate governance mechanisms, the tobacco industry is different, given increasing likelihood the proposed "settlement" will fail to take effect and given pending litigation. Anther factor is the interest in this issue shown by Assemblyman Wally Knox. CalPERS may find itself under increasing pressure from the Legislature to divest. As I'm sure you are aware, the Maryland Retirement System became the first state pension fund to sell its tobacco stocks in 1996. New York followed suit with a freeze (Common Retirement Fund and State Teachers). Then in May this year came the Florida Investment Board selling off its entire $825 million with three Vermont funds following and additional pressures on Massachusetts, and New York City. The Pennsylvania Public School Employees Retirement System can be added to the list of those who have stopped buying shares. I understand the supporting analysis for the Florida Investment Board by Cornerstone Capital Management shows declining risk adjusted returns in comparison to the market as a whole using a ratio developed by William Sharpe. I also understand Professor Sharpe addressed the CalPERS Board at an in-house investment workshop several years ago (1993?) so many at the System may be familiar with his work. In footnote seven to a preamble on prudent asset management, proposed regulations (29 CFR, section 2550.404a-1, 1976), the Department of Labor assumed that pension fund trustees screen their index funds for significantly poor performers, for the purpose of divesting those holdings. The DOL reinforced this idea by suggesting that fiduciaries subject to ERISA who wish to used index funds should develop a "screen" to cull out companies, like today's tobacco stocks ( I would suggest), experiencing "significant adverse financial developments." (see Bevis Longstreth, Modern Investment Management and the Prudent Man Rule supra note 44, at 84, 1986). I was in Washington DC recently and stopped by the Investor Responsibility Research Center. They offer a portfolio screening service geared to corporate governance efforts, so value added screening is not unprecedented. While the DOL assumption has largely been disregarded by most index fund managers, because traditional screens have failed to detect downturns before being reflected in trading price, the situation with tobacco may be the exception which satisfies DOL's concern only through active monitoring. It is clear that fiduciary duties of care don't end once an investment is acquired but demand ongoing review. In Bruccino v. Continental Assurance Co an employee benefit fund sued an insurer and its agents for breach of fiduciary duties under ERISA. The court held the agents liable under a continuing duty to advise the fund to divest imprudent investments. In summary, the tobacco issue is one of prudence given their poor risk-adjusted performance, increasing litigation risks, and the risk of possible legislation restricting such investments. As I recall, CalPERS lost well over half a billion dollars in its forced divestment of companies doing business in South Africa. Had CalPERS taken action on its own, these losses probably could have been avoided, but the System waited until prices were driven lower. I would like to see CalPERS avoid a repeat performance in the area of tobacco. As I have indicated before, I work at 400 P Street, so I can save time and you can save postage by calling me at 327-8642 when the requested materials are available. cc: Board of Administration James McRitchie I finally did get a response from CalPERS. It basically indicated they plan to do nothing with regard to tobacco investments. I believe that is unacceptable. Contact: jm@perswatch.net