Anne Sheehan recently retired from her role as the Director of Corporate Governance for the California State Teachers’ Retirement System (CalSTRS), the largest teacher’s pension fund in the USA, where she was responsible for overseeing all corporate governance activities for the fund including company engagements, $4 billion in active management, and proxy voting. Ms. Sheehan has extensive senior leadership and strategic experience in complex organizations and has served on numerous boards. Her diverse career includes experience in human resource management, healthcare, pension and investment management, energy and resource management, and environmental conservation.
Ms. Sheehan served as the Chair of the Council of Institutional Investors for 2012 and 2013 as well as having served two terms on the NASDAQ Listing Council. Ms. Sheehan is currently Chair of the SEC’s Investor Advisory Committee, is a Member of the Advisory Board of the Weinberg Center for Corporate Governance at the University of Delaware, and is a Member of the Board of Directors of the 30% Coalition. Ms. Sheehan was named one of the 100 most influential people on corporate governance by Directorship magazine for the past eight years.
C-Suite had the opportunity to speak with Anne Sheehan, the now-former Director of Corporate Governance for the California State Teachers Retirement System (CalSTRS), about the changes she observed (and led) during her tenure. In addition, Sheehan shared her thoughts on what we can expect to see as the relationships between boards of directors and their shareholders continue to evolve.
Anne Sheehan: I was at CalSTRS for nearly 10 years, and I was the first person to have the official role as Director of Corporate Governance. CalSTRS had engaged on governance issues in the past, but the board wanted to elevate the position to make a statement that corporate governance was and is a high priority for the fund.
In that time, the whole landscape changed tremendously. Initially, pension funds and socially responsible investing (SRI) funds were much more focused on environmental, social and governance (ESG) issues, but traditional asset managers have come to appreciate the importance of corporate governance in recent years. As an example, look at what State Street and BlackRock have done with guidelines on diversity. The entire governance movement has shifted dramatically to the mainstream.
Ultimately, the reason we care about corporate governance is risk management. CalSTRS has $220 billion in assets, over half of which is in public equities and two-thirds of which is indexed. So we own a wide swath of the market. And as long as there are teachers in California, we are going to be invested in the market. We can’t sell those companies if we are displeased, so we need to be invested in how they govern.
Sheehan: The most important thing we can do is get a good return on investment to pay pensions for teachers in California. We are long-term investors, which works to our advantage because this is a marathon, not a sprint. Yes, we pay attention to the day-to-day vagaries of the market, but it’s a point in time. When you have a portfolio as large as ours and liabilities going out 30 to 40 years, you think about it for the long term.
Engagement and active ownership are in our DNA. The phrase “passive investors, active owners” has permeated our philosophy here going back to the 1970s.
Sheehan: Director elections are some of the most important votes we make every year for thousands of companies. I depend on those people to make good, wise decisions for shareholders, and not just for shareholders inside the boardroom but outside as well. We began looking at this issue about 10 years ago as we realized, frankly, that a lot of the folks inside the boardroom were long-tenured white guys. Women represent half the population, they lead in post-graduate degrees, they’re judges and in Congress, so why are we not tapping into that expertise?
The state treasurer challenged us to engage on the issue of diversity in trying to expand skill sets, background and experience of board members. We’re not doing this for political reasons, but because studies show financial performance is better when you have diversity. It’s not just about having one woman or adding one person from a particular racial or ethnic background. It’s about trying to reach parity and break up the group-think approach. We were an early mover—writing letters, voting against certain directors and providing candidates through the Diverse Directors Datasource (3D). (Disclosure: 3D is a part of the Equilar Diversity Network, a “registry of registries” highlighting board candidates from participating organizations.)
This is another issue that has become mainstream. State Street voted against 400 or 500 directors, and BlackRock and Vanguard have increased their influence here. It’s all about getting the best, most qualified individuals in the boardroom to make decisions on our behalf. California is a very diverse state, and two-thirds of our beneficiaries are women, so this resonates with them and with our asset managers. CalSTRS will continue to push that issue as part of its portfolio.
