The Altman Interview – Anne Sheehan, Director of Corporate Governance, California State Teachers’ Retirement System (CalSTRS)
Anne Sheehan manages the major corporate governance initiatives on behalf of the California State Teachers’ Retirement System, the second largest pension fund in the United States. Sheehan guides the day-to-day activities of an eight member staff responsible for the oversight of an activist investment management portfolio of $3 billion and execution of approximately 8,000 proxy votes annually. Ms. Sheehan has nearly three decades of management and leadership experience in major policy positions at both the state and federal levels, involving the restructure and reorganizing of state government; and the analysis of unfunded pension and health care liabilities of cities, counties, and public agencies in California. Anne is a board member of the Council of Institutional Investors.
1. F. H. Byrd: Proxy Access may become a reality in 2011, for U.S. companies. What should boards, managements and their advisors anticipate from CalSTRS (and allied activist institutions)?
Anne Sheehan: CalSTRS has a history of focused relationships with boards of directors and that focus will continue whether the access proposal is adopted or not. In our view the board is the only legitimate representative of shareholders and although they do not run the company on a daily basis, they select who runs it, they decide on whether the appropriate amount of risk is being taken in one endeavor or another, they decide on its public persona, virtually all the things that make the securities of a company attractive to the market…
CalSTRS is currently focused on boards of directors at the companies in its portfolio; this takes in everything from the structure and operation of the board, including how the board is established, how well do the Nominating, Compensation, Risk and Audit committees function, what the qualifications the board is seeking from candidates, and how shareholders participate in the nomination process for directors. Some examples of this are the tactical focused effort at flagged directors who were on the boards of failed companies like Washington Mutual, Lehman Brothers, and Merrill Lynch. In recognition of the enormous financial wreck that has impacted our pocketbooks, jobs, pension accounts, and investment accounts, we are asking companies today why they are still putting forth these candidates? Tell us why this person is the best candidate you could come up with to represent shareholder interests on the board of a company that we own stock in? This focus enables us to have a more in-depth discussion on issues such as majority voting, diversity on corporate boards, risk oversight, succession planning requirements for directors, and the like.
2. F.H. Byrd: As advisors to boards and management, The Altman Group has seen an evolution in the standards for assessing the performance of directors and boards used by proxy advisory firms, institutional investors and governance commentators in making a determination on whether to issue a withhold vote recommendation or launch a vote NO campaign. What criteria will CalSTRS use in determining whether to withhold support or initiate a campaign (Vote NO or short slate) against incumbent directors at your portfolio companies?
Anne Sheehan: Specifically when casting votes on directors we are looking to make sure they are fulfilling their duty to us as shareholders. Our primary concern is always the health of the asset, the company and its long-term financial and economic sustainability. I can’t see why the current CalSTRS guidelines on directors would change materially. When we withhold for directors now, we use criteria like attendance, conflicts, service on other companies during the time of a corporate bankruptcy, major litigation--such as the Bank of America case where it appears that shareholders were actively misled about the costs of the Merrill merger-- compensation policies, candidates being over-boarded or having Nominating committees that do not meet, failing to enact shareholder proposals that have received a majority vote and having a board that has less than two-thirds of its members as independent directors. We will continue to use these criteria for withhold/or vote no campaigns.
3. F.H. Byrd: Do you believe Proxy Access, in whatever form it is approved (SEC or federal law) will foster more frequent and substantive dialogue, or will it create difficulties for boards and companies in communicating with shareholders on issues such as risk and strategy? How are shareholders getting up to speed on these key issues so as to make the most efficient use their engagement with directors and management?
Anne Sheehan: Certainly, the enactment of access should foster more substantive dialogue between shareholders and companies, and between management and directors. I don’t see that it complicates discussion on any of the issues including risk and strategy. CalSTRS plans to use proxy access as a last resort, when all other engagement techniques have failed. As for shareholders being prepared, at CalSTRS, when we engage a company on any issue, we use a variety of resources, both internal and external to review the company. This means everything from information vendors, research vendors, investment managers, because we don’t want to waste either the company’s time or resources, or our own.
4. F.H. Byrd: Recent media stories have reported that CalSTRS and CalPERS, working with other investors, are in the process of developing a database of potential director nominee candidates for short slates and for submission to companies. What skill sets are you seeking from these potential candidates and how will you assure that these individuals meet (or exceed) the criteria specified by companies’ boards of directors?
