CORPORATE GOVERNANCE
2014 ANNUAL REPORT
TABLE OF CONTENTS
Section
Page
1 / Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2 / Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3 / Partnerships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4 / Engagements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5 / Proxy Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6 / Managers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7 / Looking Forward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8 / Fact Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
California State Teachers’ Retirement System
Anne Sheehan
Director Corporate Governance
100 Waterfront Place, MS-04
West Sacramento, CA 95605-2807
October 16, 2014
CalSTRS is pleased to publish our second annual Corporate Governance Report. This is an opportunity for us
as a large, long-term shareholder to communicate with our portfolio companies the priorities of our Corporate
Governance Program.
CalSTRS, the largest educator-only pension fund in the world, with assets under management of approximately
$190 billion, is responsible for the retirement needs of more than 868,000 beneficiaries and has an obligation
to be responsible stewards of the retirement funds of California’s educators. CalSTRS has long been active
in the corporate governance arena and expects the companies in our portfolio to make wise decisions on our
behalf to be responsible managers and carry out their duties. As owners, we actively monitor our holdings and
expect our portfolio companies to govern themselves responsibly, acknowledging their duty to shareholders. In
return, we seek a return on our capital that balances risks with rewards. When we believe any of our portfolio
companies are not carrying out their duty, we will engage and communicate with them to share our concerns.
This report helps to provide a framework for our activities. We are happy to share our philosophy and principles
here in order to continue to strengthen our stewardship rate.
Sincerely,
Anne Sheehan
Director of Corporate Governance
CalSTRS
Our Mission: Securing the Financial Future and Sustaining the Trust of California’s Educators
1 / OVERVIEW
It has been documented that well-
market participants on issues
these various programs, the CalSTRS
governed companies significantly
that impact public equity security
Corporate Governance team adds value
outperform poorly governed companies.
value. CalSTRS routinely engages
and provides a layer of risk management
One of the most definitive studies,
corporate representatives, regulatory
across the CalSTRS Investment Portfolio.
Corporate Governance and Equity Prices,
organizations, government officials, and
published in 2003 by economists Paul
fellow investors on key issues that have
Gompers, Joy Ishii and Andrew Metrick,
demonstrated links to value.
found that in the 1990s companies that
promoted shareholder rights outperformed
those that didn’t by 8.5 percentage
points annually. This finding should not
be a surprise: well-governed companies,
with accountable management, are
more likely to allocate capital efficiently
and productively.
Additionally, the CalSTRS Corporate
Governance Unit is responsible for
managing an approximate $5 billion
Today, CalSTRS has a suite of internal
Public Equity portfolio that features
programs that cover a variety of
external managers who employ an
governance issues. Staff focuses on
activist investment philosophy. These
executive compensation, diversity on
managers work with undervalued and
corporate boards, director election
misunderstood public equity companies
standards, and sustainability risk
to improve their governance profiles and
awareness and integration. The
business practices. The improvements
CalSTRS Corporate Governance staff
these managers engineer must be
Like Gompers, Ishii and Metrick, CalSTRS
is also responsible for voting more
designed to provide long-term value, not
has long-recognized the importance of
than 7,000 domestic and international
temporary price appreciation. As a long-
promoting best-practice governance.
proxies annually; evaluating, processing
term investor, CalSTRS will own these
With the majority of our investment
and monitoring securities class actions;
companies in other parts of our Public
portfolio aligned with large global equity
and providing support to the CalSTRS
Equity portfolio long after the activist
indexes, CalSTRS needs to be engaging
legal and legislative units. Through
manager sells them.
4 / CalSTRS Corporate Governance Annual Report Fall 2014
2 / POLICIES
CalSTRS has one of the longest-standing corporate governance
The Corporate Governance Principles, adopted in 1978 and
policies in the public pension community, with a detailed
last revised in 2011, lay the foundation for CalSTRS’ proxy
written policy that dates back to 1978. CalSTRS’ policies
voting, as well as the foundation for all of the activities of the
affirm its position as a long-term investor with a significant
Corporate Governance Program. CalSTRS principles are based
commitment to passively managed portfolios in its two largest
on what are the best practices in the marketplace and staff
asset categories: Global Equities and Fixed Income. As long-
conducts corporate engagements in order to move financial
term owners and lenders to corporations around the world,
market participants toward these best practices.
CalSTRS’ duty is to protect those assets through the pursuit of
good governance and operational accountability. The CalSTRS
Corporate Governance Program is designed to maximize
the long-term value of the CalSTRS Investment Portfolio,
consistent with its role as a provider of patient, significant
capital to the global financial markets.
The Principles for Executive Compensation and the Executive
Compensation Model Policy Guidelines are intended to
serve as a framework for a broader discussion on executive
remuneration and act as an aid toward more effective
evaluation and regulation of corporate compensation practices.
CalSTRS believes that a thorough review of pay practices is an
All activities of the Corporate Governance Program are
important fiduciary duty that should be exercised with diligence
guided by the CalSTRS Corporate Governance Policies, which
and care.
include the Corporate Governance Principles, the Principles for
Executive Compensation, the Executive Compensation Model
Policy Guidelines, the Investment Policy Regarding Geopolitical
and Social Risks, and the Responsible Contractor Policy.
The Investment Policy Regarding Geopolitical and Social Risks,
adopted in 2006, is intended to address the financial and
administrative risks associated with corporate decisions that
violate the CalSTRS 21 Risk Factors adopted by the Teachers’
Retirement Board.
CalSTRS Corporate Governance Annual Report Fall 2014 / 5
3 / PARTNERSHIPS
CalSTRS recognizes the importance of working collaboratively
with other institutional investors through organizations
that promote best governance practices. Because of this
recognition, CalSTRS is actively involved in many organizations
and associations that allow staff to be more deeply and
broadly engaged with a variety of financial market participants
across a larger spectrum of issues.
