My interview with Anne Simpson, CalPERS’ investment director for sustainability starts with a bang. “Clearly you’re not in the process of initiating a proxy access campaign,” I’m half way through saying, alluding to my recent RI article on the issue.
At which point Simpson interrupts me to counter: “The point is we could”.
It’s one of a number of topics we cover, most of which converge on the issue of long-term strategy versus short-term gains. Justifying the importance of the right of proxy access, leads Simpson back to her beginnings in the US markets, when majority voting was unknown, never mind proxy access: “Politics is the art of the possible, so is accountability. That’s why majority voting is equally important. When I first got here, you could vote ‘yes’ for a director but not ‘no’. That meant that your voting rights were about as good as a feather duster,” she jokes. “There was no accountability,” she adds, noting that the voting process was not democratic. “But even now we have got majority voting, voting directors out is still very unusual,” adding that the number of directors who have been ousted is a very small one. “There was a director voted out at Bank of America during the financial crisis, two directors left the risk committee at J.P. Morgan during the London Whale scandal even without a vote against that was only in the 40% range. Also, a director was voted out at Hewlett-Packard, after a series of failed acquisitions. Once you’ve demonstrated that shareholders are willing to say no, it sends a signal of possibility which is what accountability requires. It’s not that we would, but that we could.”
This leads her neatly into how she feels about proxy access; the possibility not necessarily the necessity. “Exxon is a prime example,” she says. “After years and years of asking for a climate competent director to be elected to the board, we gain proxy access and all of a sudden a climate competent director is elected to the board. The idea that shareholders would exerciseaccountability at the ballot box is still quite new here.” She questions why it has been traditionally possible to put most types of shareholder proposal forward on the proxy statement, but not propose a director, “which is arguably the most significant thing you can do as a shareholder”. She recalls that CalPERS, in its more activist phase, had hired fund managers to run proxy contests for it, with a significant price tag. “The candidates,” she quips “needed nerves of steel and the ability to survive Marvel comic hero battles”. Unfortunately, she concedes, these were not ideal board candidate attributes. These kinds of outcome were what encouraged the fund to move its resources into getting companies to introduce majority voting. “Every year we selected 50 companies, starting with the most valuable in the portfolio, and asked them for majority voting. In our first round, we won 75% of the vote at Apple.” But, she explains, the company still resisted introducing the practice, only agreeing to it when 80% of shareholders supported it the following year. This win was very influential in the campaign. The fund still engages 50 companies in a year as it continues to work through its the portfolio, but it only has to file at one or two of those, because companies look at a company the size of Apple having to concede and recognise that they are on the wrong side of history. “Proxy access will be used in circumstances like this,” she says, going on to list the circumstances under which a director nomination campaign might be mounted. “The company faces an enormous challenge, failure of performance, an existential threat which is not being addressed, a major risk on the horizon, like climate change. Or it might be egregious pay, or some major mismanagement of human capital, such as lack of diversity or sexual misconduct.” These, she says, are the situations that might prompt owners to enlist the help of proxy access. However, she stresses that: “once they are appointed, they owe their fiduciary duty to all shareholders, not just the activist funds that put them there.”
I have already written about proxy access as a big stick, a threat to companies that, if they didn’t engage, would be used, but Simpson disagrees with this characterisation. “I wouldn’t characterise proxy access as a threat,” she said “it’s just an ability, the very fact that it can be done, the possibility, a credible option. Threat makes it sound like something bad’s going to happen. Whereas, if we go ahead with it, it’s just a signal that we need some new people to come in.” Being English, it was only a matter of time before a football analogy came in. “If this was a football team, nobody would bat an eyelid You’ve not won a match for how long? It’s time to go. You just have to think about Arsène Wenger, manager of Arsenal. It was my local team back in London.” If shareholders were football fans, she jokes, they wouldn’t put up with it. “If directors aren’t doing their job it’s time for them to be replaced. Proxy access is just a mechanism for making this happen.” Moving on to the question of engagement or divestment regarding gun stocks, I mention that I had read the transcript of the CalPERS board meeting where California Treasurer John Chiang brought up a vote to ask the board to consider at its next meeting divesting from gun retailers. The vote failed, and the divestment discussion will only come up again at the April 2019 board meeting. I also read through a lot of the presentations from the members of the public who came to the board meeting: most were heartrending and asked for divestment. Only two presentations told the board that it was their fiduciary duty to continue owning these stocks. The transcript also records Simpson’s report on her engagement with the gun retailers which was initiated after the Las Vegas shooting last year. Simpson says: “We did a short, two-minute video explaining that the board has instructed us to keep going on the engagement that is on our YouTube channel.” Simpson said in her report that only one company during their engagements over recent months had said it was not going to make any change. All the others had agreed to make changes such as ending the sale of assault weapons and/or raising the minimum age of buying long guns to 21.“If you look at the numbers in our portfolio,” Simpson continues, “we had about $600 million in retailers that sell assault weapons and the associated machinery that goes with it. By the time we got down to the last engagement, Sportsman’s Warehouse, we had at that date some $600,000 in shares in the company, which is only 0.1% of our total investment in gun retailers; but we still engaged. This particular company felt that it might be the object of litigation if it raised the age for purchasing these guns to 21. And, in fact, Walmart and Dick’s Sporting Goods are already being sued over infringement of constitutional rights.”
