CalSTRS invests a multi-billion dollar fund in a unique and complex social-economic milieu and recognizes we can neither operate nor invest in a vacuum. As a significant investor with a long-term investment horizon, engagement is a critical tool used by the CalSTRS Sustainable Investment and Stewardship Strategies team to influence changes in public policies and corporate practices that support long-term value creation.
We engage, through meetings, letters, shareholder proposals, investor coalitions and proxy voting, to influence companies to adopt best practices in managing environmental, social and governance issues to create sustainable businesses. We also engage policymakers to codify strong governance practices that improve the financial market landscape for long-term investors and their beneficiaries. Our history of engagement activities has resulted in better relationships and outcomes across global industries.
CalSTRS engagements for the third quarter, 2023
Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation.
Each year, CalSTRS casts approximately 100,000 proxy votes at more than 10,000 company shareholder meetings. As part of our mission, we influence the companies we invest in by actively casting our proxy votes at annual board meetings, supporting corporate board members and resolutions that align with our interests—to manage risk in the CalSTRS Investment Portfolio to achieve returns and pay California educators’ hard-earned benefits. Leading up to the 2023 proxy season, we announced our intent to increase the scrutiny of our votes against boards that are not appropriately managing and addressing sustainable business practices.
We carried through with this commitment by voting against:
- The boards of directors at a record 2,035 global companies because they did not provide necessary climate risk disclosures. Disclosure is important for investors to appropriately assess the financial risk climate change poses to a company’s long-term profitability.
- Certain directors at 3,401 companies that either lacked board diversity or failed to disclose key information about the diversity characteristics of their board. Research shows the financial performance of an organization improves when teams are diverse.
- 31.5% of executive compensation plans. We scrutinize the compensation plans of executives, ensuring proper pay-for-performance alignment, which in turn encourages executives to focus on long-term performance of their company.
In addition to voting on issues that companies put up for a vote, investors can also raise issues for all investors to vote upon. These are known as shareholder proposals and often address important environmental and social factors. We carefully consider and vote each shareholder proposal based on its merit and alignment with our mission of sustaining the trust and securing the financial future of our members—California’s public educators. In the 2023 proxy season, there were more than 1,200 proposals at our portfolio companies. We supported 42% of those proposals.
When we decide to vote against a shareholder proposal, it’s due to one or more of these reasons:
- There are structural issues with how the proposal is written.
- The proposal may be overly prescriptive, and we prefer companies to determine their own best strategies.
- The company may already provide the information the proposal asks for, which means another report would not be a good use of company resources.
This was the first year universal proxy cards were used for contested board elections, in which both the company and an investor put up nominees for the board of directors. We have long supported the implementation of universal proxy cards to ensure investors can elect the most qualified boards possible.
In the past, at contested board elections, investors were forced to choose between the entire slate of directors nominated by the company or the slate nominated by the investor. Universal proxy cards allow proxy voters to mix and match directors nominated by both the company and investor. The result is the ability of voters to choose the best possible mix of board members from all available nominees. While still preliminary, our observation is that companies are more likely to work with investors to resolve disputes before they escalate to a contested director election.
You can view our voting record at all public companies.
Stewardship priorities update
CalSTRS establishes priorities for future standard-setting to enhance sustainability disclosures
The International Sustainability Standards Board is developing a comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. In May 2023, the ISSB opened a consultation period requesting comments from companies, investors and other interested stakeholders. The purpose of the consultation was to establish strategic direction of the ISSB during the next two-year period, including input on how the ISSB should prioritize its workload and what new standard-setting projects it should explore.
CalSTRS responded by emphasizing the importance of the ISSB focusing on ensuring a smooth implementation of our first two disclosure standards [known as S1 (general disclosures) and S2 (climate disclosures)] that were released in June 2023. Additionally, we identified human capital management, which broadly refers to an organization’s workforce practices, as a project for future standard-setting, including emphasis on topics such as workforce composition and costs; diversity, equity and inclusion; and investment in employee development.
The ISSB is expected to deliberate comments received through the end of 2023 and publish its two-year work plan early in 2024. We remain committed to working closely with the ISSB both to push for broad adoption of the general and climate disclosures by companies and in the development of new global standards.
California investor coalition continues to make progress on board diversity
California-based investors, including CalSTRS, California Public Employees’ Retirement System, Los Angeles County Employees Retirement Association and San Francisco Employees’ Retirement System, wrapped up another year of diversity-related engagement at the end of June 2023. The group has been building success since its inception in 2015 with an initial focus on increasing the board diversity of California companies.
In 2022, the same California-based investors expanded their focus to 60 companies in the MSCI USA Investable Market Index (a stock market index that covers the U.S. broadly and is not California-specific). The focus of the engagement with these companies was to increase diverse director representation and implement governance practices that would ensure future board refreshment and expanded recruitment practices. The California group’s efforts resulted in 29 companies appointing 35 diverse directors. Additional engagement successes include:
- Twenty-four companies updated their definition of diversity to include gender and race/ethnicity in either their proxy or governance documents.
- Twenty-two companies included a skills matrix in their proxy statements.
- Fifteen companies included a diversity matrix in their proxy, often combined with the skills matrix.
- Seven companies adopted a diverse director recruitment policy that requires candidates from underrepresented groups be included in the initial search pool of candidates.
For the fiscal year 2023–24 engagement season, the group will engage 52 companies in the Russell 3000 index (an index that covers more companies than the MSCI USA Investable Market Index). These engagements will encourage companies to enhance their board diversity disclosures, address board diversity in board refreshment and recruitment practices, and increase diverse director representation.