[Diversity is] about trying to reach parity and break up the group-think approach.
Sheehan: Investors want companies to manage potential risks hurting the performance of the company. Our purpose is to pay teachers’ retirement, and we want good, well-managed companies that can address and mitigate risks. For oil and gas companies, for example, we want to know how they are being forward-looking on the impact of climate change and policies changing around use of fossil fuels. If they blow up half the Gulf of Mexico, it’s not good for their returns and it hurts performance.
Even if it’s not material environmental risk, human capital and supply chain logistics can be really damaging to companies. You have an obligation to see where you’re sourcing your product. Especially in the age of social media, reputation can be very harmful to a company. Companies and boards have an obligation to the portfolio to tell shareholders about this.
ESG matters are evolving issues. You may not have an OSHA risk or environmental concern today, but tomorrow it may turn into how you use water. We’ve engaged a number of companies on energy efficiency. These issues are integral to the bottom line of the company.
Much of our engagement has been focused on disclosure and encouraging a move to integrated reporting. These risks can easily turn into financial issues if they are not managed well.
“You have an obligation to see where you’re sourcing your product. Especially in the age of social media, reputation can be very harmful to a company.”
Sheehan: Executive compensation is a never-ending discussion shareholders have with boards. We’ve seen progress in ending some of the bad practices, but there is still a long way to go. There’s always the potential for something in a comp program we may not like, but we vote for alignment with the shareholders with the right metrics. We don’t want to see executives make money when the shareholders are not.
Say on Pay was the motivation and the spark for greater engagement. Companies have to talk to shareholders about compensation now, and that’s been an opening to talk about many issues—board composition, capital allocation, governance structure—and allowed for greater dialogue.
On the pay ratio issue, it’s early and it’s the first year. So shareholders want to put it in context. It’s a baseline number right now, and they are assessing peers and industries with ranges of numbers. Financials will have a different ratio than utilities or retail. It’s one more data point that shareholders will look at—it will evolve in terms of how it’s used and calculated, and its impact on Say on Pay will remain to be seen.
I do think that companies should be cognizant of what that ratio is. If you have a big gap between the CEO and average worker, what kind of message does that send? Frankly, the ratio is more important inside the company than to the shareholders.
Then there’s the question of how much is too much for CEOs. Boards have an obligation to consider that given the political discussion about income inequality. That feeds in again to whether it is the right amount and structured properly. If a board sets metrics that are too easy to reach and everyone is above median, that’s a problem.
We don’t want to see executives make money when the shareholders are not.
Sheehan: The number of public companies itself has not really affected us, but this growth in dual-class shares is a bit troubling. We’ve seen shareholders coalescing around this because if something goes wrong, there is nothing we can do about it. You don’t have the ability to hold the executives or CEO accountable by exercising rights as an owner. And back to our structure: We don’t have an option to sell that company. If you think it’s important the first few years as you get established, then sunset them and take the training wheels off to become a grown-up company.
In terms of the number, some point to the historical figure of public companies from the early 2000s. I have to be honest, many of those probably shouldn’t have been public. So when companies go public now, they are much stronger and more sustainable in capital structure and foundation than in the past. It wasn’t good for investors to buy stock in a company and have it crash 12 to 18 months later.
The other thing is that we are in very different financial markets these days. Companies have more access to capital and many more options, many of which mean they don’t have to go to the public markets to raise capital. Plus, we’re seeing many more mergers and acquisitions. Instead of going public, companies are getting bought by one that is public already.
Sheehan: For investors, keep doing what you’re doing. It’s important to hold your portfolio companies accountable, because as shareholders we depend on them. Sometimes it can get off track, and we have to remind them of our expectations. As providers of the capital, we need to advise them on issues that matter to us.
For board members, remember that you serve all of the shareholders, those inside and outside the boardroom. You’re not there to serve the CEO or there to serve the other directors. Think about the teacher in south central LA saving for retirement or your grandmother living on her 401(k). Those are the people we represent and who you are ultimately serving.