Philosophy
The California State Teachers’ Retirement System (CalSTRS) is committed to holding and managing equity investments and to exercising the shareholder rights appurtenant to those investments, all for the benefit of its participants and beneficiaries. It is the fiduciary responsibility of the Teachers’ Retirement Board (TRB) to discharge its duty in the exclusive interest of the participants and beneficiaries and for the primary purpose of providing benefits to participants and their beneficiaries. The TRB should defray the reasonable expenses of administering the Teachers’ Retirement Fund; the investment policy of the Fund should reflect and reinforce this purpose. The TRB views its corporate governance role as that of a catalyst for enhanced management accountability, disclosure and performance. The objective of the TRB’s corporate governance effort is to enhance long-term shareholder returns.

CalSTRS is a long-term investor; its long-term strategy is demonstrated through its significant commitment to passively managed portfolios in its three largest asset categories: U.S. Equities, Fixed Income, and non-U.S. Equities. CalSTRS’ thrust in corporate governance is to maximize the longer-term value of the shares, consistent with its role as a significant capital allocator.

Statutory Authority

Education Code Section 22354 requires the Board to retain investment managers who are experienced and knowledgeable in corporate management issues to monitor corporations whose shares are owned by the System plan and to advise the Board on the voting of the shares owned by the plan and on all other matters pertaining to corporate governance.

While CalSTRS is not subject to the Employee Retirement Income Security Act (ERISA), applicable provisions of both the California Constitution and the Education Code make clear that CalSTRS’ commitment to corporate governance is a diligent exercise of its fiduciary responsibility. As observed by the U.S. Department of Labor:

“In general, the fiduciary act of managing plan assets which are shares of corporate stock would include the voting of proxies appurtenant to those shares of stock. … Moreover, because voting such proxies involves plan asset management, section 403(a) requires that plan trustees have the exclusive authority and responsibility for voting these proxies…”

Thus, CalSTRS’ legal authority for corporate governance springs from its fiduciary concerns as a prudent investor and the statutory obligation imposed on it by the Legislature.

Policies

The following represent the approved policies to be used in the exercise of CalSTRS’ shareholder rights and the implementation of its Corporate Governance Program. The policies are designed to set boundaries for the management of proxies and other corporate actions. As with all other plan assets, these corporate governance policies cannot be altered without explicit direction from the TRB.

1. Laws and Statutes: The Corporate Governance Program (Program) for the California State Teachers’ Retirement System (CalSTRS) will be managed in a prudent manner for the sole benefit of the CalSTRS participants and beneficiaries, in accordance with the Teacher’s Retirement Laws and other applicable State statutes.

2. Regulations: For U.S. equities, the Program will comply with the rules of the Securities and Exchange Commission (SEC), equity exchanges, and other regulatory agencies. For non-U.S. equities, the Program will comply with the appropriate regulatory body in the respective country.

3. Program Objective: The Program shall be managed to provide long-term enhanced shareholder value through clear and certain disclosure and accountability. Enhancing shareholder value shall always take precedence, non-financial or collateral benefits notwithstanding.

4. Program Components: The Program shall consist of the following components:

a. Voting of Proxies: CalSTRS will make a best effort to vote all U.S. and non-U.S. proxies; exceptions may be made based on the legal requirements or local conventions of certain markets and where practical difficulties make an informed and meaningful decision impossible. Voting of proxies shall be in conformance with all approved documents such as the “Financial Responsibility Criteria for Corporate Investments.” (Attachment A)

b. Annual Workplan Companies: CalSTRS will continue its practice of identifying for enhanced shareholder action, on an annual basis, companies in which the System holds a significant passive investment position that are underperforming applicable performance benchmarks. In the organization and completion of this Workplan, staff shall consider the market value of the investment, CalSTRS’ ownership percentage, and the resources required and the direct cost involved in seeking a desired result.

Enhanced shareholder action” includes, but is not limited to:

• Informal or formal expressions of concern to company management concerning corporate governance practices that are adversely affecting shareholder value;
  
• Development of shareholder proposals, either individually or in concert with other institutional investors;
  
• Participation by CalSTRS in litigation, consistent with its policy with regards thereto, in the event that the subject company’s underperformance is related to matters that are or may become the subject of such litigation.

c. Corporate Governance Organizations: CalSTRS will continue its active participation in the Council of Institutional Investors and in other forums designed to have an impact on corporate governance practices.

d. Securities Litigation: CalSTRS will manage its interests in securities litigation matters as assets of the trust fund with the goal of enhancing the long-term value of the portfolio consistent with the Investment Management Plan. Consistent with this goal, CalSTRS will pursue the following objectives:

1) Increasing the net monetary value of settlements;

2) Increasing the long-term value of shares in a company subject to shareholder litigation held in CalSTRS’ portfolio;

3) Deterring wrongful corporate conduct that undermines the integrity of the financial markets.

