RI Interview: CalSTRS’ CIO Chris Ailman on Cerberus, proxy access, infrastructure (Part 2)

The second part of our dialogue with the US pension executive

Earlier, Responsible Investor talked to the California State Teachers’ Retirement System (CalSTRS) about pressure from the California senate for it to sell out of fossil fuels. Here, we speak to its chief investment officer Christopher Ailman about weapons divestment, proxy access, infrastructure and engagement with European funds.

There has been pressure from pension scheme members and California state treasurer John Chaing on CalSTRS to divest from private equity fund Cerberus Capital Management which owns the maker of the guns used in the Sandy Hook shootings. There have also been protests around it this month…

There were eight teachers here. They put up a tent, they had a conference, there were three TV stations and two print publications, so it certainly got a lot of coverage, but it was eight people, and that is about the size we had for the fossil fuel divestment protest the next day.
Our board voted two years ago to divest firearms that are illegal for sale in California. It is a very specific feature on guns that are illegal here, so we sold the public stocks. Our divestment policy only covers the public securities, as it recognizes that when we are in partnership we don’t actually own anything. So in the case of Cerberus, we are in two of their older funds from 2005 and 2007, and those funds are maturing and moving towards the end of their lives. Among companies those funds own, one is called Remington Outdoor Group, which does make firearms. We’ve been trying to figure it out, it is a very small partnership, we don’t own the company, we just own a partnership that has an economic exposure to it.

Why don’t you just sell Cerberus Capital Management?

We have been working on this for the past two years, the board has said that we would like to eliminate that exposure and sell, so we have been trying to figure out how to do it. The problem is that we do this in closed sessions. We can’t disclose this. What we can share is that we have been pushing Cerberus. It has publicly said it would like to sell but other investors have pushed back on them as they want to maximize return and don’t mind owning a gun company. All I can say to people is that as you can expect selling a private company is always difficult, selling a private company which has a tarnished image or an issue around it, is even that much more difficult. We are disappointed in Cerberus that it has taken two years, but we absolutely understand why it has taken that long, they are just as committed to us and helping us get liquidity on that exposure.

We have to understand the circumstances around it, so we are going to stay engaged, we would like to eliminate economic exposure to the gun manufacture, if that means selling the entire Cerberus Partnership, we would rather not do that as it is an awful small slice, and there are some very good, positive companies in the partnership, but we will do whatever makes economic sense and is expedient to do.

The proxy access debate in the US has gathered momentum. What is driving this?

Whole Foods was the catalyst. It took the most egregious stance and we were offended. There is no other word for it. It was outrageous and offensive for any shareholder in Whole Foods. The SEC staff gave them a no-action letter and when the chair of the SEC realized what was happening they put a stop to everything. So as shareholders we are trying to team up and say here is a reasonable position. We are not trying to make every little thing a fight as we realize we are long-term shareholders and we want stability.But the door has to be open, we are the shareowners of the company not management, we have to have a chance to have some access, have a vote and open up the process. So we think that it is a real critical stage for corporate governance in America. But it doesn’t look like anything is going to happen in the near term because the Chamber of Commerce and the Business Roundtable came on strong to the SEC. It is good that the SEC is taking a step back and assessing the situation and I am hopeful that reasonable minds will come at this. Corporate governance is powerful, but it is like a glacier, when you look back over time you will see huge changes, but my goodness it is slow moving!

There have been press reports that CalSTRS is creating an infrastructure alliance with other investors.

We are teaming up with a large non-US fund on this. There was a White House Treasury department conference about nine months ago on infrastructure and I said we were planning to form a consortium with other investors. Infrastructure is a very interesting area to invest, but it is also about very low, stable returns which means you have got to have the right structure, as you can’t structure a private equity fund and pay all kinds of fees. So we are hoping for a brave new future where long-term investors team up together, and be managers. Rather than us being at the fund managers’ mercy with the source of capital, we should team up and our hope is that the consortium has got room to grow. Clearly, the USA has an enormous need for infrastructure investment, but at the same time nothing happens here. So we are vocal that whether it is tax regulation or municipal bonds that will open this market, I know that a lot of capital would like to be put to work on investing in infrastructure. We are optimistic that this is the future. We are modeling this on what the Australian funds have done in terms of teaming up together. A lot of peers have said they would like to look at it, I think there is a lot of appetite and they like the idea of teaming together. That said, partnerships are always hard and you need to get like-minded investors who are looking for the same thing.

You were in Europe recently. Can you tell us about the trip?

This was a very special trip we organized. It was the chair of our board, the chair of our investment committee, our CEO and myself. The purpose was to gain information, to have a dialogue and to learn more about what other funds and other groups are doing particularly around sustainability. We met USS, EAPF, AP2, the Unilever-Univest pension plan, PGGM, APG, FTSE and Mercer Consulting and others. We also met the PRI, Carbon Tracker, the Carbon Disclosure Project and some of our money managers, some new. Our board also had a dinner with a bunch of trustees from several funds in the UK. It was about understanding what they are doing about sustainability, what they are doing about ESG, how they have integrated that into their investment process.

We discussed the divestment issue, that’s why I can say with absolute confidence that the vast majority of the largest European investors do not believe in divestment. They believe in active ownership. It was a very good dialogue overall. It was very helpful for the chair of the board and our investment committee to connect, to hear what they are struggling with and where they are finding challenges.