There was no picket line in front of TIAA-CREF's main office at 730 Third Avenue this morning. As President and CEO Herbert Allison noted with sorrow at the beginning of the Q&A period, the respected and regular meeting participant Neil Wollman (Make TIAA-CREF Ethical Coalition) was unable to attend due to the death of his 8-year old daughter Scout. Annual Meeting admission was through the side door to the lobby, on East 45 Street, just West of Third Avenue. They used a metal detector and a bag x-ray machine. Adhesive “Visitor" badges were issued, for which you had to present your photo identification with the mailed admission pass. Attended elevators went only to the meeting floor. Participants were not admitted to the building until 9:00AM, one half-hour before the meeting.
There were more documents set out on a table than ever before. These included press releases about socially responsible investing and the executive compensation vote. There were full-text booklets on policies covering corporate governance and the new (2007) executive compensation policy. For the first time, the agenda was handed out to each arrival in the meeting room itself, an improved practice over having to ask for it near the elevators. Mr. Allison and some officers were in the room before the meeting and spoke to several participants before retiring to the management's pre-meeting lounge.
Attendance was down this year: Wharton Auditorium was about 35% full, of its 240-person capacity. It was a little fuller by the end of the meeting. After an anonymous voice asked that cell phones be turned off, the 18th annual CREF meeting was called to order at 9:36 AM. Mr. Allison introduced a number of senior employees and board members. For the first time in five years, every CREF board nominee (nine of them) attended the meeting. Two TIAA trustees, Marta Tienda and Ronald L. Thomson sat in the second row, behind the Executive Vice Presidents, while the CREF trustees sat in a group to the left of the dais. None of the Overseers were introduced this year, so I don't know if any attended. The accounting firm representatives sat in my row, chimping on their Blackberries.
There were four seats on the dais, with the speaker's lectern on the audience's right. From left to right, the speakers were E. Laverne Jones (VP and Corporate Secretary, who announced her retirement), George W. Madison (EVP and General Counsel), Edward Grzybowski (Chief Investment Officer), and Herbert M. Allison (Chairman.)
Mr. Allison said that the meeting usually takes about two hours, but it would not end until everyone who wished to speak had received an opportunity. This was an effort to encourage the socially responsible investing speakers to wait for the general question period, but he was again unsuccessful in achieving this.
Mr. Allison gave a substantial introduction. While he mainly noted progress in the rollout of the "Open Plan Solution", the company's new service platform, he also acknowledged continuing service problems. (Previous press release) He noted the increase in TIAA's surplus, from $11 Billion in 2002 to $20 Billion in 2007, and that there were now $4.6 Billion in Wealth Management service accounts. He reviewed implementation of socially responsible investing initiatives. He listed the following advantages to TIAA-CREF's business. (Although there were no slides for his speech, I'm listing them as "bullet points")
Next Mr. Grzybowski gave a new kind of investment management speech. Instead of showing a chart of the CREF funds and their performance (and their failure to mostly beat their benchmarks after expenses ....), he showed slides about a fictitious participant named "Ray Wisdom". Mr. Wisdom's was assumed to spend his career contributing 15% of his wages to either to TIAA-CREF funds (TIAA Traditional and CREF Stock) or to a similar portfolio of U.S. index funds. His starting salary was $20,000, with an annual increase of 4.5%. The two portfolios had three allocations to Equity and Fixed-Income, 100/0, 50/50, and 0/100. In each case, over the full course of his career (I missed the time period, but it was probably 30 years), the TIAA-CREF portfolio beat the index-fund portfolio by 12-15%. This is just the kind of colloquial information that is useful to the average participant. Grzybowski also reported that TIAA-CREF's mutual funds (not the CREF Variable Annuities) had been ranked 7th out of 67 companies in a Lipper/Barrons survey, and that Morningstar had listed all of the CREF funds as either 3, 4, or 5-Star Variable Annuities. (This is an entirely different category than "mutual funds".) The Mid Cap Value Index Fund was listed 1st among 221 Mid-Cap Value Funds in the 2006 Lipper Fund Awards.
