Californian funds look through 3D to diversify boards

The two large Californian public funds, CalPERS and CalSTRS, recently collaborated to help develop a new digital resource dedicated to finding untapped diverse talent to serve on corporate boards. Director of corporate governance at CalSTRS, Anne Sheehan (pictured), discusses the need for such a resource, and why collaboration is such a key component of corporate governance.

For the past couple of years, the California State Teachers’ Retirement System (CalSTRS) and the California Public Employees’ Retirement System (CalPERS) have been working with an advisory panel of leading corporate governance experts to develop a new digital resource devoted to finding untapped diverse talent to serve on corporate boards.

The Diverse Director DataSource, known as “3D”, will offer its subscribers – which will most likely be shareowners and companies – a facility from which to recruit individuals whose experience, skills and knowledge qualify them to be a candidate for a director’s seat.

“3D has been in the works for a couple of years. We have been collaborating with CalPERS, and an alliance of interested firms, diversity groups, headhunters, and investors, to get a pool of talent to act as a source for appointing board members,” the director of corporate governance at CalSTRS, Anne Sheehan, says.

The focus is not just on “traditional” diversity, such as gender and ethnicity, but also diversity of skill sets, backgrounds, and perspectives.

“There is a lack of diversity of thought on boards. We want to see different perspectives on the issue, and a general encouragement of diversity of thought,” Sheehan says.

The 3D resource will be a data source, acting as a kind of “bench” of people from non-traditional board backgrounds which will be made available to subscribers, who will then be responsible for screening them for the particular position.

While with this particular resource, neither pension fund will be involved with choosing or recommending board members, CalSTRS has indulged in recommending board members before, through the engagement process.

The most vocal of those was the recommendation, with Relational Investors, of a board member at Occidental Petroleum, the culmination of engagement over the oil company’s compensation practices and the board’s failure to abide by its retirement policy, or announce a succession plan for its long-serving chief executive and chairman.

“Through our engagement process we sometimes recommend people for boards,” Sheehan says. “When we do engagement or litigation, 3D is a potential source for us.”

In the past year or so, the issue of majority vote has remained the most debated topic at CalSTRS, with 28 of the 39 shareholder resolutions this year on majority vote.

“Majority vote is an emphasis this year, it’s basic. Why should a board member sit in a meeting when they’re not a majority vote representation,” she says.

To this end CalSTRS is one of a group of investors in the US that have collaborated, and divided the market, in order to ensure full coverage.

“CalSTRS takes on the mid-cap market, CalPERS the S&P500 and Florida sent a letter to the Russell 2000,” she says.

CalSTRS’ corporate governance program includes about $3 billion with activist managers as part of its global equities. It is a relatively new program, with Sheehan only in the job since October 2008. Much of its engagement is based on improving performance and reducing the risk of underperforming companies, but it is yet to develop any meaningful measurement – that is the next step.

The corporate governance program is based on four strategic objectives: proxy voting, executive compensation, board diversity and sustainability risk management.

Sheehan, who is also a member of the Council for Institutional Investors, and the NASDAQ listing council, says the fund will continue to look at poor performers and engage with them on issues such as the separation of chair and chief executive positions.

“You need to de-personalise it when talking to those individuals and discuss the structure, not the individuals, going forward,” she says.

CalSTRS is keen to lead by example when it comes to corporate governance, and Sheehan says there is often a discussion at the board level about keeping its own house in order.

“Every pension fund board has its own balance. We constantly discuss at the board if we throw stones then we have to have our own house in order,” she says noting CalSTRS was an early mover on pay to play and implementing a placement agent policy, by way of example.