Commentary on December 15, 2003 Meeting

There was a small demonstration on Third Avenue, in front of the TIAA-CREF offices. About ten protestors were holding signs by the curb, and a few more were handing out leaflets. They were there in support of the participant proposals in the proxy statement, particularly those supporting the divestiture of certain stocks from CREF portfolios.

Although there was a cheerful holiday display in the lobby, security was extremely tight. There was a former high school football player in a blazer or a suit every 20 feet. After having our names checked against a list, visitors' bags were inspected, and we were asked to remove and carry our outerwear coats. Elevator operators were provided to deliver us (only) to the floor where Wharton Auditorium is located. On that floor, rest rooms, water, and coffee were available. There was a table with a few handouts available, relating to TIAA-CREF governance. There was also a printed agenda for the meeting, and a handout titled "Decisions 2003". You might have read this phrase in articles by Mr. Allison. It's the marquee name for his research and plans to reorganize the TIAA-CREF businesses.

The start of the meeting was delayed briefly because word was sent up that there were still people being screened in the lobby. The CREF trustees, and a large number of the TIAA trustees were seated in the front rows, directly facing the dais. As they attempted to start the meeting, one participant (a parlementarian at a university) called for a quorum. This was a highly techical maneuver, involving whether votes represented by proxy could be counted towards the required attendance. My personal impression was "Guerilla Theater", rather than effective opposition to managment policies. After all, since we pay for holding a meeting, it's not to our advantage to force the scheduling of a second meeting.

Mr. Allison gave a long and substantive introduction that was posted on the TIAA-CREF website a few days later. It's required reading, especially because he announced two important governance reforms. One could suggest that they were a pre-emptive response to Proposals II and III. The speech was a masterpiece, and I don't mean that dismissively. It anticipated questions about the embarassing change in meeting dates, selling the Long-Term Care Insurance business, and the 8% layoff, as well as Proposals II and II. The creation of meetings of the independent trustees without managment present is a major reform. Stephen A. Ross was appointed Presiding Trustee of CREF, and Ronald L. Thompson Presiding Trustee of TIAA, to manage those meetings and report to Mr. Allison. The decision to have all the trustees stand for re-election together seems to me to be a more cosmetic reform. Rather like the old Soviet Union, or Saddam Hussein's Iraq, we have no one else we can vote for in those elections.

Although it wasn't intended as a question, one participant made a remark about contacting the company that prompted Mr. Allison to volunteer an interesting comment. He mentioned that the company had made an affirmative decision that it would be inappropriate to move our "call centers" offshore. As a native New Yorker, I might ask whether the people I used to talk to in Manhattan, who now live and work in North Carolina, might as well be offshore. But they've told me that they like their new surroundings.

A modest, but pointed question was asked about Mr. Allison's employment contract [.pdf file] and compensation. This had clearly been expected, because Mr. Allison turned the floor over to Ronald L. Thompson. Mr. Thompson (who has a Ph.D.--see next paragraph) had a well-prepared presentation, which was delivered in a deep, soothing voice. (I'm not being disrespectful. I'm in show business, and I know a good speaker when I hear one. This presentation was even more masterful than Mr. Allison's speech, which relied more on being well-written and rehearsed. Mr. Thompson would make a fine commencement speaker!) To greatly summarize Mr. Thompson's presentation, he made it clear that the Board went out into the marketplace, found what they wanted, and paid what they felt was an appropriate price. Upon a participant's comment that "No one is asking Mr. Allison to work for minimum wage", Mr. Thompson didn't invoke Bill Clinton's name, but Bill's version of Mr. Thompson's reply would have been "Well, it all depends on what you mean by 'minimum wage'". The way I understood the answer was that when you're talking about financial services executives, the minimum wage [.pdf file] starts with someone else's lifetime income.

Mr. Thompson also went to some pains to explain the nature of Mr. Allison's bonuses. He said that it's quite common for a first year's bonus to be non-contingent. He explained how Mr. Allison's non-contingent compensation will decrease until it's soon only "one-eighth, 12 and a half percent" of his possible pay. I read enough proxy statements that I'm forced to confirm that, in the current debased state of the English language, it is quite common to use the term "bonus", even if it's not contingent on anything!

Mr. Thompson sat down without bringing up the "Golden Parachute". I didn't come to the meeting to discuss executive compensation, but I had to rise and ask about this. To again cruelly abbreviate a fine speech, Mr. Thompson explained that the definition of "for good cause" had been so carefully crafted that he never expected to be standing up here explaining why it had been invoked. My own experience has been that one public company after another (which CREF is not...) has allowed their now-unwanted CEO to resign "for good cause" in the interest of a quick disappearance and minimal display of dirty laundry. That phrase triggers the maximum "Golden Parachute". I lived to regret my question, because I was later accurately described as having "spoken more than once".

Mr. Allison returned to the lectern and introduced Martin L. Leibowitz, who is about to retire from several offices, including Chief Investment Officer. (If you look at the biographies page on the TIAA-CREF web site, you'll see that when he departs, there will be no longer be a full-time employee on that page with a Ph.D. It's not that I don't respect M.B.A.'s, but it's quite fair to say that TIAA-CREF has a long academic tradition. To me, this has some symbolic import with respect to Mr. Allison's denial that "TIAA-CREF is trying to emulate the for-profit, mass-market financial firms.") Mr. Leibowitz presented financial performance slides for the CREF funds. Luckily for him, this has been an up year, so the data were generally good news. The information was similar to the "performance" inserts you receive in your TIAA-CREF mailings.