The International Corporate Governance Network is a nonprofit
global membership organization of around 600 leaders in
corporate governance from 50 countries around the world.
Its mission is to raise the standards of corporate governance
worldwide to benefit the trillions of assets under management
of its membership. The ICGN was established in 1995 as an
offshoot of the U.S.-focused Council of Institutional Investors.
The first ICGN meeting began a new era of increasingly routine
communication among institutional investors around the world.
The Council of Institutional Investors is a nonprofit association
of pension funds, other employee benefit funds, endowments
and foundations with combined assets that exceed $3 trillion.
CalSTRS has been a member of this organization since its
inception in 1985. CII educates its members, policymakers
and the public about the importance of corporate governance
and related investment issues. CalSTRS continues to be an
active member of CII as it continues to be a leading voice for
CalSTRS has a history of being part of the ICGN leadership
and recently a member of the CalSTRS Corporate Governance
Team was elected to the ICGN board of governors. Today,
CalSTRS is an active member of the ICGN, participating in
the cross-border dialogue at conferences, influencing public
policy through ICGN committees and promoting best practices
around the world.
effective corporate governance and strong shareholder rights.
Ceres is an advocate for sustainability leadership. Ceres
mobilizes investors, companies and public interest groups to
The Asian Corporate Governance Association is an
accelerate and expand the adoption of sustainable business
independent, nonprofit membership organization dedicated
practices and solutions. Ceres helps its more than 130
to working with investors, companies and regulators in the
member organizations to engage with corporations and
implementation of effective corporate governance practices
advance the goal of building a sustainable global economy.
throughout Asia. The ACGA provides in-depth corporate
Through the various Ceres platforms, CalSTRS engages
governance research and advocacy for 11 Asian markets:
a broad spectrum of U.S. companies on their level of
Japan, China, Hong Kong, South Korea, Taiwan, India,
environmental risk management and disclosure.
Singapore, Indonesia, Malaysia, Thailand and the Philippines.
6 / CalSTRS Corporate Governance Annual Report Fall 2014
3 / PARTNERSHIPS
The Investor Network on Climate Risk, a project of CERES,
is a $10 trillion network of more than 100 investors that
promotes the better understanding of the financial risks and
opportunities posed by climate change.
INCR partners with investors worldwide to advance the
investment opportunities and reduce the material risks posed
by challenges such as global climate change and water
scarcity. CalSTRS is an active member of the INCR and through
this collaboration is able to help shape the strategies and
policies institutional investors use in their efforts to mitigate
the risks associated with environmental issues such as
The PRI is a network of international investors working
together to promote responsible investment practices. The
PRI’s principles were developed by the investment community
and reflect the view that environmental, social and governance
issues can affect the performance of investment portfolios
and therefore must be given appropriate consideration by
investors if they are to fulfill their fiduciary (or equivalent) duty.
Signatories to the PRI believe they have a duty to act in the
best long-term interests of their beneficiaries and that ESG
issues can affect the performance of investment portfolios.
CalSTRS shared the belief that considering ESG issues
climate change.
was integral to long-term value maximization and became a
The Shareholder-Director Exchange was formed by leading
Corporate Governance Anne Sheehan was recently asked
advisors to corporations and their directors to provide for
to join the SDX Working Group, which includes leading
a more effective means for directors and shareholders to
independent directors and representatives from some of the
communicate. SDX participants came together and used
largest and most influential long-term institutional investors.
signatory to the PRI.
their collective experience to develop the SDX Protocol, a set
of guidelines to provide a framework for shareholder-director
engagements. The 10-point SDX Protocol offers guidance
to U.S. public company boards and shareholders on when
such engagement is appropriate, and how to make these
engagements valuable and effective. CalSTRS Director of
CalSTRS Corporate Governance Annual Report Fall 2014 / 7
4 / ENGAGEMENTS
As a large, mostly passive public market
between executive pay and company
investor, CalSTRS is exposed to all of
performance is viewed as a material
the risks inherent in the global capital
risk to the viability of the company.
markets. CalSTRS believes that, as
Poorly structured pay packages
fiduciary, it is responsible for managing
harm shareholder value by unfairly
market risks, even in its passive
enriching executives at the expense of
portfolios. Staff’s various engagement
shareholders.
efforts work to raise financial market
awareness on a variety of risks and help
to drive long-term value.
Executive Compensation—
Say-on-Pay
CalSTRS has been actively engaging in
all aspects of executive compensation
for over two decades. Some of
these issues include the amount of
moving in that direction.
For shareholders, the hard work begins
now. With the elimination of these
dubious components of pay, the focus
turns to the difficult task of finding a true
alignment between pay and performance.
This not only includes selecting the
In summer 2010, the Dodd-Frank Wall
right components of pay, such as cash,
Street Reform and Consumer Protection
options, restricted stock or performance
Act was signed into federal law by
shares, but also ensuring the awards
President Obama. This act included a
and/or opportunities are appropriately
provision that required public companies
sized. This is especially important given
to submit their executive compensation
the rising market we have experienced
plans to a nonbinding, advisory-type,
the past few years. Without appropriate
shareholder vote at least once every
safeguards, such as caps on bonuses
three years.
or maximum payouts on awards,
compensation can quickly appear out of
compensation awarded, the types
This requirement went into effect in
of compensation awards given, the
January 2011. Since then, shareholders
concentration of awards given to top-
have had four years to consider and
CalSTRS sees the inclusion of
level executives, change of control
vote on the executive pay at U.S.
performance-vesting equity in
agreements, and severance packages.
companies. These advisory votes on
compensation plans as an encouraging
compensation, otherwise known as
development in the marketplace.
say-on-pay, have provided a unique
Performance shares require certain
opportunity for CalSTRS to directly
financial metrics to be reached prior to
express its views on compensation
the equity awards vesting. While CalSTRS
plans at the companies in which
sees this as a positive trend, it is vital
it invests.
that companies are choosing the right
CalSTRS has always supported
market-wide governance initiatives
that are expected to improve the
investing landscape for shareholders.