But Simpson felt that it was the fund’s fiduciary duty to engage with the companies about the potential risks they face. As she said in the video: “We walk away, we take our voice, our vote out of the discussion and we don’t achieve change.” In our conversation, she adds: “We feel that is within our concept of being a responsible owner of these companies. However, we have to recognize that these shops are just one channel to purchase them and that the other channels are completely unregulated.”
However, the fund took another route with gun manufacturers. “After the Sandy Hook shooting,” said Simpson, “we analysed the portfolio and found that we were invested in two gun manufacturers. The board decided to get out of both of those companies, so we haven’t been in a position to engage with them.”
The conversation then moves on to the current campaign to press companies via shareholder resolutions to disclose trade association membership, payments to trade associations, and expenses related to state and federal lobbying. CalPERS’ support for the campaign was fairly explicit. “The CalPERS principle that covers this,” she says “that we adopted some years ago, in 2013, I think, covers all political and charitable donations, including trade associations. First, we want full disclosure. Second, we want board oversight of the issue; we don’t want this controlled by the government affairs or some other managerial department. We want
board oversight to ensure that the lobbying is aligned with the company’s long-term business strategy.”
She compares this principle requiring board oversight to the Climate Action 100+ campaign, a five-year initiative led by 256 investors running USD$28 trillion to engage with the world’s largest corporate greenhouse gas emitters to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures. “This is the same principle that we have in Climate Action 100+. We’ve enhanced what the TCFD is asking for on climate risk to include full disclosure of policy and to make sure that remuneration is aligned with climate risk. What we want to know, for example, is: were shareholder funds being used to promote the mistaken idea that climate change was not real, was management making adjustments to their business strategy based on the assumption that science was not science. There are lawsuits out there based on this misuse of shareholder funds at the moment.”
Simpson stressed the common theme in all of these issues, that the fund’s policies were aimed at making sure that management was not spending money to focus on short-term profits at the expense of strategies for long-term value growth. “This issue about having true and fair disclosure is really important,” she said “especially regarding policy and regulation surrounding a systemic risk like climate change. We don’t want companies using shareholders’ funds to undermine the long-term interests of the owners just for some short-term gain. We’ve seen this in other sectors already, like General Motors lobbying against the improvement in air quality and fuel efficiency standards.”General Motors is the manufacturer of the ‘gas guzzler’ Hummer brand. This short-term view, she said, allowed Japanese and European fuel-efficient manufacturers to capture the largest share of the market.
“A company gets the short-term gain from lobbying over something, but we want them to take a long-term perspective because that’s our perspective as a universal owner.”
I asked what was the fund’s specific focus for the 2018 proxy season? “You have seen in our March board items that we’ve highlighted that we are going to be running proxy campaigns where we will win more votes, we hope, with the other Climate Action 100+ members. With our successes last year, we broke the sound barrier, but you still have to go ‘further faster’ in this market. There were 15 companies where the vote was not won last year, and at most of those they have been refiled. And there are other companies where the resolution is being filed for the first time. Our commitment is to run proxy solicitations for all of those campaigns, which is important, and it’s a lot of work, but it’s very necessary, and every vote counts. This is the only way we can really bring the long-term agenda to bear in the boardroom.”