With their massive stock holdings, CalPERS and CalSTRS have been leaders in pushing companies on issues such as sky-high executive pay, captive corporate boards that lack diversity, and hurdles to putting resolutions up for a vote by all shareholders.
The two giant pension funds are out front again in a new climate-change wave pushing companies to report and reduce their “carbon footprint” from all activities while also looking at their “sustainability” or ability to prosper in the long run.
A more subtle pressure on companies comes as public pension funds and other institutional investors use what are often called ESG principles (environmental, social and corporate governance) as they buy and sell stock.
Last week the corporate world pushed back when the Securities and Exchange Commission, urged by business groups, proposed new rules for 1) firms that advise big investors on their shareholder votes and 2) for putting issues up for a shareholder vote.
“Generally speaking, CalPERS is concerned that both proposals may have an adverse impact on shareowners’ proxy voting process and ultimately undermine shareowner rights,” said Megan White, CalPERS spokeswoman.
CalSTRS issued a news release that, among other things, strongly urged the SEC not to impose the rule that would “compromise” the independence of the advisory firms and warned that the other rule will “handicap” new ESG proposals that may be raised in the future.
“The proposed rules seek to solve problems that simply do not exist and further diminish the rights of shareholders and their ability to hold corporations accountable,” said the CalSTRS release.
The SEC approved the new rules on a party line 3-to-2 vote, three Republican members in support and two Democrats opposed. In an attempt to ensure a nonpartisan commission, no more than three of the five members may belong to the same political party.
A Reuters news service analysis last week said President Trump appointed SEC Chairman Jay Clayton two years ago with a mandate to encourage more companies to go public and issue stock, rather than remain privately owned.
“The changes — 17 implemented so far with a further nine proposed — are part of a broader push to help reverse a 20-year decline in U.S. public company listings by modernizing disclosures and cutting regulatory costs for firms,” said the Reuters story.
The number of U.S. companies listed on stock markets fell from 7,300 to 3,700 over the last two decades, the CalPERS board was told by staff last year during a discussion of its plan to increase private equity holdings.
In his opening remarks last week, Clayton mentioned another stock market trend: a major change in shareholders. Most stock now is purchased by big investors like pension funds, not average individuals and small “main street” investors.
“The retail / institutional shareholder split has flipped from 90% retail / 10% institutional in 1950, to 20% retail / 80% institutional in 2017,” Clayton said.
Both the California Public Employees Retirement System, with a fund valued at $386 billion last week, and the California State Teachers Retirement System, valued at $242 billion on Sept. 30, each have half of their portfolios invested in stocks worldwide.
Casting informed votes on their shareholder issues is a big job. CalPERS voted in the meetings of 11,000 companies, 3,300 in the U.S., from Jan. 1 of this year through the end of last month, said the spokeswoman.
CalSTRS votes in the meetings of about 8,000 companies a year, a growing number, and votes more than 80,000 times if the count includes each director, shareholder resolution, and audits, said Aeisha Mastagni, CalSTRS portfolio manager.
In addition to other sources, the big funds both use recommendations from the leading “proxy” advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, to save time and money as they follow their corporate governance principles and make voting decisions.
A “proxy” allows shareholders to vote without being physically present at the meeting. CalPERS, the largest U.S. pension fund, publishes its voting decisions in advance to encourage other shareowners to vote the same way. But it’s not a solicitation covered by the new rule.
The proposed SEC rule allows companies that file proxy materials at least 25 days before a meeting (earlier than usual) to review and respond to what proxy advisory firms recommend before shareholder clients see it.
The CalSTRS release said the rule “would require proxy advisors to gain approval from the very companies they are researching before they can release the reports to their investor clients, hampering the proxy voting process which is our fiduciary responsibility.”
Backers of the proposed rule say proxy advisors make too many errors, pointing to a report that opponents said was largely disproven. The rule also requires proxy advisors to disclose conflicts of interest, which some think is aimed at ESG consulting provided by ISS.
“The commission’s proposal is intended to help ensure that proxy voting advice used by investors and others who vote on investors’ behalf is accurate, transparent, and materially complete,” said an SEC news release.
The other proposed SEC rule increases the requirements for putting resolutions on the ballot at shareholder meetings. Many of the proposals are on various ESG or environmental, social and corportate governance issues.
The current shareholder requirement for qualifying a resolution, holding at least $2,000 in stock for a year, is increased to at least $2,000 for three years, $15,000 for two years, and $25,000 for one year.
The SEC said the rule modernizes and updates requirements that haven’t changed for decades. Opponents said small investors would be harmed by the new minimums and by a ban on pooling holdings to meet the new requirements.
In the first update since 1954, the rule also makes it more difficult for shareholders to repeatedly place the same resolution on a company’s ballots. For example, a resolution would need at least 5 percent of the vote to be eligible for another ballot in the following three years.
Repeated votes can be a strategy for raising awareness of an issue. Often, says the Forum for Sustainable and Responsible Investment website, a significant but not majority vote will “succeed in persuading management to adopt some or all of the requested changes.”
In part of his remarks last week, Chairman Clayton said letters he received from a half dozen small “main street” investors were a reminder that action on the proxy issue should not be shareholders and proxy advisors vs. companies but an attempt to balance all interests.
“A common theme in their letters was the concern that their financial investments—including their retirement funds—were being steered by third parties to promote individual agendas, rather than to further their primary goals of being able to have enough money to lessen the fear of ‘running out’ in retirement or to leave money to their children and grandchildren,” Clayton said.
It seems safe to say the best way to that goal is still in dispute. The proposed rules have a 60-day public comment period following publication in the Federal Register.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.