Executive compensation is one of
those governance initiatives that
directly influences the bottom line
Over the course of the first two
as compensation payments come
years of say-on-pay, CalSTRS staff
directly out of the earnings—or lack
observed a number of significant
thereof in some circumstances—that a
changes to compensation plans. Plan
company generates.
components such as tax gross-ups,
Since it is well known that financial
incentives can drive human behavior,
it is extremely important to CalSTRS
that there be an alignment between
the performance of a company and
the compensation awarded to its
executives. A clear misalignment
excessive perquisites, and employment
agreements with guaranteed payments
were disappearing as companies no
longer wanted to be a “target” for
including these pay practices in their
plans. While these problematic pay
practices haven’t been completely
eliminated, the market is definitely
8 / CalSTRS Corporate Governance Annual Report Fall 2014
line with market peer groups.
metrics and ensuring these metrics are
challenging enough to drive value for
all shareholders. While disclosure is an
important component throughout the
Compensation Discussion and Analysis,
explaining why certain metrics were
chosen and how they are structured to
drive value in the business is critical
so that shareholders can understand
how the company’s strategy is linked
to compensation.
CalSTRS has spent a significant amount
4 / ENGAGEMENTS
of time during the past couple of years
to align executives with the broader
CalSTRS will continue to apply the same
engaging with companies about their
shareholder base. CalSTRS hopes that
diligence and care to the proxies it votes
pay plans. The communication between
companies view their failed say-on-pay
and work with the companies in which it
CalSTRS and its portfolio companies
votes as an opportunity to overhaul their
invests to truly align compensation with
goes both ways. In some cases,
compensation programs, with input from
performance to enhance value for all
companies have reached out to staff
shareholders.
market participants.
CalSTRS believes that a thorough
Majority Vote Standards
to seek input. In other cases, CalSTRS
has contacted companies in which
staff has questions about a plan or to
communicate the rationale for voting
against a plan.
review of pay practices is an important
fiduciary duty both institutional investors
and corporate boards of directors
should exercise with diligence and
In 2013 and 2014, the market saw
care. The structure of a compensation
a number of notable companies lose
program provides valuable insight into
their say-on-pay vote by a significant
the inner workings of the board. If
margin. The market wasn’t focused on
directors can’t say “no” to a CEO’s pay
one particular industry—companies
package, how can shareholders trust
from across industries failed to garner
that they will provide proper oversight of
majority support.
the company? Compensation can be a
In CalSTRS’ opinion, these significant
“no” votes were about the sheer
magnitude of company pay as well as
several structural issues that failed
productive tool to incentivize executives,
but it can also be a destructive tool
As shareowners, CalSTRS depends
on corporate directors to protect the
Teachers’ Retirement Fund’s best
interests. To that end, CalSTRS believes
that directors should only be elected
if the majority of shareholders vote in
favor of their election. While the vast
majority of directors are elected with
more than 90 percent of the vote, every
year there are directors who receive
less than 50 percent support and are
still re-elected.
that awards executives for failure or
For many years, there has been
incentivizes unnecessary risks.
an active effort by shareholders
The table below provides examples of companies whose say-on-pay proposals CalSTRS voted against and that did not obtain
majority support.
Company
Industry
Annual Meeting Date
Say-on-Pay Vote
Chipotle Mexican Grill, Inc.
Consumer Services
May 15, 2014
23%
Freeport-McMoRan Inc.
Materials
July 17, 2013
29%
Guess?, Inc.
Retailing
June 26, 2014
35%
Hasbro, Inc.
Consumer Durables & Apparel
May 22, 2014
46%
McKesson Corporation
Health Care Equipment
July 31, 2013
22%
Oracle Corporation
Software & Services
October 31, 2013
43%
CalSTRS Corporate Governance Annual Report Fall 2014 / 9
4 / ENGAGEMENTS
to establish majority voting as the
Since that time, shareholders have
Staff was pleasantly surprised when
standard in director elections. The
increased their efforts to make majority
more than 80 percent of the companies
majority voting standard requires that a
voting the standard by filing proposals
they engaged agreed to adopt a majority
sitting board member receive a majority
one company at a time calling for such
voting or a resignation policy (where a
of the shareholder votes cast in order to
a standard.
director who does not receive a majority
continue to serve as the shareholders’
representative. Many companies use
the plurality vote standard in which a
nominee can be elected with a single
affirmative vote. CalSTRS believes the
alignment of interest is greater between
boards of directors and shareholders
when directors are elected under
vote offers his or her resignation and
Beginning in fiscal year 2010–11,
the board or a committee of the board
CalSTRS embarked on an ambitious
engagement campaign by filing majority
voting proposals at 26 companies.
determines whether to accept it) without
the filed proposal going to a vote. Staff
was also pleased that the majority vote
This effort focused on smaller cap
proposals that went to a vote passed
companies because more than two-
overwhelmingly.
thirds of the companies in that market
cap space still maintained a plurality
Given the success of the 2010–11
standard. This was in stark contrast
campaign, CalSTRS expanded the
to the S&P 500 Index, consisting
program in fiscal years 2011–12,
In 2010, investors pushed for a majority
of the 500 largest publicly traded
2012–13 and 2013–14, attempting
voting standard for director elections to
U.S. companies, where less than
to engage 100 companies in each
be part of the Dodd-Frank Act, but in a
10 percent of companies had a strict
fiscal year. In all three years, a large
last minute compromise the provision
plurality standard.
percentage of the companies engaged
a majority, rather than a plurality,
vote standard.
was left out of the final legislation.
adopted majority voting standards
The following table shows the majority vote standard engagement outcomes for each of the last four fiscal years.
