The California State Teachers’ Retirement System (CalSTRS) was established in 1913 for the benefit of California’s public school teachers. This year we celebrate our 100th anniversary serving the retirement needs of our 862,000 members and beneficiaries. The long-term nature of CalSTRS liabilities, and our responsibilities as fiduciaries to the educators of California, makes us keenly interested in governance issues that affect our investment portfolio. We expect the companies in our portfolio to be responsible stewards of our capital and we have an obligation to effectively engage those companies while balancing risks and rewards.
This year, CalSTRS published its inaugural corporate governance report to communicate our governance program priorities to the investment community. While we pursue a variety of initiatives throughout the year, our engagements focused on four main themes:
- Executive compensation
- Majority vote standards
- Diversity of corporate boards
- And sustainability
Although some could argue these topics are very different, we at CalSTRS believe there is a central tenet behind each. It is accountability.
In the governance arena executive compensation is one of those initiatives that can be traced directly to the bottom line. Compensation to executives can be measured as these payments come directly out of the profits—or lack thereof, in some circumstances—a company generates. In an era with ever climbing pay scales, CalSTRS has continued its work to align pay with performance. Too many compensation programs are structured with little downside and almost unlimited upside to executives. CalSTRS, like other shareholders, has to suffer the ups and downs of our portfolio investments. Executives on the other hand don’t always have true dollars at risk and in down years when equity awards may not vest, they get a chance to start over the following year generally with a new set of grants. Shareholders do not get a reset button. For all these reasons we continue to focus on executive compensation as a primary part of our engagement program.
It is almost unbelievable that the United States is one of the few remaining countries where plurality voting for the election of directors is the default standard. In an election where directors are running for a board seat unopposed, we haven’t made a shift to majority voting which would require every director to garner the support of at least half of its shareholders. Investors pushed for a majority vote standard to be included as part of the Dodd-Frank Wall Street Reform Act, but in a last minute compromise, the provision was removed. Since then, CalSTRS has engaged hundreds of companies in an effort to get issuers to adopt a majority vote standard. Directors should be able to garner at least fifty percent support from their shareholders, and if they can’t, maybe they shouldn’t be in the boardroom.
Corporate Board Diversity
Similar to majority voting, it is amazing that the United States lags so far behind other developed nations in terms of diversity in the board room. In a world where women make up more than half of the population and minorities continue to increase, it is unfathomable that these two groups represent such a small percentage of corporate board seats. Even more shocking—these statistics have barely moved in the last decade. CalSTRS is on a mission to try and change this dynamic and be part of a solution. We have created the Diverse Director Datasource to house board-ready candidates that are not the typical ex-CEO. We are also having more and more discussions with companies about turnover in the boardroom because, let’s face it—you can’t get diversity in the board without some empty seats to fill.
Sustainability is an issue that has grown from a debate about the merits of global warming into an in-depth discussion about the many environmental and social risks that can impact investment portfolio value. As a large, diversified global investor, CalSTRS recognizes that it needs to be mindful of its exposure to sustainability-related risks. Our engagement efforts focus on those risks that can have a substantial influence on the value of our portfolio. That’s why we engage companies on issues, such as deep-water oil and gas production, hydraulic fracturing, and the efficient use of energy. Not only are we trying to make sure that the companies we invest in are taking all necessary precautions to manage risks, we also want to ensure they are maximizing profits for shareholders by minimizing costs wherever possible. We are the longest of shareholders and we want to be sure that companies are not sacrificing long-term gains for short term profits.
Every year, we elect directors to serve in corporate boardrooms on our behalf. We expect them to efficiently oversee our capital and effectively carry out their duty to shareholders. Whether designing a compensation plan that aligns executive interests with those of shareholders, or sustaining short-term investment returns without sacrificing long-term performance, CalSTRS engages companies because we have an obligation to ensure the retirement needs of the teachers of California now and into the future.