But Crist persisted. His hunch was that directorial independence, board practices that ensured accountability to shareholders, and other undeniably intangible factors were indeed indicators of long-term value. With that view in mind, CalPERS urged its focus-list companies to appoint a majority of independent directors, to forbid poison-pill takeover-protection plans, to pay directors only with stock and cash, and to evaluate their own and their CEO's performance against written criteria.
The hunch paid off. CalPERS studies have since shown that companies that revamp their governance do, in fact, increase their value. The stock prices of 62 companies that were targeted by CalPERS as poor performers had trailed Standard & Poor's 500 Index by 89% (14% per year) in the five years before CalPERS began badgering those companies. Within a few years of when the badgering began, those companies had outperformed the S&P's average total returns by 23%.
For CalPERS, the presence of an enlightened board has become one of the strongest indicators of long-term value. That's why every year, between November and March, Boldt spends 20% of his time talking to executives and board members at underperforming companies. Governance, that intangible factor driving performance, is the first topic that he brings up.
In the early 1990s, CalPERS began to investigate another indicator of intangible value: enlightened workplace practices -- for example, offering employees regular training, involving employees in corporate decision making, and linking employees' pay to their performance. A 1994 report commissioned by the system concluded that companies that do a poor job of nurturing their human assets often do an equally poor job of protecting the value of their stock. The report went on to recommend that CalPERS consider using workplace practices as another criterion for selecting focus-list companies.
The system embraced the notion but stopped short of elevating it to the same level as board oversight. It remains a work in progress until Boldt and his colleagues can generate the hard data they need to link workplace practices to higher profits. "I can say unequivocally that having a strong board that is looking out for the interests of shareholders is good," says Boldt. "I can say very few things unequivocally about workplace practices." But, adds Crist, "workplace practices are still a consideration. I believe they will be emphasized more and more as we go along and refine them."
Finally, Boldt has turned his attention to a third "soft" indicator of long-term value: pay plans that reward the real contributors of value-smart people. That simple notion accords with the evolving conditions of today's economy. If people create most of the value in the new economy through their innovation and through customer service, then companies should pay those people in a way that motivates them to create more of that value. The question, Boldt says, is "How does management deal with the fact that it doesn't own its own assets -- it only rents them for a period of time each day?"
The answer? In a world where intellectual capital produces more value than financial capital, systems that foster the production of intellectual capital make a company worth more over the long term. For startups, the system of choice is the stock-option plan. "The ideal situation is a highly entrepreneurial company in which employees are compensated largely with stock and therefore feel attached to what's happening to the company," says Boldt. "If you're a company starting up today and you can put yourself in that position, the sky's the limit -- and that's what the stock market is saying."
But CalPERS invests only a sliver of its portfolio in small firms. Most money goes to giants like Gillette and General Motors. Do options doled out in huge corporations stimulate the creation of intellectual capital? In fact, Boldt says, they function more as lottery tickets: "You can be rewarded for something that you had no part of, and you can be punished for something that you had no part of."
It's a lesson that Boldt learned during a stint at Texas Instruments, where he worked on an advanced computer project. At TI, he observed two kinds of engineers. The first, all fortysomethings, owned big chunks of stock; they had joined the company when ti was small. Working there was more than just a job -- it was their financial future. Those engineers were willing to do whatever it took to make their projects work. They were committed to guarding TI's future. They acted like owners because they were owners.
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