Majority Voting Engagement Outcomes
60
53
48
50
42
40
34
33
30
24
21
20
11
10
6
5
1
0
2013–14
2012–13
9
4
2011–12
5
0
0
2010–11
Standard Adopted Without Filing a Proposal
Proposal for Standard Went to Vote and Passed
Standard Adopted After Filing a Proposal
Proposal for Standard Went to Vote and Failed
10 / CalSTRS Corporate Governance Annual Report Fall 2014
4 / ENGAGEMENTS
without a proposal going to vote, an
on diversity on corporate boards
CalSTRS has also begun a joint effort
even larger percentage adopted the
during the 2013–14 proxy season.
with CalPERS to engage with 131
standard after receiving a proposal to
Staff approached this engagement
California companies regarding the
do so, and the majority of proposals
from a number of different angles,
issue of increasing board diversity.
that did go to a vote passed.
using CalSTRS’ proxy power to engage,
CalSTRS total equity holdings of this
propose resolutions, vote according to
subset of companies is approximately
our guidelines, and advocate for best
$660 million. These companies were
practices in the marketplace.
identified in the 2012–13 report,
Diversity of Corporate
Boards
According to recent U.S. Census Bureau
estimates, women represent more
than 50 percent of our population and
minorities together make up more than
35 percent of our population. Those
same estimates show that Blacks/
African Americans number more than
40 million, Asians make up more than
15 million and Hispanics/Latinos
comprise more than 50 million. Yet,
those numbers are hardly reflected
in the leadership of our nation’s
top corporations.
There is no doubt that corporations are
reaping record profits in part by tapping
into the buying power of women and
UC Davis Study of California Women
During fiscal year 2013–14, CalSTRS
introduced one shareholder resolution
asking for an amendment to relevant
Business Leaders, A Census of Women
Directors and Highest-Paid Executives,
as not having any women members
charter documents to include
diversity as a criterion in the selection
on their board of directors.
and evaluation of candidates for
The majority of the companies
directorships on its board. After the
identified in the UC Davis report
company committed to the substance
have been on the list for the entire
of the CalSTRS proposal and ultimately
three- year history of the study. Five
revised its disclosure in its 2014 Proxy
of the companies—highlighted in
Statement, the proposal was withdrawn.
the 2013 UC Davis study—have
Staff considers this a win-win situation
been previously engaged by CalSTRS
for both the company and shareholders,
for a lack of diversity efforts
as engagement is more efficient and
and were selected for increased
expeditious than traveling the timely and
engagement. CalSTRS’ goal is not
costly shareholder proposal route.
only to increase the board diversity
of these 131 companies, but also
minority communities. According to the
U.S. Women’s Chamber of Commerce,
women make 85 percent of all U.S.
consumer purchases. According to
Below is a sample chart of the number of proposals that CalSTRS directly engaged
the Selig Center for Economic Growth,
on the issue of board diversity over the last five years.
as of 2013, the purchasing power of
the Hispanic/Latino, Black/African-
Diversity Proposal Engagement in 2009−10 to 2013−14
American, and Asian communities
10
was estimated at $1.2 trillion, $1
trillion and $713 billion, respectively.
Given the importance of these
communities to corporate profits, it is
8
6
4
imperative that they be represented in
2
corporate boardrooms.
0
2009−2010
2010−2011
2011−2012
2012−2013
2013−2014
As in every proxy season since 2008,
CalSTRS continued its long-term focus
Withdrawn
Voted
CalSTRS Corporate Governance Annual Report Fall 2014 / 11
4 / ENGAGEMENTS
for these companies to widen the pool
of existing network structures that
U.S.-based organizations that facilitate
of board candidates considered by
impede diversity.
environmental risk dialogue at both the
using alternate resources, such as the
CalSTRS-CalPERS jointly sponsored
Diverse Director Datasource. Since
this engagement began, 13 percent of
these companies have announced that
they have placed at least one woman
on their boards. This is a long-term
engagement project for CalSTRS.
Diverse Director
DataSource
company and policy levels.
Sustainability
Often referred to as environmental,
social and governance considerations,
sustainability has been a principal
focus of the CalSTRS Corporate
Governance team for many years. As
a large, diversified global investor,
CalSTRS recognizes that it needs to
be mindful of its exposure to a variety
of sustainability-related risks. The
Corporate Governance Unit’s job is to
consider which sustainability issues
are material to investment value, where
these issues might impact value, and
what can be done to mitigate CalSTRS’
Developed by CalSTRS and CalPERS,
exposure to them.
and owned, operated and maintained by
CalSTRS staff pursues multiple
sustainability-related engagements
simultaneously. These engagements
can be event driven or geared toward
promoting sustainability awareness
in a specific sector or around a
particular theme.
Energy Efficiency Initiative
In an effort to get more portfolio
companies focused on carbon
emissions management, and at
the same time drive cost savings
to improve value, staff has been
focusing on promoting energy efficiency
considerations at large U.S. companies.
MSCI, the Diverse Director DataSource
At the direction of the Teachers’
Investments in energy efficiency are an
is a clearinghouse for corporate director
Retirement Board, the governance
attractive way to curb volatile energy
candidates, with a special emphasis
staff has developed a sustainability
costs, can help companies respond to
on a more diverse range of skills and
risk management program that works
potential regulations, and can enhance
experience. Shareowners, nominating
to identify and mitigate sustainability-
a company’s role as a corporate citizen.
committees and commercial executive/
related risk in the CalSTRS portfolio.
director search firms can search
The program focuses on engaging
the 3D database of candidates as a
portfolio companies, fellow investors,
means to expand board diversity, which
regulatory agencies, and government
has been shown to improve overall
officials on the importance of integrating
corporate performance. While 3D is
sustainability considerations into
intended to identify a robust and diverse
corporate operations, regulatory actions,
candidate pool, it does not create any
government policies, and investor
preference based on race, sex, color,
evaluation and analysis.
ethnicity or national origin. Companies
accepting candidates to the board will
be responsible for due diligence and
the candidate for a board nomination
is responsible for his or her own data.
