SACRAMENTO — Citing “excessive” executive compensation, the nation’s largest public pension fund said Monday it would fight the proposed merger of WellPoint Health Networks and Anthem Inc. that would create the nation’s largest health maintenance organization.
California Treasurer Phil Angelides joined with officials from the California Public Employees’ Retirement System in asking other major shareholders to oppose the merger they say will generate more than $600 million in compensation for top executives of both firms.
CalPERS directors also called on Gov. Arnold Schwarzenegger through his Department of Managed Health Care to hold a public hearing on the merger and impose its authority to prohibit improper spending on administrative costs such as executive compensation.
The merger of Thousand Oaks-based WellPoint – owner of Blue Cross of California – and the Indianapolis-based Anthem would create an HMO with 26 million patients, the nation’s largest. Critics said the merger plan is tailored to provide a golden parachute to outgoing executives who have little stake in how the new company performs.
The WellPoint-Anthem merger also offers another platform for Angelides and CalPERS, who have both been increasingly active combatants in the battle for more open corporate governance.
“This merger is the poster child for excessive executive compensation,” said Angelides, a member of the CalPERS board. “These are payouts that will be made on Day One – without any regard as to how this merger performs for shareholders in the years ahead.”
The merger is scheduled to go before shareholders June 28.
In recent months, CalPERS has aggressively wielded the power of its $162 billion portfolio to press for corporate reforms. The fund holds 721,840 shares of WellPoint and 612,938 shares of Anthem for a combined value estimated at $250 million.
Ken Ferber, spokesman for WellPoint, said Angelides has incorrectly based his claims on double counting some of the benefits. Instead, 293 executives will receive a merger payout of $200 million, which is well within the average compensation on similar mergers, he said.
“The real figures are merely fractions of what the treasurer and CalPERS claim,” Ferber said. “We’ve disclosed all this information for months.”
No one from the governor’s office or the Department of Managed Health Care could say if a hearing would be held before shareholders vote.
CalPERS President Sean Harrigan was especially critical of the $76 million payment he said WellPoint Chairman Leonard Schaeffer would receive.
“This is beyond the realm of excessive,” Harrigan said, adding that the merger would only help “the elite corps of senior managers who have structured it to benefit themselves.”
Angelides said Schaeffer’s “compensation package rivals in audacity and excess the salary grab by ousted New York Stock Exchange Chairman Richard Grasso, and it simply cannot be justified.”
Angelides was one of the first public officials to call for resignation of New York Stock Exchange Chairman Richard Grasso over his $140 million pay package. Grasso resigned Sept. 18, but the New York attorney general has filed suit seeking $100 million of the pay Grasso has already collected.
Last week, WellPoint and Anthem executives told a state Assembly committee that California ratepayers wouldn’t be paying for the multimillion dollar compensation packages.
But Angelides said the money could only come from two sources: company shareholders or health care policy holders.
Ferber, however, argued that Schaeffer will receive about half as much as Angelides claims – $30.5 million in severance pay, $10.5 million in pension contributions and $6 million in additional stock options.
“The thing that has not been brought up here, is that Mr. Schaeffer is losing his job as a result of this merger,” he explained. “That’s after 18 years running the company.”
Company filings indicate Schaeffer made $11.9 million in salaries and bonuses in 2003.
Angelides spokesman Mitchell Benson said the treasurer included stock options tied to the merger as part of the estimates of the compensation packages.
Although federal regulators have said the merger will not hurt competition or consumers, the state’s Department of Insurance has not issued its opinion.
Since WellPoint has a total market capitalization of more than $18 billion, CalPERS’ share is just a tiny percentage, Ferber said. Since the merger was announced in October, both companies’ share price has risen nearly 30 percent, he added, so “obviously a lot of other shareholders do not agree with Calpers about the merger.”
Consumer groups, however, say the administration should order further review.
“Gov. Schwarzenegger cannot ignore the state’s largest purchaser of health care and must require his administration to conduct extensive public hearings and oppose the merger unless significant patient protections are adopted,” said Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights. “Hundreds of millions of dollars in pay-outs to HMO executives would undermine patient care and the stability of the merged company.”
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