CalSTRS Enhances Corporate Governance Principles with Expanded Board of Directors Accountability Standards
Changes highlight dynamic nature of CalSTRS’ Governance Program through increased corporate board accountability to protect interests of long-term shareholders.
WEST SACRAMENTO, Calif. – The California State Teachers’ Retirement System last Thursday, July 14, approved policy changes to the Corporate Governance Principles which establish the high-level framework, proxy voting activities and shareholder priorities. The recent changes focus primarily on climate change risk management expertise, board diversity, governance structure and composition of public company boards, as well as holding corporate directors accountable to represent and protect the interests of long-term shareholders.
The changes emphasize CalSTRS support of boards of directors possessing a diverse mix of skills, attributes and experience, which includes the management of risks faced by various public companies. Having a wide and diversified range of skills, expertise and exposure to market trends is critical in maintaining the knowledge-base and accountability standards of corporate boards.
“These principles guide our proxy voting, which is one of the most important tasks we undertake as a long-term shareholder in support of our fiduciary duty to our members,” said CalSTRS Director of Corporate Governance Anne Sheehan. “This action reflects how important board diversity, structure and overall effectiveness are to good corporate governance, which in turn is the keystone to long-term, healthy corporate performance.”
One of the recently approved changes focuses on increasing board competency and expertise in climate change risk management. CalSTRS has identified this topic as a priority, especially in the wake of the global financial crisis, which caused investors’ expectations of boards to increase and with that, the importance of mitigating climate change risks and maximizing opportunities to impact and modify business practices. As a long-term shareholder, CalSTRS is continually assessing and mitigating portfolio risks, and has increasingly called for climate-competent corporate boards and directors. Additionally, last week in a separate discussion, CalSTRS committed $2.5 billion to a low-carbon global equity index, which further aligns with the organization’s climate-focused commitments under the COP 21 Paris climate change talks of 2015.
Board diversity is also highlighted as one of the recent policy revisions with the addition of language defining CalSTRS’ right to hold boards of directors accountable and, ultimately, voting against the directors, if after engagement, no action has been taken to address the lack of board diversity. According to Ms. Sheehan, “CalSTRS has a long-standing diversity initiative in place because we believe diversity is not simply a social issue. It is about mitigating risk, improving accountability, and enhancing the long-term sustainable value and company performance for shareholders. And, to be effective in impacting corporate performance, research shows that diversity starts at the board level and permeates throughout leadership and staff positions.”
CalSTRS also made several additions to the language addressing executive compensation standards. While many of the additions were implicit in the previous policy, increased emphasis was placed on equity awards outside the normal incentive plan, as well as the use of peer groups in determining executive pay structures. As executive compensation continues to be a perennial issue in the United States, it is vital that investors stay alert and vigilant to ensure there is an alignment between management interests and those of the shareholders.
Lastly, CalSTRS continues to stress the importance of a one-share, one-vote structure. A recent trend includes a number of companies entering the public markets with unequal voting rights, and even well established companies have issued new classes of stock which perpetuate these unfair voting structures. CalSTRS wants to make its position clear: Voting rights should be aligned with economic interests.
“CalSTRS’ Corporate Governance Principles are dynamic, living documents that are responsive to the marketplace,” Ms. Sheehan added. “We are constantly reevaluating our principles and policies to bring them in line with the market and relevant to the issues that are of utmost importance to shareholders, which reinforces our mission to support the financial security of California’s educators.”
The California State Teachers’ Retirement System, with a portfolio valued at $188.7 billion as of June 30, 2016, is the largest educator-only pension fund in the world. CalSTRS administers a hybrid retirement system, consisting of traditional defined benefit, cash balance and voluntary defined contribution plans. CalSTRS also provides disability and survivor benefits. CalSTRS serves California’s 896,000 public school educators and their families from the state’s 1,700 school districts, county offices of education and community college districts.