Candidates can self-nominate into
3D to mitigate against the exclusivity
In fiscal year 2013–14, staff sent
engagement letters to 21 companies,
with a combined portfolio value of
approximately $1.2 billion, identified
through its analysis of companies held
in the Russell 1000 Index. The letters
outlined CalSTRS’ belief that companies
need to be cost effective, that
incorporating efficiency initiatives into
CalSTRS also supports organizations
business plans would be beneficial from
that promote sustainability awareness
a financial and reputational perspective,
and facilitate dialogue on sustainability-
and that little disclosure surrounding
related concerns. CalSTRS is a
the company’s efforts at efficiency could
signatory to the CDP as well as to the
be found.
PRI. CalSTRS also supports Ceres and
the Investor Network on Climate Risk,
12 / CalSTRS Corporate Governance Annual Report Fall 2014
4 / ENGAGEMENTS
Fourteen of the 21 companies targeted
efficiency was being considered or
a level of fossil fuel reserves that, if
responded to staff’s engagement
agreed to implement energy efficiency
burned, would increase atmospheric
letter. Most of these companies had
reviews of their operations, and are
levels of carbon dioxide such that global
considered, were considering or were
committed to publicly disclosing energy
temperatures would rise to a level that
willing to consider energy efficiency
efficiency initiatives. For this reason, all
couldn’t support human society. Some
initiatives. The seven companies that
seven proposals were withdrawn.
experts have predicted that between
did not respond to CalSTRS engagement
40 percent and 60 percent of fossil fuel
letter received proposals calling for
reserves would need to be sequestered
Fossil Fuel Reserve
Engagement
energy use management reports.
However, subsequent to receiving
if global temperatures were to remain
Stranded Asset Theory, as it relates to
CalSTRS’ shareholder proposal, all
fossil fuels, theorizes that companies
seven companies chose to engage staff
in the oil & gas and coal industries are
and either demonstrated that energy
overvalued as their value is based on
within tolerable limits. Were this
sequestration to occur, theorists claim
that the valuations of oil & gas and coal
companies would dramatically decline.
The following chart shows the various sectors engaged and the portfolio value in each sector in fiscal year 2013–14.
Building Materials
Chemical Fertilizer
Coal Mining
$8,409,964
$46,462,184
$4,311,833
Containers & Packaging
Drug Retailers
$80,065,116
$8,951,646
Food & Beverage
Industrial Goods
$150,504,617
$18,090,038
Oil & Gas
Pharmaceuticals
Electricity Generation
$287,919,915
$45,865,396
$10,708,264
Retailers
Specialty Gases
Steel Manufacturing
Waste Management
$389,369,014
$19,747,677
$36,501,577
$63,869,504
CalSTRS Corporate Governance Annual Report Fall 2014 / 13
4 / ENGAGEMENTS
CalSTRS has
established a crossasset class group,
the 21 Risk Factor
Review Committee,
to evaluate and
address issues that
affect the total fund
and aid individual
asset classes in
engagement on
these issues.
During fiscal year 2013–14, staff
Policy), the Responsible Contractor
continued to engage relevant energy
Policy and the Divestment Policy, all of
companies held in the Global Equity
which are available in the Corporate
portfolio concerning their fossil fuel
Governance section of the CalSTRS
reserve valuations. This issue was
website at CalSTRS.com. While
one of the higher profile risk issues
each asset class within CalSTRS is
to surface during fiscal year 2012–13
responsible for addressing the 21 Risk
and its significance carried over into
Factors as they relate to its portfolio,
fiscal year 2013–14. The dialogues
CalSTRS has established a cross-asset
have been centered on how and why
class group, the 21 Risk Factor Review
energy companies are making capital
Committee, to evaluate and address
expenditure decisions to seek more
issues that affect the total fund and aid
reserves when the viability of existing
individual asset classes in engagement
reserves is being challenged.
on these issues.
CalSTRS has joined many other
The 21 Risk Factor Review Committee
institutional investors in this
is chaired by the Corporate
engagement, which is focused on
Governance Unit and consists of the
45 companies held in the CalSTRS
Chief Investment Officer, the Deputy
Global Equity portfolio. CalSTRS’
Chief Investment Officer and at
holdings in these companies have
least one senior staff member from
a combined portfolio value of
each investment unit. Additionally,
approximately $5.9 billion. During fiscal
the Corporate Governance staff is
year 2013–14, staff led or participated
responsible for the research and
in engagements with Exxon Mobil,
presentation of items to the committee,
Chevron, Occidental Petroleum, Apache
as well as the reporting of activities to
Corporation and Chesapeake Energy
the Teachers’ Retirement Board. The
and expects dialogues with these
21 Risk Factor Review Committee was
companies, and others, to continue
originally created to review investments
throughout the 2014–15 fiscal year.
potentially meeting the criteria of
legislatively mandated divestment.
21 Risk Factor Review
Committee
CalSTRS actively works to address and
minimize the geopolitical and social risk
to which the fund is exposed. To further
this effort, the Teachers’ Retirement
Board has implemented several
policies, including the Investment Policy
for Mitigating Environmental, Social
and Governance Risks (21 Risk Factor
14 / CalSTRS Corporate Governance Annual Report Fall 2014
Since that time, the committee has
expanded its scope beyond companies
targeted under divestment legislation.
The committee now evaluates
companies identified as potentially
exposed to ESG risk issues such
as geopolitical risk, labor disputes,
environmental degradation, human
rights, CalSTRS tobacco divestment and
CalSTRS firearms divestment.
5 / PROXY VOTING
CalSTRS votes all of its U.S. and non-U.S. proxies in a
Institutional Shareholder Services, Governance Metrics
manner that aligns with its interests and philosophy. Not only
International, Equilar, MSCI ESG Research, and Sustainable
is the voting of proxies a fiduciary duty, CalSTRS believes
Investment Institute. Additionally, CalSTRS frequently has
that the execution of proxies is an important fundamental
dialogues with corporate issuers and other relevant parties to
shareholder right, and staff always seeks to exercise CalSTRS’
obtain additional information or perspectives before making a
rights in a consistent manner that is in the best interests of
proxy vote decision on key shareholder issues.
its beneficiaries.