Anne Sheehan: We are working on establishing a database of independent director candidates and we are doing that for a few important reasons. One reason is that there is now demonstrated economic value from having a diverse board of directors and we believe that makes the composition of boards a shareholder value issue. Another reason is the necessity to expand the pool of qualified candidates. Almost 3,000 of the sitting directors on companies in the Russell 3000 are between the ages of 70 and 90, a lot of companies have retirement policies that typically go into effect at 72, and couple that with the adoption of majority voting standards by companies and this looks like a significant long-term shareholder value concern. Add to that the last three decades of market collapses, beginning with the 1987 crash, and we as long-term investors have to take the director pool seriously. In each of these major collapses, the one thing that is a constant is that these failures were cultural, related to the people that were serving on the boards and how they discharged their duties to shareholders. We can only have an effect on the cultural mind-set by expanding the pool. This is not a short-term goal and we realize that this will not be accomplished in one annual meeting season. As to qualifications, the SEC’s recent disclosure rules requiring disclosures regarding director qualifications is going to be very valuable for shareholders because we should learn why the sitting directors are on the boards. Naturally, the qualifications are going to have to match the company’s needs. We will put quality people in the database, many of whom will not have prior public company board service and we will do some screening to be sure that the qualifications that people put forth are true, but the final decision will still be made by shareholders when they vote. The nominating committees on these boards are going to be critical to this effort as well and in the final analysis, we are dealing with a human problem and there are no guarantees. There aren’t any in the current environment and the existence of the CalSTRS/CalPERS data base is not going to produce any magical guarantees either.
F.H.Byrd: Thanks Anne, we appreciate your taking the time out for us’
The below commentary appeared in the Second Quarter issue of Directors & Boards magazine as part of a special issue examining the role of the board of directors in speaking for the company. Mr. Byrd’s article appears along with opinions from a number of luminaries and thought-leaders in the corporate governance field. The complete article may be found at http://www.directorsandboards.com/whospeaks.pdf.
Directors & Boards: Who Speaks For The Board? - No More Hiding Behind Management’s Voice
Francis H. Byrd, Managing Director, The Altman Group
Since the onset of the Great Recession, the critical question of who speaks for the board, or to what extent the board should speak, has become one of vital importance. The expectations facing directors from regulators, investors, and the business media may be misplaced, but they now represent a fact of life. The question now is not whether the board should speak, but who from the board should speak besides the CEO, and under what circumstances.
Ordinary circumstances such as earning releases, new product introductions, analyst conferences, and engagements with shareholders usually do not require the presence of a board member. Our experience at The Altman Group leads us to say that the party who should speak for the board depends on the answers to the following three questions:
• What Is the Nature of the Issue/Situation? Is the company in a weakened industry and has accepted a massive taxpayer financed bailout, or is it a question of convincing shareholders and proxy advisory firms that the firm’s compensation program drives performance and does not incentivize risky business practices?
• How Does the Issue/Situation Need To Be Addressed? Would the board member need to appear before Congress and/or regulatory agencies to testify, or would participation in a conference with RiskMetrics or BlackRock be an appropriate course of action?
• Who Is the Audience(s) That Will Be/Is Being Addressed? Do the public markets, consumers, and regulators need reassurance about the company’s viability, or are a group of vocal institutional investors perhaps asking for a review and report on the company’s environmental or human rights policies?
Where public and investor confidence in management has been seriously shaken — for example, as in the present crisis at companies participating in a government bailout program — the role of a director speaking for the board can help demonstrate the board’s commitment to, and its involvement in, guiding the company through the rough patch. This represents a “big stage” example of board involvement that most companies are unlikely to ever experience.
More likely, a company may have a problem with proxy advisory firms, or activist shareholders or institutional investors advocating through the shareholder resolution process or short-slate candidacies, for the company to take a specific course of action to increase shareholder value. In these instances the involvement of a lead director (and/or committee chairs, if appropriate) can be extremely helpful in resolving investor concerns — or when necessary, defending the company’s strategy or executive compensation program — and removing from the discussion the appearance of management self-interest.
The bottom line is that the role of the public company board has changed forever. Directors can no longer remain hidden behind management and the CEO as the company’s key or sole spokesperson(s). There will be occasions in the life of a company when board members will need to step up to the microphone, at either a press conference or a teleconference. Directors, executive management, and their advisers should be prepared for this eventuality.
