(FORTUNE Magazine) – Who would have believed, a year ago, that the new shareholder activism would have come so far, so fast? But with the CEOs of GM, American Express, and Westinghouse thrown out, institutional shareholders have emphatically gotten corporate America's attention. FORTUNE's Myron Magnet asked leading public and private fund chiefs what they want next and how they plan to get it.

THOMAS FLANIGAN, Chief Investment Officer JANICE HESTER-AMEY, Corporate Governance Officer California State Teachers' Retirement System Flanigan: The larger public pension funds can't just walk away when companies aren't performing well. There'd be no market. Everybody would be on one side of the trade. So as fiduciaries, in the absence of the ability to sell, we've got to do something else. We try to have a dialogue to sensitize the management and boards of these corporations to the fact that there are problems, while conveying to them that we want to be long-term investors and join them in improving the value of the corporation. I think it's critical that we have driven toward the separation of management from the board, and toward the heavier reliance on outside directors to pick the right managers and incentivize and monitor them on our behalf. Hester-Amey: You can make clear to directors that they are the fiduciaries of shareholders, not of management. They are not there to be management's friends. They are certainly liable for the acts of management. They have to do something about the company for which they serve. We're not at all interested in picking board members, and we're not even interested in saying whether something is a good strategy. We're more interested in finding out if there is a strategy, what it is, and having someone monitoring the implementation. We're long-term shareholders. We have to give them all the rope that they require. This is a backward-looking process, and by the time we get there, things are already pretty bad. With those circumstances, you know, what's another year?

EDWARD V. REGAN Comptroller, New York State We have moved from entrepreneurial capitalism -- the Rockefellers and Carnegies -- to managerial capitalism and now to shareholder capitalism. We have a very elaborate new system -- we've been developing it for years. We'll be analyzing every company in the S&P 500 every quarter: adjusted for risk, for industry peers, looking at one- and five-year accounting and financial ratios. We set standards. In five-year return on investment, a company can't be doing worse than two-thirds of the S&P or their industry peers. The system is designed to drop out approximately 10% of the S&P 500. All this is loaded into a computer, and we can do it without much expense. Then our own investment staff narrows the list further, focusing not on past poor performers -- we know them from our computer runs -- but on who isn't changing their strategy, their management style. Then our consultant calls up former employees, former board members, Wall Street analysts, and visits the company and writes a report. The goal is to get under the corporate culture: Are they really changing, do they understand, have they opened up the process -- or are they just sitting there making excuses and now and then announcing a layoff or a plant closing? Is there a strategy that appears to be healthy and creative? The point is to develop a systematic way of dealing with all potential underperformers, not just the ones that hit the headlines, and intercepting them before they've gone over the cliff. We're going to share our system with everybody, so they could take our methodology, our software program, and do it themselves. At any time you can call and say, ''Where is X Corp. in the process?'' U.S. tradition says power ought to be exercised in the most responsible way, in a very public manner, in a separate, uncollective fashion. We're not a Bundesbank, keiretsu society here. We have big suspicions of concentrations of power. If I were to call Calpers and Florida and Texas and Wisconsin and say, ''Okay, guys, we've now got 22% of something, let's do something about it,'' people would say, ''Wait a minute, here! What's going on?'' I'm very nervous about the power that's being exercised even in a scattered, fractured way -- worried enough to be not necessarily a fan of the new SEC communications rules ((which relax restrictions on shareholders communicating with one another)). I'm not sure it's been thought through enough. I'm nervous that communication could go further and become collective action, where the power that now exists perhaps, conceivably, could be abused. Who knows, if you ever had a huge public movement out there, a major concern -- like Dow Chemical making napalm? When other ((fund managers)) call me, I make notes and tell them I'm doing it. And the notes are available to anyone.

ROBERT POZEN General Counsel and Managing Director Fidelity Investments We apply a rigorous cost/benefit analysis in which we try to think whether the time, resources, and energy we put in are likely to achieve worthwhile benefits for our clients. The clearest cases for activism are those where we think the price of a company in a merger, acquisition, or tender offer is too low. If we can get the price increased, that goes directly to our clients' bottom line. At the other end of the continuum, we have things like whether we should have a chairman who is also CEO, or part-time chairman, or outside chairman. In our view that's a procedural frill that doesn't systematically go to providing value to the shareholders, though in a particular case it might be important. Another example is a shareholders' advisory committee, which we view as a little confused. Either they won't do anything, or alternatively they will do a lot -- and the question is, what's their role vis-a-vis the board? We don't see that as something that's systematically going to lift the value for corporate shareholders. Public funds will tell you that they have the same take on it, but for a private management company both the fee competition and the performance competition are so rigorous that we feel that the market holds us to a much higher level of discipline than public funds. The times when we become most activist are when we get drawn into it, either because people propose things that we think are not in the interests of the shareholders, or because companies have such a low level of management that we almost feel we have gone beyond the pale with our investment. In some cases we have a big position, and our managers may feel there is such a great potential if the CEO would only focus on making money or paying out a dividend rather than making every new acquisition you can think of. Sometimes our positions are so great that it's not easy to get out without affecting the price. Sometimes we really feel this is a situation with great potential -- we don't want to sell out. We think by modest changes here or there we could really do a lot better. The takeovers of the Eighties had lots of problems, but they surely enforced a level of accountability that was very dramatic. One reason there has been more institutional activism is that there has been a bit of an accountability vacuum in the 1990s. I don't think we should kid ourselves and think that a shareholder resolution has the same effect as a tender offer. I think more communication among shareholders, and between shareholders and management, is now playing some of the disciplinary role that the threat of takeovers used to play.