Since 2011, CalSTRS has voted both U.S. and non-U.S.
As a long-term asset owner, CalSTRS believes that it can
proxies in-house by using the Glass Lewis proxy voting
use its proxy votes to support certain corporate directors or
platform. Glass Lewis follows CalSTRS’ proxy voting guidelines
shareholder proposals to introduce necessary changes that
when voting proxies on the fund’s behalf. CalSTRS staff
will enhance the company’s long-term shareholder value.
casts votes on mergers, shareholder proposals, contested
When voting proxies, CalSTRS relies on the Corporate
Governance Principles, which can be found on CalSTRS.com.
These principles serve as guidelines to be used in conjunction
election meetings, and extraordinary vote items. CalSTRS is
also committed to disclosing its proxy votes on its website at
CalSTRS.com.
with analysis and judgment when voting proxies. The principles
CalSTRS keeps abreast of high-profile shareholder issues
consider best practices for corporate governance on topics
in the investment community by attending conferences and
such as the board of directors, auditors, compensation plans
participating in webinars hosted by proxy advisory firms,
and governance structure.
investor activists, corporate issuers or other pension funds.
To assist staff in its proxy vote analysis, CalSTRS subscribes
to proxy research from vendors such as Glass Lewis Co.,
In the 2013–14 fiscal year, the high-profile shareholder
topics included say-on-pay, political spending and lobbying,
environmental issues, and proxy access.
CalSTRS Corporate Governance Annual Report Fall 2014 / 15
5 / PROXY VOTING
The following table details CalSTRS’ proxy voting guidelines on major issues.
Issue
CalSTRS Proxy Voting Guidelines
Directors
CalSTRS generally votes in support of a director unless the proxy statement shows
circumstances contrary to CalSTRS’ policy. Some circumstances that warrant a withhold vote
for a director include a potential conflict of interest due to other directorships or employment,
providing legal or investment banking advice, poor board meeting attendance (less than
75 percent) or a lack of board independence.
Auditors
CalSTRS will vote to ratify the independent auditors recommended by management unless the
auditor provides services that run contrary to those in the CalSTRS policy. Examples of those
services include consulting, investment banking support, and excessive non-audit fees (greater
than 30 percent of the total fees billed).
Compensation Plans
Companies provide a variety of compensation plans such as stock option plans, employee
stock purchase plans, and so on, for executives, employees, and non-employee directors. Many
of these compensation plans provide for the issuance of long-term incentives to attract, reward
and retain key employees. CalSTRS evaluates these compensation plans based on their design
and factors such as the performance metrics, burn rate and dilution potential.
Say on Pay
CalSTRS refers to its Principles for Executive Compensation when voting the Advisory Vote
on Executive Compensation, more commonly known as say-on-pay. The say-on-pay vote
provides shareholders the opportunity to ratify the compensation of the named executives
in the proxy. CalSTRS generally supports the say-on-pay vote if the company provides a clear
alignment between performance and pay in the plan and the total executive compensation is a
reasonable amount.
Mergers & Acquisitions
When CalSTRS votes for a merger or acquisition, it is done on a case-by-case basis using
a total portfolio view. Some considerations are given to the strategic rationale behind the
transaction, the sales process, the change in control amount, the price premium or lack of it,
the market reaction and the impact on the corporate governance of the surviving entity.
Other Issues
CalSTRS votes corporate actions or corporate governance issues such as those related to
spin-offs, incorporation, stock issuance, stock splits, and charter and bylaw amendments on
a case-by-case basis. Similarly, CalSTRS votes on a variety of shareholder proposals such
as sustainability, political contributions and social issues on a case-by-case basis using the
guidelines set by the Teachers’ Retirement Board.
16 / CalSTRS Corporate Governance Annual Report Fall 2014
5 / PROXY VOTING
In fiscal year 2013–14, CalSTRS voted on more than 7,900
proposals covered a variety of topics, including the election
meetings, of which approximately 3,000 were from U.S.
of directors, the ratification of auditors, the ratification of
companies and approximately 4,900 were from non-U.S.
compensation reports or plans, the approval of executive and
companies. These meetings resulted in CalSTRS considering
director compensation plans, and the approval of mergers and
more than 25,000 proposals for U.S. companies and
acquisitions. A detailed summary of the voted proxies for the
approximately 49,000 proposals for non-U.S. companies. The
2013–14 fiscal year can be found at CalSTRS.com.
The following table shows the top issues CalSTRS voted on in fiscal year 2013–14 by volume.
Top Issues by Volume
Percentage For
Percentage Against
Total
Election of Directors
66%
34%
17,546
Ratification of Auditor
91%
9%
2,776
Advisory Vote on Executive Compensation
83%
17%
2,533
Equity Compensation Plan
79%
21%
829
Merger/Acquisition
98%
2%
130
Increase in Authorized Common Stock
15%
85%
107
Total
71%
29%
23,921
CalSTRS Corporate Governance Annual Report Fall 2014 / 17
5 / PROXY VOTING
The following chart shows how CalSTRS voted on certain issues and the volume in fiscal year 2013–14.
Severance Packages
Against
26
Environment
Independent Chairman
43
68
0
Restrict Exec. Comp.
41
15
Majority Voting
31
0
Declassify Board
18
0
Proxy Access
5
0
For
64
25
11
10
20
30
40
50
60
70
80
The following chart illustrates the type and volume of the major shareholder proposals that staff considered during
fiscal year 2013–14.
