RI interview: Anne Simpson, CalPERS: building a global coalition of asset owners on governance

How an informal group of the world’s largest asset owners is seeking to change the corporate governance landscape.

Anne Simpson, Senior Portfolio Manager and Director for Corporate Governance at CalPERS, calls it the Theodore Roosevelt approach to reforming investment markets through better governance; speak softly and carry a big stick. The soft talk, she says, comes via a ‘low profile’ group of 11 large global asset owners that have agreed to work together on what she describes as “tilting capital” in ways to improve the markets in terms of safety and better corporate governance via informal dialogue with investee companies and regulators. The big stick is their $1.5 trillion combined asset muscle that will back key shareholder votes at intransigent corporates. The investor pool includes Norges Bank Investment Management, which runs the assets of the Norwegian Government Pension Fund, APG and PGGM in the Netherlands, the BT Pension Scheme in the UK, AustralianSuper, PREVI, the large Brazilian fund, the Government Employees Pension Fund (GEPF) in South Africa, TIAACREF in the US and Canada’s Ontario Teachers Pension Plan. The group is considering approaching asset owners in Asia to come on board. Simpson says: “We haven’t made a big fuss about this because we can do more on a fairly low-key level. But we meet regularly and we co-ordinate thinking.”
An example of the joined-up approach to investor governance has been CalPERS’ backing for resolutions that Norges Bank Investment Management (NBIM) has filed on proxy access (the right to nominate director candidates) in the US: Link Norwegians surprised many in the US at the end of last year by announcing a vigorous and broad campaign with proposals filed at companies including Wells Fargo, Staples, Western Union, CME Group and Charles Schwab. NBIM has $108bn, or 18% of its assets, invested in US companies, and said proxy access would lower its US investment risk. The Norges’ proposals are also seen as key in testing a legal technicality in the US around securities rule 14a-8, which states that to submit a shareholder proposal, investors must hold 1% of the company’s securities for at least one year by the date the proposal is submitted. Corporate legal challenges have led to the SEC issuing a ‘no action’ advice – meaning the company does not need to vote on the proposals at its AGM – if the 1% threshold has been reached by multiple shareholders pooling their voting rights or where a shareholder proposal is deemed to clash with an existing management resolution. The Norges proposals, however, were all passed for vote by the SEC, despite similar legal push-backs. Simpson says: “It’s really important for us to publicly support this campaign because then there is a ‘coat-tails’ effect regarding the recommendations of proxy voting advisors because we are among their biggest clients. We don’t necessarily take their advice, but they do give advice to smaller funds that often don’t have the resources to research corporate governance issues fully. We also support the fact that the Norges proposal is at a much lower level than the SEC threshold: 1% for one year.”
The CalPERS governance chief says there is also
realpolitik behind the Norges approach: “In the US we have some overseas funds filing resolutions, which if you know the US market are not really the first, useful step towards transforming the company. We believe that the critical issue in US AGMs is majority voting (the ability to apply a majority vote approval to individual directors): unless you can hold the board to account, you may as well stop worrying about any other governance issue. Shareholders might want an independent chairman, for example, and we also think that is very important. But, filing a proposal now when you don’t have qualified majority voting is going too fast.”
It’s a campaign that is yielding results. Shareholders at Graco, the US lubricants firm, were the latest to vote by 83% for the company to adopt a majority vote standard for board candidates in uncontested elections. More iconic was a similar result at Apple earlier this year following hard, joint lobbying from CalPERS, its sister Californian fund, CalSTRS, and the Florida State Board of Administration. Apple had previously operated under a plurality voting standard in which directors need to obtain only a majority of the votes cast, omitting those who failed to vote their shares.
Says Simpson: “Apple was a fabulous result because you’re taking on a really successful company, but the principle is the same. The other point is that too often asset owners don’t co-ordinate; there’s sometimes rivalry and a lack of strategic purpose behind corporate engagement.”
She believes this is changing and that asset owners are now adopting collective strategies to get the right board representation and accountability:“We’re thinking together now about the need to get more competence, quality, skills and experience on boards. We need stewards of our capital! To date, too much of the noise around companies has been created by the traders and raiders, and we the owners are left with problems on our hands while it all goes to hell in a handcart.”
The flip side of the equation is whether companies are ready to be more responsive to long-term owners. Simpson says she thinks they’d love to, but that performance parameters such as executive pay have to be altered to help them do so: “We made a rod for our own back by designing compensation packages that focus on the short-term, such as options without performance targets. We are now living through the consequences.” She cites the recent shock of last month’s Citigroup shareholder revolt on pay as a watershed moment: “The big thing about the Citigroup vote was that from our point of view they had set out long term performance targets but not the relevant risk frameworks that these would be based on. It’s both of these together that matter to us. Just chasing returns at all cost could take us over the cliff. It was a lack of disclosure that lost Citigroup the vote. I think it also shows investors getting much more thoughtful about what we mean by long-term pay, measures of performance linked to strategy, and for CalPERS, ESG issues as an additional target.”
It’s a strategy of joined-up governance thinking, which she says demands thorough feedback to the company to underline seriousness: “We voted against 200 companies last year on executive pay and we followed up in each case with a letter laying out precisely what we didn’t find
appealing about their proposals. I’d say about half of those companies have come back with change and alterations, so that’s good. Where we’ve had no response we will be voting against compensation committee members, but of course we can only do that in many of those companies because we have already gone through the majority voting exercise. Holding compensation committee members to account is the important part. We are shareholders, not company insiders. We don’t want to have a dog and bark ourselves! Pay reforms should come via the board, but they need clarity from shareholders on the parameters we want them to work to.”For CalPERS, she says, this means basing metrics on the ‘long-term’, meaning five years minimum through an economic cycle: “We also want to see vesting periods for performance rewards that don’t end when someone leaves the company because they could be leaving problems behind for other people. Once these kinds of measurements become standard market practice we’ll see improvement; it won’t solve everything, but it will be a big step forward.”