The value of CalSTRS engagements
Third quarter, 2020
Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation for the period of July 1 through September 30, 2020, are listed below.
Highlights from the 2020 proxy season
In the wake of the COVID-19 pandemic and the resulting market disruption, CalSTRS observed several notable trends in the 2020 proxy voting season, including the global transition to virtual annual general meeting (AGM) formats. The virtual meetings highlighted a heightened focus on board effectiveness, particularly with respect to crisis management and business continuity and resulted in greater shareholder attention on director attendance at meetings and effective management of human capital and supply chains.
Against this backdrop, we tightened our vote policy on board diversity and increased our scrutiny of executive compensation plans. As a result, we voted against 551 public company boards that had no gender diversity as we believe the effectiveness of these boards is seriously weakened since it has been shown that diverse teams financially outperform those that are not. In addition, we took a stronger stance on the alignment of pay and performance, resulting in us voting against 33% of U.S. executive compensation plans versus 15% the previous year.
Two notable actions this season include our votes against the executive compensation plans at The Walt Disney Company and Uber Technologies, Inc. due to concerns about poor plan structure and CEO pay magnitude. A significant number of other shareholders joined us in opposing the proposals at rates of 46% and 29%, respectively. While this is the first year that Uber has had an AGM since the company went public in 2019, the opposition vote toward Disney represents an increase over the previous year’s rate of 39%. According to a report by executive compensation consulting firm Semler Brossy, thus far in 2020 the average rate of support for executive compensation plans at U.S. companies has been over 90%. Disney and Uber fall well short of this industry average. Both votes send a strong message to the companies that investor scrutiny regarding their compensation is escalating and requires additional engagement and ultimately reform.
Protecting the rights of shareholders: Activities with regulators
This proxy season, we observed increased regulatory-related activity with respect to oversight of proxy advisors, shareholder rights in submitting shareholder proposals, and environmental, social and governance (ESG) issues generally. We have a vested interest in safeguarding shareholder protections within the rules and regulations of the U.S. and global securities markets. In alignment with our stewardship priority of corporate and market accountability, staff continues to monitor and respond to proposed legislation and regulations that affect institutional investors and, like many of our peers, have been alarmed by recent developments that threaten to weaken investor rights:
- We responded to proposed rule changes by the Securities and Exchange Commission. The proposed changes introduce substantive hurdles that impact the ability of investors to efficiently vote proxies in a timely manner, which is an extremely concerning development for investors who rely heavily on voting at company AGMs to influence robust corporate governance practices. Furthermore, the changes hinder shareholders’ ability to file proposals on issues that we believe are not being adequately addressed by company management.
- Alongside over 60 other nonprofits, institutional investors and businesses, we supported a letter from CERES seeking engagement with several federal financial regulators on climate change-related risks. The letter highlights CERES’ report, Addressing Climate as a Systemic Risk: A call to action for U.S. financial regulators, which examines the wide-ranging and compounding impacts of climate change on the stability of U.S. financial markets. We have and will continue to policy advocacy as part of our Low-Carbon Transition Work Plan.
- We submitted a letter to the Department of Labor on its proposed rule regarding ESG funds that appears to fundamentally distort why investors seek to integrate ESG issues into investment decision making. The stressed the importance of our responsibility to ensure that the corporations and entities in which we invest strive for long-term sustainability and achieve long-term growth. The proposed rule drew widespread attention and received over 1,100 comment letters. We will continue to engage the DOL on ESG-related issues in order to preserve capital flows to this growing and vital market need.
While the COVID-19 pandemic led to severe restrictions on travel and in-person events, we continued our record of strong representation at industry events through virtual participation:
- Pension Bridge 2020 panel “Climate Change Impact, Risks and Opportunities in the Investment Process“— North America’s largest investors and global asset managers met to strengthen relationships and discuss market trends and challenges.
- Bloomberg Green Festival panel “Investing in Change”— A five day event focused on core issues of climate action.
- MSCI Institutional Investor Conference panel “A Discussion on Diversity“— Institutional investors discussed current challenges and opportunities in the marketplace.
- Chief Executive Group panel “Money Talks: Linking ESG Performance and Executive Pay”— Organization focused on improving the performance of U.S. CEOs and corporate directors.
- New America Alliance California National Tour— Emerging and diverse investment managers met with staff to discuss how to partner with CalSTRS.
- Council of Institutional Investors (CII) Fall Conference panel “Diversity and Inclusion in Asset Management”— CII educated members about best corporate governance practices.
- Professional Risk Managers’ International Association/MSCI panel “Current and Future State of Diversity in Risk Profession“— Organization focused on risk management best practices.
- Money Management Institute/Investment Integration Project webinar “Guiding Investors in Addressing Income Inequality“— Organizations focused on system-wide shifts occurring in the financial industry.
- BlackRock Inaugural Global Sustainability Summit panel “Integrating ESG Considerations Into Core Investment Processes”— Held to inform BlackRock’s global clients.
We played an active role in these events to showcase CalSTRS’ leadership, build relationships that improve our collaboration within the industry and stay informed of global best practices in sustainable investing.
CalSTRS stewardship priorities updates
Launch of Pandemic Resilient – 50
In response to the COVID-19 pandemic, CalSTRS and a group of institutional investors formed a collaborative initiative called Pandemic Resilient – 50. The group of investors represents approximately $3 trillion in assets under management. The Pandemic Resilient – 50 will engage companies to understand the impact of those most affected by the pandemic. The group selected 50 global companies:
- Where employees were acutely affected by the pandemic.
- With high potential for reputational risk.
- That failed to provide adequate disclosure on changes in policy and practices resulting from COVID-19.
- Who were immediately impacted by the pandemic reducing demand for goods or services.
This multiyear engagement initiative will focus on board oversight of business continuity, employee health and well-being, and financial alignment as a means of promoting sustainable business practices and driving long-term value creation.
Dominion Energy, a CalSTRS-led Climate Action 100+ engagement company, agreed in July to sell its gas transmission (pipelines) and storage assets to Berkshire Hathaway Energy in a transaction valued at $9.7 billion. The company also announced it was cancelling the Atlantic Coast Pipeline (ACP). The ACP project was a 600-mile $8 billion natural gas pipeline owned by Dominion Energy and Duke Energy, another CalSTRS-led Climate Action 100+ engagement company. These decisions by Dominion and Duke align with the engagement requests by Climate Action 100+ investors for utility companies to move to a more electrified and renewable future. The engagement has resulted in the companies making commitments to net-zero emissions in their operations and demonstrating a strategic repositioning toward being resilient in a low-carbon future.
Early this summer, the CalSTRS-led Principles for a Responsible Civilian Firearms Industry investor collaboration met with major firearms retailers to discuss point-of-sale policies, including background checks, employee training and customer education. Private and public companies informed us that they require a background check to complete firearm transactions. Additionally, the companies say they have customized software that prevents a sale from processing without a successfully completed background check.
While engagements with companies have been positive, the data on United States gun sales raises concerns. Using data from the FBI, the group Everytown for Gun Safety found that gun sales in the U.S. reached record levels in spring and summer 2020 while the national background check system was overwhelmed with requests. The data indicates that 300,000 Americans may have acquired firearms without completing the required background check during the COVID-19 pandemic. Dubbed “The Charleston Loophole” in reference to a 2017 mass shooting in South Carolina, federal law allows firearms dealers to release a weapon if an FBI background check takes longer than three business days to complete. The graph below illustrates the sustained increase in sales starting in March 2020.
There are more than 50,000 federally licensed firearms dealers in the U.S.