Misc. Governance Issues, 79
Political Contributions, 94
Declassify Board, 18
Right to Call Special
Meeting, 16
Misc. Social Issues, 41
Written Consent, 30
Proxy Access, 16
Voting Standards, 49
Independent Chair, 68
18 / CalSTRS Corporate Governance Annual Report Fall 2014
Compensation, 75
Environmental, 69
5 / PROXY VOTING
Staff looked at the number of votes cast on major issues
In fiscal year 2013–14, there was also an increase in
for U.S. proxies in fiscal year 2013–14 compared to the
shareholder proposals related to environmental issues and
2012–13 fiscal year and found that fewer director elections,
political activities. The large increase in the environmental
auditor ratifications and compensation plans were considered.
shareholder proposals is likely due to renewed interest in
The decline in the number of directors, auditors and
sustainability and fossil fuel risks. The slight increase in the
compensations plans considered is likely attributable to the
number of shareholder proposals related to political activities
fewer shareholder meetings staff voted on—approximately
is likely attributable to the U.S. Supreme Court decision on
3,000 in fiscal year 2013–14 compared to approximately
the Citizens United v. Federal Election Commission case
3,200 in the 2012–13 fiscal year.
allowing independent political expenditures by corporations. In
response to this decision, shareholders have been requesting
more information on and disclosure of political spending and
lobbying activities from companies.
The following table shows the number of proposals considered on major issues in fiscal years 2012–13 and 2013–14, and shows
the percentage change year over year.
Issue
2012–13 Proposals
Considered
2013–14 Proposals
Considered
2012–13 to 2013–14
Change
Election of Directors
18,444
17,546
–4.9%
Ratification of Auditor
2,954
2,776
–6.0%
2,494
2,533
1.6%
1,320
1,273
–3.6%
Majority Voting
30
31
3.3%
Political Activities
82
94
14.6%
Environment
47
69
46.8%
Advisory Vote on Executive
Compensation
Equity Compensation Plan
CalSTRS Corporate Governance Annual Report Fall 2014 / 19
6 / MANAGERS
CalSTRS believes that good governance
Since the majority of the CalSTRS
contributes to better long-term,
assets are indexed, the fund is always
sustainable performance. To capitalize
invested across much of the global
on this outperformance, CalSTRS has
equity markets. By allocating assets
allocated money to select corporate
to corporate governance activist
governance activist managers. The
managers, CalSTRS gains additional
CalSTRS Corporate Governance
alpha by making large investments in
Activist Funds are externally managed,
certain companies. Additionally, as
concentrated portfolios that take large
managers improve the governance and
individual positions and engage boards
performance of their holdings, CalSTRS
and management to undertake value
enjoys the added benefits of holding
driving change. These funds have an
better-performing and better-governed
investment strategy that relies on active
companies in its indexed portfolios.
intervention in a company’s long-term
strategy, capital structure, capital
allocation plan, executive compensation
and corporate governance, including
takeover defenses, board structure and
board composition.
CalSTRS believes
that good governance
contributes to better
long-term, sustainable
performance.
CalSTRS began the Activist portfolio in
June 2004 by initially allocating $700
million to the Relational Investors Large
Cap Fund. Since inception, the program
has expanded and grown to more than
$5 billion invested across nine funds.
The table below shows the current allocations to CalSTRS various activist managers since partnerships were initiated.
Partnership Initiated
Market Cap
Geography
Commitments
Relational
June 2004
Mid to Large Cap
North America
$1 Billion
GO Investment Partners
June 2008
Small to Mid Cap
Europe
$350 Million
New Mountain Capital
December 2008
Mid to Large Cap
North America
$1 Billion
Knight Vinke
March 2010
Large Cap
Europe
€150 Million
Trian Partners
April 2011
Large Cap
North America
$400 Million
Blue Harbour Group
November 2011
Small to Mid Cap
North America
$325 Million
Starboard Value
March 2013
Small Cap
North America
$100 Million
Cartica
November 2013
Small Cap
Emerging Markets
$300 Million
Legion Partners
January 2014
Small Cap
North America
$200 Million
20 / CalSTRS Corporate Governance Annual Report Fall 2014
6 / MANAGERS
The CalSTRS Corporate Governance
contributes to this volatility. Typically,
deteriorating price, then stabilize, and
Activist portfolios are subject to
the holding period for an investment
ultimately improve as the managers’
greater volatility than traditional equity
is three to five years, with a J-curve
engagement efforts are recognized by
portfolios. The concentrated nature
type lifecycle. A typical investment will
the market.
and long duration of each investment
be purchased at a relatively low or
The following chart shows the since inception aggregate performance of the CalSTRS U.S. Activist portfolio relative to the U.S.
public equity index.
CalSTRS U.S. Activist Funds
U.S. Activist Funds
U.S. Index
160%
140%
120%
100%
80%
60%
40%
20%
0%
–20%
April 01, 2004
July 01, 2004
October 01, 2004
January 01, 2005
April 01, 2005
July 01, 2005
October 01, 2005
January 01, 2006
April 01, 2006
July 01, 2006
October 01, 2006
January 01, 2007
April 01, 2007
July 01, 2007
October 01, 2007
January 01, 2008
April 01, 2008
July 01, 2008
October 01, 2008
January 01, 2009
April 01, 2009
July 01, 2009
October 01, 2009
January 01, 2010
April 01, 2010
July 01, 2010
October 01, 2010
January 01, 2011
April 01, 2011
July 01, 2011
October 01, 2011
January 01, 2012
April 01, 2012
July 01, 2012
October 01, 2012
January 01, 2013
April 01, 2013
July 01, 2013
October 01, 2013
January 01, 2014
April 01, 2014
–40%
CalSTRS Corporate Governance Annual Report Fall 2014 / 21
June 01, 2008
22 / CalSTRS Corporate Governance Annual Report Fall 2014
June 01, 2014
April 01, 2014
February 01, 2014
December 01, 2013
Non-U.S. Funds
October 01, 2013
August 01, 2013
June 01, 2013
April 01, 2013
February 01, 2013
December 01, 2012
October 01, 2012
August 01, 2012
June 01, 2012
April 01, 2012
February 01, 2012
December 01, 2011
October 01, 2011
August 01, 2011
June 01, 2011
April 01, 2011
February 01, 2011
December 01, 2010
October 01, 2010
August 01, 2010
June 01, 2010
April 01, 2010
February 01, 2010
December 01, 2009
October 01, 2009
August 01, 2009
June 01, 2009
April 01, 2009
February 01, 2009
December 01, 2008
October 01, 2008
August 01, 2008
6 / MANAGERS
The following chart shows the since inception aggregate performance of the CalSTRS Corporate Governance Non-U.S. Activist
portfolio relative to the non-U.S. public equity index.