In most cases, CalSTRS’ interests in securities class action litigation claims will be adequately addressed solely through passive participation as a class member. However, in select cases a higher level of involvement will be appropriate, including:

• Moving for Lead Plaintiff Status: In securities class action cases where CalSTRS’ potential damages exceed $5 million, or in other cases where there is an exceptional opportunity to preserve or enhance the long-term value of a significant portfolio holding or to deter wrongful corporate conduct, CalSTRS will consider moving for lead plaintiff status. If staff concludes that seeking lead plaintiff status is appropriate, the case will be referred to outside counsel for evaluation and recommendation to the Subcommittee on Corporate Governance/Investment Committee. Such counsel shall be selected and compensated on a retainer basis to evaluate the case, make a recommendation thereto, and to represent CalSTRS in the filing of a motion for lead plaintiff status if such action is approved, but shall not otherwise be eligible to represent CalSTRS as lead class counsel if CalSTRS is selected as lead plaintiff.

A determination on whether to seek lead plaintiff status shall be made by the Subcommittee on Corporate Governance/Investment Committee. If, pursuant to such Subcommittee/Committee approval, lead plaintiff status is sought and approved by the Court, CalSTRS will conduct a competitive selection of lead class counsel in order to secure the most qualified counsel at a fee structure that aligns the interests of the class and lead counsel.

• Alternatives to Lead Plaintiff Status Requiring Subcommittee/Committee Approval: In some instances where seeking lead plaintiff status is not sought or where the court has denied a motion therefore, CalSTRS may consider the following alternatives: 1) Participating as a co-lead plaintiff with other institutional investors; 2) Opting out of a class and filing a separate securities action in state or federal court; 3) Filing a shareholder derivative claim in state or federal court; 4) Formal or informal intervention in pending litigation and/or filing objections to inadequate class action settlements. Such actions shall require the approval of the Subcommittee on Corporate Governance/ Investment Committee following an evaluation by staff and outside counsel.
  
• Litigation Alternatives Delegated to Staff: If, in a particular case, the seeking of lead plaintiff status or the above alternatives is either not deemed to be appropriate or is not approved by the Court, but staff believes that some active involvement by CalSTRS would be consistent with the goal and objectives of this program, on the recommendation of the Chief Counsel and approval of the Chief Executive Officer CalSTRS may: 1) Attempt to persuade another claimant whose interests are aligned with CalSTRS to seek lead plaintiff status; 2) File briefs or motions with the Court concerning the selection of lead plaintiff, lead counsel, or other litigation matters; 3) File a notice of appearance and more actively monitor the case; or 4) Participate in settlement negotiations or consult on a proposed settlement.
  
• Non-Litigation Alternatives: In considering the appropriate response to a company that is subject to shareholder litigation, CalSTRS will evaluate the pursuit of alternatives to litigation that address the underlying cause of the company’s problem. For example, contacting appropriate regulatory and/or law enforcement agencies about potential prosecution of wrongdoers may deter similar conduct in the future that undermines the integrity of the financial markets. As another example, filing shareholder resolutions or negotiating for corporate governance changes like the addition of independent directors or the creation of an independent audit committee may address the problems that lead to the litigation and could aid in the long-term recovery of the company and the value of its stock.

e. Statement of Investment Responsibility: The “Statement of Investment Responsibility” (Attachment B) remains in effect.

5. Business Plan: The Program will be managed in accordance with a business plan which will be prepared on an annual basis and will describe CalSTRS’ objectives for the next twelve-month period.

6. Monitoring: Staff shall monitor adherence to the corporate governance policy for all internal and external managed portfolios.

7. Authorized Access: Authorization memoranda, delineating access and authority levels relating to CalSTRS corporate governance related business, will be provided to the master custodian, staff and proxy voting intermediary. Whenever there is a change in authorized personnel a written notice shall be provided to each affected party, within 48 hours of change.

8. Delegation of Authority: The Chief Investment Officer (CIO) or designee has the authority to manage the Corporate Governance Program and may use other investment personnel to implement these policies.

9. Decision-Making Authority: Subject to the review and approval of the Investment Committee and the TRB, the Subcommittee on Corporate Governance shall:

• Review and make recommendations with regard to this Policy, the Financial Responsibility Criteria for Corporate Investments (Attachment A), the Statement of Investment Responsibility (Attachment B);
• Receive reports from staff on the status of current proxy votes, and recommend to the Investment Committee action to be taken on votes which do not fall within the guidelines;
• Direct development of the Annual Corporate Governance Plan;
• Receive from staff annual summaries of votes cast on behalf of the Board;
• Act as liaison between the Board and the Council of Institutional Investors;
• Monitor developments in the corporate governance area that may affect the value of shares held by the System;
• Develop and propose various actions related to corporate governance, including, but not limited to, shareholder resolutions, criteria for selection of companies for focus lists, criteria for entering into litigation related to securities fraud and/or to accomplish the purposes of the corporate governance policy.

10. Reporting: Staff shall present quarterly reports to the Sub-Committee on Corporate Governance on all actions taken to implement the corporate governance policy, including corporate actions, litigation, and proxy votes cast.

Approved by the Subcommittee on Corporate Governance: October 13, 1999
Adopted by the Investment Committee: October 13, 1999

Amended by the Subcommittee on Corporate Governance: January 5, 2000
Adopted by the Investment Committee: January 5, 2000