OUT OF STEP ON REEBOK

By Daniel Kadlec

Dealmakers had their heyday in the 1980s. Today the power on Wall Street resides with money managers, who control huge and growing pools of cash amid an unprecedented wave of investment by the American public. A flick of some fund manager's wrist can send $100 million barreling in or out of a single stock. That kind of heft flattens a lot of resistance.

True to Wall Street form, the new titans are exploiting their influence. Mutual-fund manager Michael Price actively pushes for change at companies--Dow Jones is a recent target--in order to improve their laggard stock prices. Meanwhile, the California Public Employees' Retirement System (CalPERS), the nation's largest pension fund with a mountainous $108 billion under management, each year flaunts a list of losers it owns to try to embarrass CEOs into remedial action. CalPERS and other managers--be they of mutual funds or public or private pension funds--have generally wielded their clout for the good of all. The money, after all, is largely ours. We should cheer as they ferret out clueless CEOs and demand solutions. Indeed, the average CalPERS laggard stock begins outperforming the market once it hits the list. Can't argue with that.

But CalPERS and others are getting drunk with power--as did brash dealmakers in the power seats of the '80s. Consider this year's losers list, announced last week. Sure, it has some real dogs, such as struggling Apple Computers Inc. and Stride Rite, a worn-out shoe company. But CalPERS also stepped on sneaker company Reebok. This is odd, given that Reebok's stock has doubled in 10 months and beaten the market averages handily in the past year. That's not all: Reebok shares have risen an average annual 29% since the bull market began in October 1990--outdistancing the average stock, which has risen just 16% a year. Granted, Reebok had some lean years. And next to fleet-footed Nike, its problems glowed in the dark. But management got back in training and since 1995 has cut expenses, sold the underperforming Avia division, bought back 23% of outstanding stock and embarked on an ambitious new-product campaign. Its backlog of footwear orders is now up for the first time in two years.

If Reebok is one of the worst of some 1,500 stocks in CalPERS' portfolio, god bless 'em. They could teach Warren Buffet a thing or two. Have they no Woolworths? The company hasn't been worth a dime in a decade. Times-Mirror trades below its 1987 peak. Bethlehem Steel has been pure lead for years. I don't know if CalPERS owns those awful stocks. The point is that real losers are out there. Dumping on Reebok is like saying you don't want Shaq on your team because he isn't Michael Jordan. Reebok founder and CEO Paul Fireman, a fierce competitor, chickened out of publicly responding to CalPERS. That, I think, is a measure of how powerful money managers have become and why CalPERS needs to be more careful about whom it puts on the list. It has become closely watched and uniformly accepted as investment gospel. Not only is it a public embarrassment to be singled out (Time Warner, this magazine's owner, was a target in 1992 and 1993), but people are making decisions based on the list. Kayla Gillan, general counsel at CalPERS, says Reebok was chosen last summer--before its recent stock surge. C'mon, there's no excuse for not having the flexibility to adjust this list to the market. Money managers do that every day, don't they?

Daniel Kadlec is TIME's Wall Street columnist. Reach him at [email protected]