Majority Voting Standard Gains Ground, CalSTRS Corporate Governance Annual Report Shows

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The 2nd annual report shows that 92 out of 100 companies engaged adopted majority voting.

Director of Corporate Governance, Anne Sheehan

The movement in the adoption of a majority voting standard and the gains made in our efforts on board diversity speak to the tenacity of our staff and the effectiveness of engagement in establishing good governance.

The California State Teachers’ Retirement System’s (CalSTRS) Corporate Governance 2014 Annual Report shows its engagement with small-cap companies yielded remarkable progress in the adoption of majority voting standards for the election of corporate directors.

The Corporate Governance 2014 Annual Report reflects four years of work with small-cap companies—those with a capitalization of $2 billion or less—to adopt the majority-vote standard. The standard requires directors to receive a majority of shareholder support to be elected to the board.

The campaign focused on small-cap firms because only one-third of the companies in the Russell 2000 index maintain a majority-vote standard. CalSTRS targeted 100 such companies. The companies adopting a majority-vote standard without a CalSTRS proposal filing increased by 37.5 percent in 2014 over 2013. When CalSTRS did file a proposal, 26.1 percent more companies adopted the standard in 2014 than did the previous fiscal year.

“The strength and impact of our program is visible throughout the report,” said CalSTRS Director of Corporate Governance Anne Sheehan. “The movement in the adoption of a majority voting standard and the gains made in our efforts on board diversity speak to the tenacity of our staff and the effectiveness of engagement in establishing good governance.”

On board diversity, CalSTRS, in collaboration with CalPERS, sent letters to the 131 California-based portfolio companies that lacked women on their boards of directors. The letter offered assistance in recruiting more diverse directors. This was the first such effort for the two pension funds. The call-to-action letter received 35 responses, with 15 companies adding at least one woman to their boards of directors.

The companies were identified in a 2013 report, UC Davis Study of California Women Business Leaders. Most of the 131 companies have been listed throughout the study’s three-year history and CalSTRS previously engaged five of the companies listed in the 2013 report.

The report also highlights CalSTRS’ efforts to address say-on-pay issues. Say-on-pay is the provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that requires companies to submit their executive compensation plans to a non-binding shareholder vote at least once every three years. Companies such as Oracle, Chipotle, Guess? and Hasbro are some of the firms whose compensation plans were soundly rejected by shareholders.

“The significant margin by which high-profile companies lost their say-on-pay votes did not happen passively. It took the perseverance, high-energy and motivation by our program’s staff to change corporate norms,” Ms. Sheehan added. “We hope the companies whose say-on-pay votes failed will see this as an opportunity to bring their executive compensation into greater alignment with the shareholder base.”

The Corporate Governance 2014 Annual Report also covers CalSTRS corporate governance engagement efforts in:

  •     Sustainability in investments, often referred to as environmental, social and governance (ESG) considerations.
  •     CalSTRS’ in-house proxy voting and transparency activity.
  •     The progress made in the use of activist managers to bring about governance change.

Strategies are in place to build on the achievements the CalSTRS Corporate Governance Program has attained to engage companies and fellow investors. In the near future the program will publish best practices documents aimed at lowering engagement costs and at reducing the influence of outside firms such as proxy advisory services.

The California State Teachers’ Retirement System, with a portfolio valued at $187.1 billion as of October 31, 2014, 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 868,000 public school educators and their families from the state’s 1,600 school districts, county offices of education and community college districts.

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