CalSTRS has been making waves on Wall Street lately, taking a more aggressive stance with corporations while grabbing a bit of the spotlight from its big brother CalPERS.
In the past year, the California State Teachers' Retirement System has picked high-profile fights with the firearms industry and Wal-Mart Stores Inc. Earlier this month, it scored a major coup by winning a shareholder vote against the management of a $5 billion-a-year steel manufacturer in Ohio.
CalSTRS' feistiness is getting noticed in boardrooms and by experts who track corporate governance issues.
"They've taken a very activist position. You have some successes and you become more visible," said Charles Elson, finance professor and director of the Weinberg Center for Corporate Governance at the University of Delaware.
As the United States' second largest public pension fund, with a portfolio valued at $167.2 billion, CalSTRS is no stranger to throwing its weight around the investment world.
It has prodded boards of directors on issues like executive pay, diversity and the environment. It has sold its tobacco stocks and unloaded investment holdings in rogue regimes such as Sudan.
But until recently, it was largely overshadowed by the largest U.S. public pension fund, the California Public Employees' Retirement System. CalPERS has $267 billion in assets and tends to make more headlines when it comes to making corporate executives uncomfortable.
CalSTRS' higher profile emerged after the financial markets crashed in 2008 and the pension fund hired its first-ever director of corporate governance, Anne Sheehan.
"The whole governance movement, especially in the post-crash environment, has taken on a new priority," said Sheehan, a former chief deputy at the Department of Finance. "We wanted to get more involved."
Public pension funds such as CalSTRS often perform a balancing act when it comes to investment decisions. They're legally obligated to earn as much money as possible, but can get tugged in multiple directions by political forces, particularly when it comes to issues of socially responsible investing.
CalSTRS in 2008 adopted 21 risk factors that discourage but don't forbid the fund from investing in companies that disregard human rights, make products that are "detrimental to human health" and so on.
Steering away from controversial investments can be costly. Consultants have concluded, for example, that CalSTRS and CalPERS have lost hundreds of millions of dollars by selling their tobacco stocks in 2000.
Pension fund officials say their decisions are based on business judgments; companies that behave themselves will do better financially over the long haul.
Often CalSTRS weighs in on issues that would seem arcane to the general public. This year it voted its shares in favor of resolutions that would have forced the CEOs of Walt Disney and JPMorgan Chase to forfeit the title of board chairman. CalSTRS' reasoning: The dual titles vest too much power in one person. (Both resolutions lost.)
Another big issue is diversity. CalSTRS nudges companies to add women and ethnic minorities to their boards, arguing it's a prescription for better financial performance.
"It inoculates against group-think," Sheehan said.
CalSTRS' biggest splash in the corporate governance waters probably came a year ago, following reports that WalMart had bribed government officials in Mexico, in violation of U.S. law.
CalSTRS, owner of 5 million shares in the big retailer, filed a "derivative" lawsuit in Delaware Chancery Court on behalf of Wal-Mart shareholders against company executives and board members.
The teachers' fund was the first institutional shareholder to take legal action over the scandal, but others soon followed.
The suit was the first in CalSTRS history.
"It was a groundbreaking move for us to file that suit, to put a stake in the ground," Sheehan said in an interview last week at CalSTRS' West Sacramento headquarters.
Shortly after the elementary school massacre in Newtown, Conn., CalSTRS took on the company that manufactured the assault rifle used in the shooting.
The pension fund said it would "re-examine" its $625 million investment in Cerberus Capital Management, a private equity firm that controls firearms maker Freedom Group Inc. Through its Cerberus investment, CalSTRS owns a 2.4 percent share of Freedom.
A day later, Cerberus announced it was putting Freedom up for sale.
It's unknown whether CalSTRS' warning influenced the decision; Cerberus wouldn't say. If Cerberus hadn't decided to sell, CalSTRS probably would have talked to the firm about the risks of holding onto Freedom Group, Sheehan said.
But CalSTRS had limited leverage. As a limited partner, it had legal obligations to stick with Cerberus and couldn't just unload its holdings, as it could with shares in a public company. "You don't have as many options," Sheehan said.
The pension fund did sell its stock in two publicly traded gun-makers, as did CalPERS. The two companies, Smith & Wesson and Sturm Ruger, make weapons that are illegal in California.
Most recently, CalSTRS took on The Timken Co., a giant Ohio manufacturer of steel and ball bearings.
Working with San Diego investment firm Relational Investors LLC, the pension fund campaigned for a shareholder resolution urging the company to split itself in two. The theory: Two companies would carry a higher stock market value than one.
Shareholders approved the resolution by 53 percent to 47 percent at Timken's May 7 annual meeting. It was a stunning outcome; dissident shareholders are usually pleased to win 30 percent of the vote in such campaigns.
While the vote was nonbinding, the company pledged to "carefully evaluate" the results.
Why go after Timken? CalSTRS believed the board was too beholden to the company's founding family, said Aeisha Mastagni, an investment officer in CalSTRS' corporate governance office.
"They weren't looking out for the best interests of shareholders," Mastagni said. "Wasting shareholders' money is the worst governance offense."
Call The Bee's Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.