Blog entry Jack Ehnes

The Importance of Good Governance

With the recent allegations of corporate misconduct, fraud and bribery, corporate accountability has become a high-profile issue. Media reports of questionable leadership underscore the role boards of directors play in the long-term growth of publicly held companies. Concerned investors like CalSTRS, want assurance that governance safeguards and effective internal controls are put in place to mitigate any future risk.

There are many critical aspects to look at when discussing how best to address a breakdown in leadership accountability or governance practices. To better facilitate the long-term value of returns, CalSTRS has undertaken a variety of corporate governance initiatives and has sounded this message in political halls, board rooms and court rooms. It is of the utmost importance that our efforts around these issues remain at a constant vigilance.

A Call to Action

As the nation’s largest teacher pension fund and 11th largest public pension fund in the world, it is the corporate responsibility of a long-term, patient investor such as CalSTRS to use our influence to advance the highest ethical standards. You may already be familiar with the recent actions of employees at a London tabloid, News of the World, where reporters allegedly eavesdropped on cellphone messages of royal family members, celebrities, crime victims and military personnel.

In reaction, CalSTRS used its voting shares to send a message regarding our opposition to the reelection of News Corp. directors including the Chairman, Rupert Murdoch. While the outcome of News Corp.’s annual meeting, where most of the existing board members will remain, is unfortunate. We believe a high number of withholds for certain directors from unaffiliated shareholders signals a strong desire for a more independent board. We believe that two-thirds of a company’s board should be independent.

CalSTRS acknowledges using voting shares at a company like News Corp. to engage structural changes such as this can be a challenging task; however, CalSTRS believes that all organizations should be held to the same leadership standards as other companies in our portfolio. This recent scandal illustrates the need for the highest ethical and governance standards.

When a share in a company is purchased shareholders – and companies – should expect an on-going dialogue that is open to risk disclosure and ensures corporate governance is managed effectively and appropriately. It is the foundation with which our members depend on to secure a financial future in a challenging market.

The State of Diversity

Another important consideration in assessing effective board conduct is the diversity of its members. According to research from the Rock Center for Corporate Governance, members of corporate boards of the largest American companies are primarily white men. Women hold only about 15 percent of the seats on Fortune 500 boards and the same percentage of key board committee chairs. Minorities hold approximately 12 percent of Fortune 500 board seats, with African-Americans in 7.4 percent of seats, Latinos in 3.1 percent of seats, and Asian-Americans in 1.5 percent of seats. Women of color fare particularly poorly in board appointments, holding only 3 percent of board seats.

CalSTRS believes that directors with fresh ideas, differing backgrounds and focused skill sets are an important safeguard against the kind of group think that played a significant role in the 2008-09 financial crisis. To better champion this issue, CalSTRS along with CalPERS pioneered a strategy for diversity through the creation of an online clearing house of diverse board candidates. The Diverse Director DataSource, or 3D is an online resource boards can use to find qualified and diverse board candidates.

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