CalPERS to Increase Engagement with Funds to Improve Governance Practices

California Public Employees’ Retirement System (CalPERS) officials are stepping up efforts to engage the thousands of companies the plan owns in its $181.3 billion global equity portfolio, including requiring corporate boards of directors to be elected by majority votes and assuring that CEO compensation isn’t excessive compared to the median of other employees.

The details of the CalPERS 2018 corporate engagement plan are contained in a March 19 report that was formally released at the retirement plan’s Investment Committee meeting on Monday. The release comes as CalPERS begins its annual process of voting proxies of the 11,000 corporations it owns in March, April, and May.

The $360.4 billion retirement plan, the largest in the US, has been one of the early institutional investor adopters of advocating for better corporate governance, arguing that it increases share prices. At the same time, it has often battled conservative and business groups who attack the pension system’s activism.

In the 1990s, CalPERS publicly disclosed the target list of companies at which it was aiming to improve governance practices, but these days, private negotiations rather than embarrassment are the pension plan’s primary tools.

While not naming names, the report says that CalPERS plans to increase the number of companies it engages in 2018 from 50 to more than 100 over the adoption of a majority vote standard for corporate board members.

Many companies, the report says, retain a “plurality voting” system that allows a director to be elected with a single vote, regardless of the number of votes withheld.

“To reform the director election process, CalPERS engages companies, requesting a majority vote standard for director elections,” the report says.

The report says that starting in 2010, CalPERS began to engage 50 companies per year regarding the adoption of majority voting.  It says that 385 of the 400 companies engaged since then “have either adopted or committed to adopt majority vote for director elections.”

In an enhanced initiative, CalPERS says in the report that it may take into account “pay ratio alignment issues” between the CEO and the median pay of employees in determining whether to vote against executive compensation advisory votes, called “Say on Pay.”

New SEC rules require corporations to disclose the pay ratio between the CEO and the median compensation of other employees, giving CalPERS the opportunity to weight in on the issue.

CalPERS doesn’t say in the report what pay ratio between the CEO and employees it would consider unacceptable.

The report also says CalPERS will continue to engage large corporations over proxy access, which allows a shareholder to nominate corporate board members instead of the process being controlled by management.

CalPERS, the report says, has started proxy access engagements at 25 S&P 500 companies.

To date, two companies have committed to adoption, and staff is in various stages of engagement at the other 23 companies, the report says. The companies were not named.

In another initiative, board diversity, CalPERS says in 2018 it will begin to hold directors accountable at companies that do not improve gender diversity or improve diversity and inclusion disclosures.

CalPERS says in the report that it will withhold voting for key board members who do not provide a response or whose answers are limited.

The report also disclosed key proxy votes in the fourth quarter of 2017, although not all were success stories.

 CalPERS says it voted for the Procter & Gamble director slate in the proxy contest against activist investment firm Trian Partners run by Nelson Peltz. “After a rare vote recount, Peltz narrowly won, and got a board seat at P&G,” the report noted.

CalPERS also says it voted against the advisory vote on executive compensation at McKesson Corporation because the company management “failed to appropriately link pay with performance.” The proposal failed to received majority shareowner support, receiving only 26% of the votes cast, the report said.

But CalPERS efforts at another company, NetApp Inc., were successful. The report says CalPERS voted for and filed a shareowner letter with the Securities and Exchange Commission (SEC) on behalf of a proxy access proposal originated by the New York City Retirement System. The proposal received overwhelming support at 90% of the votes cast, the report said.