UNITED STATES - California Public Employees Retirement Systems (CalPERS) has won support from fellow shareholders to introduce annual board elections at a specialist hotel real estate investment trust (REIT).
CalPERS brought a shareholder resolution in May 2009 against Hospitality Properties Trust (HPT), which owns hotels and travel centres in the US, following several years of investment underperformance (See earlier IPE Real Estate.com article: CalPERS puts first real estate company on focus list).
The pension fund has now gained support from four major proxy advisory firms, which are hired by corporate shareholders to cast votes on their behalf, in a bid to end staggered terms for directors and replace them with annual elections.
Glass Lewis, RiskMetrics Group, Proxy Governance and Egan-Jones have all lent their support to CalPERS's Proposal No. 5, a non-binding resolution at the company's annual meeting on April 15.
HPT trailed the stock returns of the Russell 1000 by 18.9 percentage points and industry peers by 55.6 percentage points for the five years ending 26 February 2010.
"As evidenced by the company's significant relative underperformance, the current corporate governance structure has failed to focus the board's attention on optimising the company's return to shareowners, and further insulates the board of trustees from shareowner accountability," said Anne Simpson, senior portfolio manager for CalPERS's corporate governance programme.
CalPERS owned approximately 719,000 shares of Hospitality Properties Trust on 21 February 2010.
The pension fund has been identifying underperforming public stock companies and placing them on a focus list since 1987, in a bid to publicly identify portfolio companies that have resisted its calls for improved corporate governance and stock performance. But this is the first time it has targeted a real estate firm.
One of the proxy advisers, Glass Lewis, said empirical studies show that companies with classified boards may show a reduction in the firm's value.
"In the context of hostile takeovers, classified boards operate as a takeover defence, which entrenches management, discourages potential acquirers and delivers less return to shareholders," the firm said in a statement.
Another firm, RiskMetrics Group, said the ability to elect directors is the single most important "use of the shareholder franchise", and all directors should be accountable on an annual basis.
In a statement it said: "Board classification forces dissidents and would-be acquirers to negotiate with the incumbent board, which has the authority to decide on offers without a shareholder vote."
Another reason for supporting the proposal was given by Egan-Jones: "staggered terms for directors increase the difficulty for shareholders of making fundamental changes to the composition and behaviour of the board."
The company added: "We prefer that the entire board of the company be elected annually to provide appropriate responsiveness to shareholders."