He gave a few general comments about the quality of four investment options: TIAA Traditional, CREF Stock, TIAA Real Estate Account, and CREF Social Choice. It was interesting that he noted that two (up, I think from one) life insurance companies have the top rating of all four rating companies. The most interesting detail was that CREF Stock is about 50% actively managed. That's notable because CREF ususually claims that the investment methodology no longer lends itself to determining such a figure for the CREF Stock Account.
Election of trustees was the next order of business. After the nominations were seconded, Mr. Allison called for discussion of the trustee election. Roy R-----, bearing a proxy from a C.U.N.Y. faculty member, asked about socially responsible investing responsibilities of the board, particularly emphasizing last year's decision to divest Coca-Cola.
I mentioned that there has been tremendous turnover on the board, and after this election, there will be only two trustees who have served longer than since 2005. I also observed that the board membership has tipped, over the last five years, from predominantly academic backgrounds to predominantly the for-profit investment management business.(1) I did admit that some of the academic members had not done a good job. (I was referring to the 2004 Ernst and Young scandal.) I wondered aloud whether newer trustees might be more inclined to observe for a few meetings, and "use the special rubber stamp that comes with their briefing book before a meeting." Mr. Allison smiled and said, with irony, that he had not yet seen the CREF board's rubber stamp. Nancy L. Jacob, the chairman of the board replied that the increasingly complex demands on the board have called for members with more industry experience.
Ingraham C----, a S.U.N.Y. (?) participant asked about the Trustees' stewardship in view of the fact that some CREF funds invested in the failed Refco I.P.O., and how hard it had been for him to get information about that investment. Mr. Allison replied that Refco was a case of fraud, and that Gretchen Morgenson (2) notwithstanding, many investment companies that carefully studied the offering documents had found the risk level acceptable.
All candidates were elected, with at least 95% of votes in favor. That's 1% less than last year, but it's not really a statistically significant difference.
Approval of the independent auditor was the next order of business. Mr. Allison again asked for questions specifically on that topic. PricewaterhouseCoopers was approved by the same plurality.
Mr. Allison then respectfully acknowledged Neil Wollman's absence, and asked if there were any general questions. I asked the first question, challenging Mr. Grzybowski's rosy picture of the CREF funds. I observed that with the exception of the Bond and Money Market accounts, all of the CREF variable annuity accounts had failed to beat their own benchmarks, even after considering expenses. It has been three years since the new team took over Investment Management with the retirement of Martin L. Leibowitz. The expense ratios of all the CREF accounts have gone up again, and a new category expense, Acquired Fund Fee Expense, has been added. Mr. Allison responded that the fee is not new, it's just broken out for the first time, and it's one basis point. I must have rattled Grzybowski, because he chose a bad metaphor for the CREF Stock Fund and joked that it was not easy to "turn the Titanic".
I accepted the hasty replacement of that word with something like "QE 2", and retorted that the portfolio turnover has been over 50% in each of the last three years, so the ship had in fact been steered, even churned. I also complained that 85% of all the brokerage commissions in 2006 were "Directed Brokerage". This seems to be a hidden investment management expense, since it's not included in the expense ratio, but we deliberately paid more than market rates in order to get research reports from the brokers. My point was that TIAA-CREF, in the Statement Regarding Fund Governance and Practices says "... we call upon the brokerage industry to separate trading costs from research costs so that investment advisers can disclose them to investors."
I also mentioned that the fund's Investment Strategy had been changed to "Enhanced Index Fund" three years ago, it should no longer need so much turnover. The same ten companies make up 12% of the fund, year after year, for example. Mr. Grzybowski replied that the fund attempts to reduce risk by (for example) adjusting how much of each index stock to hold. He certainly did not say so, but the implication was that this would pay off in a market downturn, in compensation for years of underperformance in an up market.
Linda T------ mentioned her own service on some N-F-P boards, and asked if the our boards were adequately indemnified for their actions. Ronald. L. Thompson, the TIAA Trustee who chairs the Human Resources Committee (cosmetically renamed from "Compensation Committee"...) corrected one of her statements by saying that while CREF is an N-F-P corporation, TIAA is an insurance company that is effectively N-F-P via charter restrictions.
