2005 CREF Proxy Proposal

Tim's Speech Introducing the Proposal, July 19, 2005

I hereby move the proposal. The reason I started with the 1989 “Settlement” is that it’s the little-known basis of the company we have today. Once you’ve read it, you’ll never suffer any nagging suspicion that shareholder input like this is mischievous or a waste of time. I also wondered what might happen after our current 3-year plan ends . But now I see in June’s “Best’s Review” that we have to wait until 2007 to learn what’s become of our 70% market share. I have two important developments to report, which occurred after I submitted the proposal, greatly increasing its importance. First, I want to mention the Board’s Opposing Statement:

Under the proposal, CREF would not “be required to send an additional proxy to 2.8 million participants.” The proposal requests, it’s illegal to require. And if the “Act” I quoted meant to require a “proxy”, it would use that word, as it does elsewhere. CREF could just insert a postcard in another mailing. In any case, CREF did send out two proxies in 2003, because they had made an error much worse than the misprinting of my web address this year. You may possibly have overlooked the fact that you paid for that second proxy.

The first new development was the issuance of the Katzenbach Report . It’s a magnificent job of detailed and honest research, which should be read by all participants. But in the last pages, Mr. Katzenbach makes one terrible mistake: He calls for the abolition of the [TIAA] Board of Overseers.

Now, I think he has overlooked the academic governance structure that must have been intended by the Carnegie Foundation when they created the superior board. But since they finally cleaned out the Augean Stables, I want Overseers. Because they are part of CREF’s Charter, their elimination would require action by the New York State Legislature. It’s a “reorganization” plan that would fall under this proposal. It’s on the table, right now, today.

It seems obvious to me that you don’t ask the three guys who pull the strings in Albany to just eliminate an excess board from a 1952 law. You get them to make all of the modernization changes you might want for the next 50 years.

Second, on June 20, the New York State Court of Appeals ruled in favor of the Governor’s scheme to use converted assets of Empire Blue Cross and Blue Shield to fill state budget gaps , including tasks never done by Empire. The state is desperate for money, and has to invent new budget fixes each year. Judge Smith’s dissent warns that the decision may pave the way for even more outrageous “takings” by the state, especially because Empire is not a “charity”. The majority opinion ruled “…that giving Empire the permission to go public did not prevent other companies from seeking to convert in the same way, contrary to the arguments that the deal was tailored to benefit one company….” By the way, The Times reported last week [June 21, 2005, p. B2] that the new WellChoice is an acquisition target. What a surprise!

The Trustees are correct to point out that this is speculative. But I didn’t make up the word “reorganize” in the 1989 “Settlement”. Keep in mind that our good friend the Governor has appointed one of our Vice-Presidents to a prestigious panel to reform the state’s public authorities. Another of our Vice-Presidents used to work for an affiliate of New Jersey’s Horizon Blue Cross/Blue Shield, expected to become a similar “cash cow” any day now. We’ve got the connections and the skills. Please support this resolution to protect your future choices. The resolution “prohibits” nothing you may eventually decide to favor.

Creation and Submission of the Proposal

At the 2003 Annual Meeting, CREF had a handout which said that "Our Market Focus: For at least the next 3 years, our core market will comprise the institutions, and their current, prospective, and past employees and families within: Higher Education, Private K-12, Research and other education-related not-for-profits, Hospitals." I asked myself, what happens after 3 years?

CREF also listed a goal of "Ensuring an economically vibrant TIAA-CREF, with unsurpassed staying power, that will be there to meet their [Our Individual Customers'] needs over the long term." Because TIAA-CREF is currently facing vigorous competition in its traditional markets, I felt there was a potential parallel with the not-for-profit health insurers and mutual insurance companies who cited capital and competition in their reorganization plans. Because the topics of New York State budget shortfalls, and of those business conversions have been so prominent in news, legislative and regulatory affairs lately, I decided this topic needed further information made available to participants. This is the second proxy proposal I have ever submitted.

The easiest way to understand my rationale is to read the following excerpt from the New York Times:

"The New York State Insurance and Health Departments gave final regulatory approval yesterday to the latest plan by Empire Blue Cross and Blue Shield, a nonprofit insurer, to turn itself into a profit-making company.

"Mark S--------, a lawyer for the consumer groups, said they would consider whether to challenge the regulatory approval. He said it did not address ''the fundamental flaw'' in the plan, which he said was the state's failure to transfer the bulk of the assets of the nonprofit Blue Cross plan to a foundation that would be devoted to health coverage.

