Calpers is considering adding First Union Corp. to its annual bad-company list, a spokesman for the nation's largest public pension fund confirmed Monday.

That means First Union's board will come under heavy pressure to improve the company's performance and if such improvement fails to materialize quickly, pressure will mount for the departure of Edward E. Crutchfield Jr., chairman and chief executive officer.

With its $155 billion of assets, Calpers - short for the California Public Employees' Retirement System - is a formidable player in the equities markets, holding stakes in more than 1,600 U.S. companies. In addition to its size and muscle, it is a leader among institutional investors in demanding high levels of corporate governance, and many other institutional investors often follow its lead.

The list includes only about 15 of the 1,600 companies Calpers owns. Although the list usually is issued in February, the numbers accidentally became public last week, the spokesman said, saying that the latest list is "preliminary."

"After sitting down with the company we may or may not decide whether to add them to the list," said a Calpers spokesperson.

For the third time this year, the $235 billion-asset banking company indicated to analysts last week that its earnings would be lower than had been expected.

First Union's stock closed down Monday 18.75 cents, or 0.6%, to $32.4375, a new low for the year. The stock is down 47% so far in 1999.

Nevertheless, Calpers has been adding First Union stock to its coffers. In the third quarter, the pension fund added 1.4 million shares, bringing its total to 5.3 million of outstanding stock, or 0.53% of the total. Calpers' big stake in First Union indicates that the pension fund believes the banking company can do much better, but that its management might need a push. In the meantime, First Union stock is so low that its dividend yields 5.8% at current prices.

Calpers and its target list have an excellent track record. Companies targeted in the past by Calpers have beaten the S&P 500 index by 34 percentage points in the five years following Calpers' initial involvement, according to a study by Wilshire Associates Inc. of Santa Monica, Calif. The study, which tracked 62 target companies of Calpers, said those companies lagged the S&P 500 by 85% in the five years preceding the first effort of the pension fund.

Described as the "Calpers effect," the increased scrutiny may bode will for the sagging stock, said Nel Minow, principal at Lens Inc., a Washington-based shareholder activist firm.

"Management behaves much like subatomic particles," Ms. Minow said. "They behave differently when they are observed."

"Calpers certainly has a lot of ability to influence First Union," said Doug Pratt, a portfolio manager at Bricoleur Capital Management in San Diego. "They are a credible institution looking at the long-term."

Calpers and other institutional investors have over the years become increasingly involved with the so-called corporate governance movement, where the investor tries to make structural changes to the way a company functions on the board level.

Calpers said it will wait to make a decision on whether to add First Union to its target list.

"If they are not cooperative, then we could engage in a proxy fight or issue a proposal directly to shareholders," said the Calpers spokesman.

No other banks are on Calpers' hit list, though St. Louis-based A.G. Edwards Inc., an investment bank, is also on the preliminary list.

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