LUTHER JONES Corporate Affairs Manager Florida State Pension Fund We have no internal research per se. Because of computerization we're in a much better position than even five years ago to keep up on a minute-by-minute basis with what's happening in the market, to be in constant communication with the top Wall Street analysts. Ten years ago we were able to do phone conversations, but it was pretty much limited to that. Since October ((when the SEC adopted its new communication rules)) we can get other large shareholders on the phone and talk to them about any corporation that we have questions on, without that act being viewed as a solicitation. So we'll have more of a true forum on corporate reform. Not just fund managers -- you'll have the corporations themselves. Analysts who follow the company or industry will be major players. There's been a lot of talk about ''destructuring'' the corporation -- about what the size of the corporation should be. The ability to generate return on equity for shareholders -- not necessarily asset size -- should be the determinant of the proper size of a corporation. They may need to downsize; maybe they're trying to be in a wrong business. In an inflationary environment, building an empire makes sense, because inflation will increase the value of those assets. In a deflationary environment the issue is whether you have the right assets that can generate a higher return. The key, from our standpoint, is to get the directors thinking about that. We've been strong advocates of directors and management having a significant amount of their wealth in the stock of the company, so that we know where the focus of their attention is going.

CHARLES H. BRUNIE, Chairman GEORGE LONG, Chief Investment Officer, Oppenheimer Capital Long: Part of our research process is to look for a shareholder-oriented management -- one that's allocating capital efficiently. As a consequence of having management on our side, we tend to take very large positions, in excess of 10% in our largest holdings. We're really investing alongside management. So managements have tended to listen to us. When we invest in a company, we look at it as if we're buying the whole company. Not many people look at it that way. Brunie: I remember going to a meeting of one of our large stocks -- it was Avon. The CEO and CFO were there, two or three outside directors, and maybe 20 holders. Three of the holders were state and local pension funds, and all they talked about was, How many minorities are you going to have? How many women are going to be on the board? Purely political questions. It wasn't about corporate governance at all. A few of us finally said, ''Let's get some questions here that are relevant.'' Long: A lot of them don't know how to think of it properly. They're not schooled in the investment process. We would like to voice our opinion directly to management, to interact with management. Hopefully they also have a good board, but we can make the decisions ourselves about whether management is doing the right thing. The public funds want the corporate boards to make those decisions that they don't really have the wherewithal to evaluate. We feel that we do have the wherewithal. Brunie: With all the legal problems and liability stuff, who would want to be on a board? To get directors who are going to be activists -- I don't see it. I have a friend who went on a board as a favor, and he's being sued for $20 million because of false accounting. He didn't know it.

DALE HANSON, CEO, California Public Employees' Retirement System What we want is, No. 1, to make sure we are acting responsibly. I don't want this sudden rolling of heads of CEOs to be seen as the natural outcome every time shareholders are upset. Our whole thrust has been the empowerment of boards to do what we were always led to believe boards were supposed to do: provide oversight to management -- the hiring, the oversight, and if necessary the firing. I don't think it's healthy for the country to be driven by the articulations of maybe six activist funds. What's healthy is for all shareholders, and some of these are very large shareholders, to begin to assert the concerns they may have. When ((former American Express CEO and chairman)) Jimmy Robinson was initially successful in retaining the chairman's spot, we had a number of people call us and ask if we were going to speak out. Our response was, ''Has the cat got your tongue?'' It becomes very comfortable to expect that those who are identified as activists will always be out there. Some of these money managers were holding very big positions in American Express, and they have to do it as well. And they did it. I'd love to be able to catch the IBMs sooner. Trying to keep track of 500 or 600 fish rather than 1,000 might be a little easier. The whole concept of relationship investing -- holding bigger stakes in fewer companies -- makes sense. But you've really got to make sure that the prospects of the companies are such that you want to hold a bigger stake. It's something that we're looking at very seriously and will be discussing with our board. We have talked about trying to establish something like the concept the Bank of England has for the promotion of nonexecutive directors. A number of public and private funds are working on a database of, say, people who may not currently be directors but would be ones you ought to consider. A lot of times corporations are looking for someone specific, for instance someone with a global marketing background. So you try to develop something on a little broader scale and reach down deeper into corporations ((for directors for other companies)). It doesn't always have to be the CEO. It may be the CFO or the operations person. I think there will be more agreement among institutions. One of the projects now is to try to come up with some standardized basis of performance evaluation. As that develops, there probably could be more focus. I've always said that this is an evolutionary process. But I have to admit that there has been a lot of revolutionary change in the past couple of years.