"Under pressure from consumer groups, California and a number of other states financed large foundations using stock in Blue Cross and Blue Shield plans that had converted to profit-making companies. But in New York, the money is to go primarily to the union's workers in the form of wage increases.

"The Insurance Department also moved yesterday to keep Empire's employees from profiting immediately from the stock sale. The new company, which will be called WellChoice, was prohibited from issuing stock or stock options to its employees and directors for one year. ..."

After much correspondence with the SEC, CREF's attempt to exclude the proposal from the proxy statement failed. When the proposal was printed in the paper proxy booklet, they made a typographical error in the URL for this website. I believe that it was an inadvertent mistake. They immediately corrected the HTML and PDF files hosted on their website. Since you and I pay for the proxies and for the annual meeting, I'm not inclined to push this matter any farther.

But because of the printing error, I would appreciate it if you'd circulate this (corrected) web address to other participants who might have failed to find my web site.[deleted]

CREF raised several objections to the resolution, all of which are commonly invoked against shareholder motions. These included alleging that the action requested was vague and indefinite, involved the company's ordinary business operations, and is within the ambit of CREF's managment or board. I did have to change the request so that it was more clearly a recommendation to the company, and not an obligation which might have been illegal under state law.

CREF is also very unhappy with the clause about mutual insurance companies. They correctly point out that CREF is not an insurance company. But I don't say that it is! My intent is to recall (especially to Easterners) the MONY demutualization, and the fuss over the change-of-control payments when it was quickly bought by AXA. I also told the SEC that the document “An Overview of T.I.A.A.’s Executive Compensation Policy” comments that “TIAA and CREF’s combined assets would make the organization the third largest U.S. life insurance company” (emphasis mine.)

In fact, if you're thinking, "Well, I wouldn't mind getting some free stock in a public CREF company!", it's important that CREF is not a mutual insurance company. In New York State, such a company is obliged to offer you cash or stock (with a tax basis of zero, by the way) when it demutualizes. Participants are likely to receive nothing if CREF were to convert!

The Proposal

Timothy H. Buchman ... owning 610.2620 accumulation units in the CREF Stock Account, and 612.6310 accumulation units in the CREF Inflation-Linked Bond Account intends to present the following resolution at the 2005 annual meeting.

Whereas, over 25 not-for-profit Blue Cross/Blue Shield plans have obtained state permission and converted to for-profit status, and;

Whereas, several substantial mutual insurance companies have converted to stock companies, with small payments to policyholder-owners, and;

Whereas, competitive pressures, and access to capital were typical reasons given for these conversions, and;

Whereas, the opportunity to issue options, stock grants, change-of-control payments, and to escape not-for-profit salary limits may have been factors in some such conversions;

THEREFORE BE IT RESOLVED that, should CREF present a reorganization plan, the Trustees of CREF are requested to exert their best efforts to solicit the requests of 25 per centum of any class of its outstanding securities for, or otherwise submit a request to the Securities and Exchange Commission, “… to render an advisory report in respect of the fairness of any such plan and its effect upon any class or classes of security holders”, as described in Section 25 of The Investment Company Act of 1940, as subsequently amended.

Participant's Supporting Statement:

This remedy is intended for use by aggrieved owners. But the fact that our trustee and proposal elections can currently be decided with a quorum of only 10% of the electorate testifies to the difficulty of a participant assembling the requests of 25 percent of any class of CREF securities, or of paying the costs of doing so.

CREF agreed, in a 1989 settlement with the ACE, the NEA, the AAUP, and other entities, ([1989 SEC LEXIS 1606] and [1989 SEC LEXIS 1605]), that it had no current intentions to reorganize as a Massachusetts Business Trust, and not to change what are now its' voting procedures "in any adverse way for a period of at least five years".

We earnestly hope that current marketing strategies and product improvements will advance TIAA-CREF’s position in the financial services marketplace. However, if these efforts fail, another reorganization plan could be considered.

One reason states have embraced these conversions (and enacted the necessary legislation) has been the financial windfalls they have extracted, towards their hard-pressed budgets. The president of a NY State teachers' union commented, “Everybody has probably spent the HIP conversion money 25 times over before HIP has even decided … to convert.”

For those who are interested in the proposal submission process, or those who want to see what CREF disliked about this proposal, I've posted the first of my two letters to the Securities and Exchange Commission here. It's about as long as CREF's first letter of objection, and has about as many footnotes. You'll have to use your "BACK" browser button to return from reading the letter.

In fact, CREF's letters, like mine, are now a matter of public record. It's likely that they'll all be posted on the SEC website in a few months, probably in .PDF format.