Only two attendees spoke specifically about their own service problems: John H-------, retired from Syracuse, described problems in both service and in broken promises from TIAA-CREF during a divorce proceeding. The issue involved trying to make his custodial daughters conditional beneficiaries of his share of his retirement account. Mr. Allison apologized for his difficulties and said they would contact him promptly.
A Baruch College retiree lamented TIAA-CREF's "chaotic phone system" and the failure of a 9-month investigation to resolve her missing institutional remittances. Referring to Mr. Allison's introductory statement that service problems were coming under control, she said, "Things have not improved." He apologized.
Roy R------, having not gotten the information he wanted about COKE (as opposed to KO, which was divested from CREF Social Choice last year), now directly asked the question, which was answered, "Yes, it will be divested."
Marc F-------, a participant and former employee, thanked Overseer Stanley O. Ikenberry(3) for assuring that a PriceWaterhouse 2005 "internal control" report was posted in May. (This brutal .PDF file discusses 2005 failures at the massive and crucial subsidiary TIAA-CREF Individual and Institutional Services LLC. Georganne C. Proctor, the new CFO replied that those failures have been remediated and there are no issues for 2006. Mr. Allison responded to a follow-up question by providing the name of the current Chief Compliance Officer responsible for "Services". (I failed to record the name accurately enough to verify it.) Marc went on to note that the retirement of the distinguished Arthur Levitt from our Board of Overseers had gone almost unremarked. Mr. Allison responded, in one sentence, that Mr. Levitt had reached the maximum age for service as an Overseer.
Honestly, I was reluctant to speak a third time, but I felt that the new Executive Compensation policy statement had not gotten enough discussion. Since attendance was so sparse, I raised my hand again. I acknowledged that the new voluntary disclosure of five "named officers" was admirable. But it exposes just how high executive compensation has climbed at this "For the Greater Good" organization. I pointed out that the renamed Compensation Committee has created a synthetic sort of Restricted Stock. (I'm not talking about ownership of the company; That can't be given away. I'm referrring to the "Non-Stock Incentive Plan Awards" or "Performance Units") But the units lack one of the most desirable attributes of Restricted Stock because they are not independently valued, daily, in an auction market. I also said that TIAA-CREF really hadn't had such a good year, with the loss of the University of Minnesota, lost College Savings plans, and asset increases that could be accounted for by stock market results, not new funds. I couldn't see how all but 4.73% of the basic objectives had been met. I also said that in a good year, an executive gets 4 times his salary in bonuses. If only 50% of his objectives were met, he'd still get 2 times his salary in bonuses.
Mr. Allison corrected my statement by saying that we were still managing existing accounts at U of Minnesota, but are not an option for new contributions. He said frankly that we lost that work by not servicing them the way we should have. He mentioned some major successes, like the CalSTRS win. There were some successes that can't be discussed at the meeting. (See next paragraph.) He said that he shouldn't speak on a matter chartered to the Human Resources Committee, and called on its chairman, Ronald. L. Thompson again. There is no doubt in my mind that this is one reason why Mr. Thompson attended the meeting. Mr. Thompson gave a detailed, civil rebuttal. He pointed out, pleasantly, that if the achievement Scorecard were only 50%, not only would that year's unit values be reduced, previously awarded but not paid units would have their value reduced.
I didn't continue the discussion. But I think that measurement of secret achievement of secret goals, evaluated in secret, with secret discretionary adjustment by the committee, well ... it's a big secret.(4)
The meeting was adjourned at 11:44 AM. The next deadline for submission of Proxy Proposals is February 13, 2008.
The sound and the slides at this meeting were both far below proper standards for an annual meeting. Although all speakers were within 30 feet of the antennas, the wireless microphones cut in and out (even for board members!), and the slides were not cued properly, flashing forward and back to find the right one. They also sometimes showed the Windows® desktop, rather than being in full-screen Slide Show mode. I also thought the lighting was unnecessarily in the eyes of the speakers, but that had little effect on the audience. (I used to do lights and sound for public company shareholder meetings.)
Some topics that didn't come up, but should have:
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