Passive investor: Active owner


Passive investor: Active owner Ethical BoardroomBy Anne Sheehan – Director of Corporate Governance, California State Teachers’
Retirement System (CalSTRS)



“As long as there are teachers in California, we are going to be investors in the capital markets,” is something Christopher J. Ailman, our chief investment officer at CalSTRS, always says. CalSTRS literally owns the market, with stakes in more than 8,000 companies around the world. Although we may be passive investors, we play a prominent role as active shareowners.

With a 104-year history of providing retirement benefits to California’s educators and investing across the global marketplace, CalSTRS consistently emphasises our long-term investment focus and related strategies. More than 914,000 California educators and their beneficiaries can rest assured that CalSTRS will be here to provide secure retirement benefits well into the future. As active owners, we frame our future – and the future of the capital markets – by advocating for best-in-class governance on a global scale.

Even given our $213.7billion fund size, CalSTRS often owns less than one half of one per cent of a globally traded company. On the other hand, California ranks as the sixth largest economy in the world and, as the largest teacher-only pension fund, CalSTRS is looked to as a powerful voice in the public markets. While we prefer behind-the-scenes efforts, we will not hesitate to engage publicly if companies maintain outdated, inefficient practices that are detrimental to their performance.

It all starts in the proxy

CalSTRS treats proxy votes like any other plan asset and exercises our right to vote to enhance shareholder returns. For US companies, the proxy is the first step in engagement with shareholders. The proxy not only serves as a compliance document, it’s also an effective communication tool.

In 2016, CalSTRS voted on 76,260 individual proposals – 24,818 from US companies and 51,442 from global companies. As active owners, CalSTRS uses a combination of analysis, research and dialogue with relevant parties, as well as a set of defined principles, to provide a full perspective of issues prior to voting. The power of the proxy vote lies in its ability to create any necessary changes that enhance a company’s long-term shareholder value.

Shareholder proposals turn up the active owner’s volume 

As an active owner, CalSTRS has a vested interest to safeguarding the long-term performance of more than 8,000 companies in our portfolio as we fulfill our duty to pay teachers’ pensions. Well-governed companies are more likely to allocate capital efficiently and productively. Promoting good corporate governance improves companies’ long-term value proposition and addresses investor concerns about whether or not a company is acting in their best interest. Private dialogue may also focus on board diversity, voting rights structure, risk management, capital allocation, sustainability awareness, executive compensation or myriad issues that may impact a company’s performance.

“By maintaining an active seat and a strong voice at the table, active owners can weigh-in on changes that could impact the long-term financial health of their respective portfolios”

Board diversity is a governance issue that has garnered success through the use of private engagement. Diversity is not only a social issue – it’s a risk that should be mitigated and an opportunity to provide improved returns. In fact, McKinsey & Co research shows that companies with more female executives in decision-making positions continue to generate stronger market returns and superior profits. The business case for diversity is evident in the rapidly changing demographic profile of the US, as well as the continuing rise in purchasing power of women and various ethnic and racial groups. Diversity offers asymmetric protection, including superior upside in growth markets, allowing companies to make better decisions about strategy and manage risks.

There is a direct correlation between diversity and performance. In the McKinsey study Why Diversity Matters, gender diverse companies were 15 per cent more likely to have financial returns that were above their national industry median and racially/ethnically diverse companies were 35 per cent more likely to have financial returns. As part of our commitment to advancing board diversity, in 2016 CalSTRS engaged with 87 California-based companies, resulting in 12 companies either appointing women to their board; amending their policies to commit to diversity; or expanding their search to include women or minority candidates.

Although we prefer quiet, behind-the-scenes engagement, sometimes companies are not receptive to our suggestions.  Through proxy voting and filing shareholder proposals, active owners can escalate their engagement efforts by going public with their unresolved concerns.

The power of proxy voting and shareholder proposals is evident in CalSTRS’ effort to advance the majority vote standard for director elections. Majority vote standard endows shareholders with the ability to 1) remove poorly performing directors, and 2) increases directors’ accountability to shareholders, who are, in fact, the company’s owners. Since 2010, we’ve engaged with approximately 100 companies annually to adopt a majority vote standard. Since the beginning of this initiative, more than 500 companies in the Russell 2000 index have adopted a majority vote standard for their director elections. This effort exemplifies the acceptance among the shareholder community that majority vote standard is a governance best practice.

Active owners in the marketplace

Asset owners with a large stake in the health of capital markets have a keen interest in the rules and regulations that govern the securities markets in the US and globally. A fair and efficient market is key to CalSTRS’ success as a long-term investor. Engaging policymakers through letter writing and committee membership puts active owners on the frontline of ensuring shareholder protections are safeguarded.

Additionally, responding to proposed regulation and legislation is a vehicle for shareholders to provide influence and education on the potential impact that proposals may have on their investments. Therefore, it’s imperative that active owners consistently provide input to regulators and industry bodies, such as the US Securities & Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB).

By maintaining an active seat and a strong voice at the table, active owners can weigh in on changes that could impact the long-term financial health of their respective portfolios.

But no one passive investor-active owner can do the work alone.

Collaborating across the active owner peer network

As stated previously, a large passive investor, like a pension fund, owns a small percentage of each portfolio company. It is important for like-minded organisations to collaborate in order to help companies, regulators and legislators understand that long-term active owners are vulnerable to the decisions, regulations and policies they are creating.

To stretch the impact of their capital and leverage their experience, active owners make strategic alignments with myriad coalitions and organisations. Active involvement with a peer network deepens and broadens the active owners’ engagement opportunities in financial markets across a large spectrum of issues. Partnerships also lend weight to an individual active owner’s position to undertake value-driving change.  The benefit is better performing, better governed companies for all investors.

Fulfilling CalSTRS’ long-standing promise to California educators

Like any large, mature financial services organisation, the challenges of balancing assets and liabilities, investment gains and losses, and creating long-term value guide our business strategies. CalSTRS maintains steadfast diligence in our role as an active owner, implementing strategies that serve to strengthen our success, with our priority focussed on the financial health of the fund.

We are stewards of the hard-earned income that dedicated California educators contribute toward their retirement and entrust to us throughout their careers. And, ultimately, our goal remains focussed on generating returns that are sufficient to pay our members’ retirement benefits, now and well into the future.


About the Author:

Ms. Sheehan is the Director of Corporate Governance for the California State Teachers’ Retirement System (CalSTRS), the largest educator-only public pension fund in the world, where she is responsible for overseeing all corporate governance activities for the fund including proxy voting, company engagements and managing over $4 billion placed with activists managers.

Prior to that, she served as Chief Deputy Director for Policy at the California Department of Finance. During her tenure at Finance, Ms. Sheehan served on both the CalSTRS and CalPERS Boards as well as serving as the Executive Director of the Governor’s Post- Employment Benefits Commission. Ms. Sheehan served as the Chair of the Council of Institutional Investors for two years, as well as having served two terms on the NASDAQ Listing Council. Ms. Sheehan is currently Chair of the SEC’s Investor Advisory Committee, a Member of the Advisory Board of the Weinberg Center for Corporate Governance at the University of Delaware, and a Member of the Board of Directors of the 30 Percent Coalition. Ms. Sheehan was named one of the 100 most influential people on corporate governance by Directorship magazine for the past seven years.