Institutional investor engagement with companies at “unprecedented level” – CalSTRS

$166bn investor issues first ever corporate governance report

The level of institutional investors’ engagement with the companies in their portfolios is at an “unprecedented level” says the California State Teachers Retirement System (CalSTRS).

The $166bn (€125bn) fund also sees greater collaboration between investors – of all types – with the realization that adding value to investments is beneficial to all shareholders.

“If any governance evolution can be gleaned from 2012, it is that the desire and willingness of institutional investors to engage their portfolio companies on how they’re being run has risen to an unprecedented level,” the West Sacramento-based investor says in its first ever corporate governance report.

Corporate directors and executives need to recognize, the fund says, that shareholders “are not going to go away”. Rather they will continue to hold boards accountable for overseeing their investments and executives accountable for how they spend shareholder’s money.

As an example, CalSTRS says that during 2012, the second year of “say-on-pay” votes in the US, companies’ engagement on the issue was effective. This resulted in CalSTRS’ “against” votes on say-on-pay proposals decrease from 23% in 2011 to 16% in 2012.

Also the fund had a “very strong response” to its requests for dialogue with companies on carbon emissions management. More than 30 of the 100 companies contacted responded, more than double the response rate CalSTRS normally sees when it engages on sustainability issues and is likely due to the importance that companies place on efficiency.Collaboration between investors will continue to evolve, CalSTRS reckons. “While you will certainly see continued collaborative efforts between public pension plans and like-minded funds, the level of collaboration between “mainstream” investment banks and “traditional” equity fund managers will also certainly grow.

“The evolution of these relationships will result from the recognition that adding value to investments, value that is designed to last, is beneficial to all shareholders, regardless of the whether your investment horizon is short or longer term.”

CalSTRS Chief Executive Jack Ehnes said: “We want companies in our investment portfolio to perform well long into the future, and sound corporate governance practices are a critical component to accomplishing just that.”

The fund’s Corporate Governance Activist Portfolios, the program that has concentrated portfolios across eight funds and seven asset managers, has now grown to $3.5bn. The program was launched with a $700m allocation to the Relational Investors Large Cap Fund in 2004.

Corporate Governance roster:

  • Relational: Large-Cap/Mid-Cap ($500m each)
  • New Mountain Capital ($500m)
  • Trian Partners( $300m)
  • Blue Harbour Group ($200m)
  • Starboard Value ($100m)
  • Governance For Owners ($350m)
  • Knight Vinke ($150m)