The next order of business was the Election of Trustees. To my surprise, one of the (naturally, elected) candidates was, due to a long-standing commitment, unable to be present. In her defense, it's perfectly true that the meeting date was changed.

Mr. Allison gives a description of the postponement of the annual meeting in his opening remarks. I have to add that he didn't mention (although you were notified with an insert in the proxy mailing) that the participant proposals were numbered and presented in two different orders in the proxy statement for the original meeting date, November 13, 2003. This would surely have triggered an unpleasant scene, if not legal action, about the validity of the mail ballots. Whether both errors actually occurred innocently, or whether the postponement was possibly contrived to "bury" the numbering error, it looks bad. Alas, over 25 years, TIAA-CREF has made more errors (on my accounts and certificates) than all of my other mutual fund companies together.

By far the largest portion of the meeting was the discussion of the six participant proposals. I used to do the projection and lighting for two large public companies' shareholder meetings. So I've heard the Gilbert brothers and Evelyn Davis speak, as well as nuns who deliberately bought one share of a company to which they had moral objections. The CREF meeting was notable for the scholarship and careful presentation of the speakers during this part of the meeting. Some of the proposal-makers were ill or absent, so one of them had been asked to introduce several proposals written by others. This reduced the impact of their statements.

The two best statements were made on divestiture of NIKE and on tobacco stocks in general. The most impact of the NIKE statements was made by a young man who described six months living in Indonesia with NIKE factory workers. He mentioned how much weight he had lost while trying to live locally with the same income as those workers. The best tobacco speaker gave a quiet comparison of the issue to the past debates on divestiture from South Africa under apartheid. He said that tobacco was a unique issue, involving not just moral decisions, but (this is my phrase, not his) certain death. The least effective statement from the floor was a complaint about COSTCO's behavior in Mexico.

I'm sorry I didn't get his name, but one of the NIKE speakers commented at the end of the meeting that he felt that CREF had welcomed his input more than some of the other companies where he has spoken. I don't doubt him, but I have to tell you that one of the other proposal authors, who has accused large companies of pollution and labor mistreatment within the United States, told me that he had an easier time with those offenders than he's had with CREF.

While ballots were tabulated (needless to say, all of the proposals were defeated, but many of the ballots were 24% "for", which is a huge result in opposition to any management recommendation), the floor was opened for questions. This is where I made my speech, about expense ratios. I judge myself just as harshly as I did the COSTCO speaker. Mr. Allison did respond to parts of my speech. He explained that the branch offices are not all that expensive, and that when TIAA-CREF representatives go out to the campuses, they are often asked, "Fidelity just opened up at the mall; When will you be coming to town?" I wish I had written down the exact words, but he did acknowledge that the expense ratios had gone up, and that it should be an objective to reduce them. He suggested that the mutual ownership of the Vanguard management company is not that different from CREF's structure, but I disagree.

At the end of the meeting, I repeated my request for an explanation of why the Investment Advisory fee has doubled in two years, but he said they would have to look into it. Because the Prospectus says that this service is provided "at cost", the question is even more important than it sounds. At issue is not only how much we pay from our mutual fund assets, but the accuracy of the Prospectus.

The most notable individual speeches were by five elderly retirees, whom I'll call the emeriti. Three of them had very heavy european accents. I mention this only because I wonder if they might have some confusion about state pensions "back there" and the widely varying American pension system. All five were upset about the decreases in their CREF retirement income. One of them felt that he had made an unwise transfer of his principal that appeared to be irrevocable. Another, who kept good records, gave the date and amount of the peak value of the CREF accumulation unit, and the percentage decrease to its' current value. There were participant service representatives present, to whom the emereti were referred for private counselling specific to their accounts.

Of course, the reason these speakers made so much impact was that they spoke personally and passionately, about their own well-being. There's nothing more important than the final result of TIAA-CREF's operations! But I have to defend TIAA-CREF's education efforts. They make very clear what the implications are of each retirement income choice. But it's still a difficult and complicated decision. No one can predict what the precise results of a payout choice will be after years of future change in the financial markets. Many people are unfamiliar with the idea of a retirement income choice that goes up and down with the stock market. I rose to say that while I won't minimize the financial suffering of these speakers, my own mother has compared her experience with her more conservative friends who chose 100% TIAA retirement incomes. They have suffered erosion of their post-inflation income, while reading news accounts of (now, past) stock market booms. She has enjoyed tremendous benefits during good years in the stock market, and is not inclined to blame the CREF management for her recent decrease in income. (However, I do blame them for selling the Long-Term Care Insurance business to a commercial company so soon after I suggested she buy that product from TIAA-CREF.)

After the adjournment, neither Mr. Allison nor Mr. Leibowitz rushed out of the room. Several participants got to speak to each of them. Many of the trustees lingered, but fewer participants tried to speak to them. The meeting ran about 2 1/2 hours.