Corporate Governance Best Strategies
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Transcript of Corporate Governance Best Strategies
Corporate Governance Best Strategies
Public Pension Financial ForumOctober 19, 2009
Aeisha MastagniInvestment Officer
• Second largest public pension fund in the United States
• Established over 96 years ago for the benefit of California’s public school teachers
• Serves the investment and retirement needs of over 833,000 plan participants
• Assets under management of approximately $130 billion
• Invest in public equity, fixed income, real estate, and private equity
• Global investor across all asset classes
Investment Office
Corporate Governance Unit
CalSTRSCorporate
GovernancePrograms
ActivistFund
Managers
PortfolioCompany
Engagement
ProxyVoting
Legal,Regulatory
andLegislative
Support
CG Engagement
ClimateRisk
Management
CorporateBoard
Diversity
ExecutiveCompensation
TraditionalGovernance
Issues
• CalSTRS has ~ $3 billion committed to this equity investment style
• Funds in the United States and Europe
• Strategies include small- , mid- , and large-cap stocks
What is an Activist Manager to CalSTRS?
• Managers hold concentrated portfolios (8 to 12 securities)
• Take large stakes in companies (up to 10% in some cases)
• Look for underperforming companies with sound fundamentals
• Manager acts as a catalyst to improve the company by engaging management and the board
• CalSTRS is an active long-term asset owner
• The majority of CalSTRS holdings are passively indexed
• CalSTRS engagements are intended to be proactive
What do we engage companies on?
• Climate Risk Awareness & Management• Diversity• Executive Compensation• Corporate Governance
– Classified Board– Majority Vote for Directors– Auditor Ratification– Poison Pills
Climate Risk Management
• Goal is to be proactive in mitigating climate risk by engaging companies to disclose their efforts on managing this risk
• CalSTRS focuses on high-risk industries– Electric Utilities– Oil & Gas– Automobile– Insurance
• Variety of sources used for risk disclosure analysis
Climate Risk Engagement
• Active member of several coalitions focused on improving environmental disclosure– Global Warming Shareholder Campaign– Carbon Disclosure Project
• Participate in forums organized to address the issue– UN Leadership Forum on Climate Change– International Investor Forum on Climate Change– Governors’ Global Climate Summit
• File shareholder proposals in collaboration with other investors
Why Diversity?• Women Board Directors (WBD) align with
strong performance at Fortune 500 Companies
• Companies with top quartile WBD rankings, outperformed companies with bottom quartile WBD rankings by:– 53% in ROE– 42% in ROS– 66% in ROIC
• Link between WBD and corporate performance holds across industriesSource: Catalyst
Corporate Board Diversity
10%
2%
84%
4%
Black Asian
White Hispanic
14%
5%
66%
15%
Black Asian
White Hispanic
Board Seats by Ethnicity US Population by Ethnicity
Female Representation
No Female Directors, 41.63%
1 Director, 34.12%
2 Directors, 17.49%
3 Directors, 5.16%
> 4 Directors, 1.28%
Female representation in the Russell 3000
Diversity Engagement
• Filed eight shareholder proposals• Six withdrawn after successful negotiations
with the companies
– Digital River– Hansen Natural– Waddell and Reed– Kirby Corp.– Eagle Materials– Helix Energy
• Proposals at Liberty Global and NutriSystems went to vote
Executive Compensation
• Very active in monitoring and engaging companies on their executive compensation practices
• In May 2009, CalSTRS published Principles for Executive Compensation and Model Policy Guidelines– Sent Principles and Guidelines to our largest 300
companies– Follow-up communications with the companies
has been positive and constructive
• Strong supporter of advisory votes on executive compensation
What do we look for?
• Performance-based pay with metrics that are indicative of value creation– Look for metrics with a capital charge (Return on
Invested Capital)– Not just share price appreciation or revenue growth
• Multi-year performance periods and vesting periods of equity awards
• Evaluate the “peer group” used by companies to analyze performance
Executive Compensation
Proxy Voting Program
• Authority to vote proxies is delegated to CalSTRS staff by the board
• Staff votes proxies based on guidelines approved by the CalSTRS board
• Votes all domestic proxies in-house along with U.K., Australia, and Canada proxies
• Europe, Asia, and Far East proxies are voted by fund managers who follow CalSTRS guidelines
Summary of Proposals
• Election of Directors – Voted For 49% and Against 51%
• Ratification of the Auditor– Voted For 89% and Against 11%
• Compensation Plans– Voted For 39% and Against 61%
• Shareholder Proposals– Voted For 82% and Against 18%
Legal Support
• Corporate Governance assists the CalSTRS Legal Dept. with securities class actions
• Often try to seek lead plaintiff status
• Corporate Governance files Proofs of Claims
Regulatory and Legislative Support
• Comment on proposed legislative bills that are likely to effect CalSTRS
• Comment to regulatory bodies, such as the SEC, NYSE, and PCAOB on actions or rule change proposals
• 2009 Comment letters to the SEC:– Short Sale Rule– Proxy Access– Proxy Disclosure and Director Qualifications– Pay-to-Play
Divestment/Engagement
• CA Legislature passed AB 221 and AB 2491 calling for CalSTRS to divest from companies doing business in Sudan or Iran
• CalSTRS sent letters to identified companies requesting an update on their activities in the two countries
• Staff is evaluating the responses and arranging face-to-face meetings with several companies
Conclusion
• CalSTRS uses Corporate Governance as a tool to mitigate portfolio risk
• We are fiduciaries to the public school teachers and taxpayers of California
• As long-term investors, we at CalSTRS believe it is our fiduciary duty to be active owners and work to reduce portfolio risk where we can