Leading US pension fund seeks to better reflect diversity of members in its investment strategies.
CalSTRS, the US$306.7 billion (as of 31 May 2021) educator-only pension fund, plans to vote against all directors at firms with zero women on their boards in upcoming years as it reinvigorates its diversity strategy. The fund will focus its diversity efforts on three primary areas: internal staff, the investment industry, and corporate boards.
“As lack of progress in board diversity has continued, more institutional investors are addressing the issue through their proxy voting practices,” a CalSTRS investment committee report on diversity in management of investments stated.
The US pension fund joins a growing list of investors driving change in the boardroom. According to a recent KPMG report on board diversity in the UK, “investors have been a key driving force” behind significant progress on female representation on boards in the UK’s FTSE 350 index companies. Between 2011 and 2021, the percentage of women on FTSE 350 company boards had tripled to 34.3%.
Elsewhere, Norges Bank Investment Management (NBIM) announced in April that it would vote in this AGM season against boards with fewer than two women, as part of its updated 2020-2022 strategy.
Diversity of thought leads to better decision making and better results, said LaShae Badelita, CalSTRS recently appointed (and first) Investment Diversity Officer during an open session of the fund’s Investment Committee on 8 July.
To avoid ‘group think’, the fund is focused on recruiting and retaining a diverse investment team internally, said Badelita.
Badelita has developed a strategic roadmap for diversity in investment management that has four core objectives: clarity, priorities, relevance and implementation. The firm will map the range of current activity on diversity, equity and inclusion. It will also identify areas of focus across the total fund, drawing on industry best practice. Reporting and targets will be integrated into the firm’s strategies, enabling staff to monitor, measure and report on progress of the long-term diversity plan for the investments branch.
These internal efforts will be complemented by external engagement with companies in which the fund invests. As of December 2019, the fund had US$15.5 billion in emerging and diverse manager investments – about 15% of its externally managed portfolio.
On corporate board diversity, 20 out of 25 companies engaged by the California Board Diversity Initiative, which comprises CalSTRS, Calpers and the Los Angeles County Employees’ Retirement Association, have appointed their first woman to their boards of directors. The Initiative partners have a collective US$700 billion under management and engage with portfolio companies that lack gender diversity and have no women board members.
Following the Initiative’s engagement, only 4% of California-headquartered companies had all-male boards. CalSTRS describes this as “a significant reduction” from the previous 29%. Of the companies that appointed women to their boards, one appointed two women while two of the 20 companies appointed a woman of colour.
Beyond the appointments of new directors, numerous companies revised nominating and governance committee charters to expand their commitment to board diversity, inclusive of gender, race and ethnicity, and sexual orientation. Many portfolio companies also incorporated provisions to ensure that any director recruitment would encompass a diverse set of candidates for consideration, said CalSTRS.
CalSTRS also participates in the Cross-Border Coalition of 5, a board effectiveness and diversity initiative that comprises Legal & General, RPMI Railpen and the Ontario Teachers’ Pension Plan, representing more than US$2 trillion in assets. This group engages with US portfolio companies that have long-tenured boards with the goal of improving diversity. The coalition emphasises that each board appointment “is also an opportunity for boards to evaluate any skill set gaps linked to the company’s long-term strategy and plan”.
As part of its diversity strategy, CalSTRS focuses on board composition including the skillsets of directors and how members are nominated and evaluated. “Using our proxy voting guidelines and corporate governance principles we engage alongside other like-minded investors and believe this approach increases our ability to improve long-term returns resulting from enhanced diversity,” stated the Investment Committee report. “Through these engagements we ask companies to assess and disclose in their proxy their boards’ current skillsets and backgrounds and how those align with companies’ long-term strategy to create and sustain value.”
Companies are also asked to affirm their commitment to identifying qualified candidates of diverse gender, racial and ethnic backgrounds for board nomination in board governance policies such as the nominating and governance committee charter. They are also asked to incorporate procedures in which women and diverse racial and ethnic backgrounds are identified for consideration in every search for a board nominee.
“We will continue our work to improve corporate board disclosures around diversity and ensure new board members have skill sets and perspectives that may be absent in corporate board rooms,” said Christopher Ailman, Chief Investment Officer. “It’s imperative that our internal investment team, as well as our investment partners and the company boards in which we invest, reflect the rich diversity of the members we serve.”