CalSTRS Non-U.S. Activist Funds
20%
Non-U.S. Index
10%
0%
−10%
−20%
−30%
−40%
−50%
−60%
−70%
7 / LOOKING FORWARD
Mission
Long-Term: Building Best Practices
The CalSTRS Corporate Governance Unit will continue to be a
Looking toward 2015 and beyond, CalSTRS staff believes
global governance leader and remain a source of innovation
more institutional investor time and attention will be spent on
and collaboration. Staff will employ a diversified engagement
developing and issuing best practices documents concerning
program to mitigate total portfolio governance risk and position
issues investors and companies engage on. When engaging
its activist manager portfolio to enhance the Global Equity
companies, staff is often asked to provide criteria concerning
portfolio and provide above-market investment returns.
what investors feel are best practices on a variety of issues,
including executive compensation, board refreshment and
Short-Term: Issue Focus
For fiscal year 2014–15, the CalSTRS governance staff
expects to continue to focus on the key issues discussed in
this report.
Executive compensation has been a principal issue for
CalSTRS Corporate Governance over the last decade and it will
continue to be an issue of importance going forward. Staff will
engage portfolio companies on how they are working to align
executive compensation with corporate performance. Staff
also expects to work with these companies to make the sayon-pay proposal an effective tool to help shape compensation
policies that incentivize long-term value creation.
Diversity of corporate boards will also continue to be a
signature focus over the next 12 months. CalSTRS staff has
spent several years building support for better corporate board
diversity and staff will continue to encourage companies to
make diversity part of the director candidate consideration.
Sustainability-related engagements will focus on fossil fuel
reserve analysis and energy efficiency. Engagement efforts will
sustainability risk management disclosure.
CalSTRS has published best practices documents in the past
and expects to continue to do so going forward. The CalSTRS
Executive Compensation Model Policy Guidelines, published
in 2009, and the CalSTRS Corporate Governance Principles,
published in 2011, are examples of staff’s efforts to produce
best practice guidelines.
Established best practices guidelines can help define a
middle-ground approach to discussions and avoid adversarial
engagements. Best practices guidelines also help establish
benchmarks and standardizations, and work to identify
corporate and investor policies and practices that fall
substantially outside the established guidelines.
Staff also believes that increased development and
distribution of best practice guidelines can help make
corporate governance analysis less proprietary in nature,
reduce the influence that outside firms such as proxy advisory
services have, and possibly lower the costs associated with
governance analysis and engagement.
also consider the risks associated with hydraulic fracturing.
Collaborating with fellow investors will continue to be an
important tool for achieving success, as will supporting
organizations that promote sustainability awareness.
CalSTRS Corporate Governance Annual Report Fall 2014 / 23
8 / FACT SHEET
Corporate Governance Investment Team
Name
Phone
Number
Title
Areas of Focus
Joined
CalSTRS
Anne Sheehan
916-414-7410
Director
Director
2008
Janice Hester-Amey
916-414-7415
Portfolio Manager
Portfolio Management
1985
Brian Rice
916-414-7413
Portfolio Manager
Activist Mgrs. & Sustainability
2003
Philip Larrieu, CFA
916-414-7417
Investment Officer
Activist Mgrs. & Geo-Political Issues
2005
Aeisha Mastagni
916-414-7418
Investment Officer
Activist Mgrs. & Exec. Compensation
2009
Eric Kwong
916-414-7414
Investment Officer
Proxy Voting & Activist Managers
1989
Ly Van
916-414-7416
Investment Officer
Proxy Voting
2007
Travis Antoniono
916-414-7421
Investment Officer
Proxy Voting
2011
Laurie Winston
916-414-7411
Executive Assistant
Staff Support
1998
Rabiia Abdul-Ali
916-414-7419
Administrative
Director Support
2014
Assistant
Program Description
CalSTRS Corporate Governance Program
Activist Fund
Managers
Legal, Regulatory and
Legislative Support
• Established in 1978 to protect assets through good
Portfolio Company
Engagement
Proxy Voting
• Nine Corporate Governance external managers and
governance and operational accountability. The
multiple side-by-side co-investments. Selection is
Corporate Governance Program includes proxy voting,
biased toward partnerships with experienced and stable
portfolio company engagements, filing of shareholder
management teams and strong track records in engaging
proposal initiatives and portfolio management.
boards and managements to undertake value-driving
• Program benchmark: Russell 3000 Index ex-Tobacco
(U.S. Equity) and MSCI ACWI ex-U.S. Index ex-Tobacco
(Non-U.S. Equity)
24 / CalSTRS Corporate Governance Annual Report Fall 2014
changes to increase long-term shareholder value.
8 / FACT SHEET
CalSTRS Portfolio
Approximate value as of June 30, 2014: $189.1 billion
Absolute Return, 0.8
Real Estate, 11.7
Inflation Sensitive, 0.7
Private Equity, 11.5
Cash, 2.5
Fixed Income, 15.5
Global Equity, 57.3
Transparency and Public Information Requests
CalSTRS strives to be a leader in corporate governance best practices, including transparency.
For more information on the Corporate Governance Program and its managers, visit CalSTRS.com.
CalSTRS Corporate Governance Annual Report Fall 2014 / 25
26 / CalSTRS Corporate Governance Annual Report Fall 2014