The California Public Employees’ Retirement System (CalPERS) has gotten tough on executive compensation at US companies, voting against 43% of the pay packages given to the top corporate executives at the more than 5,000 US companies in its portfolio in the 2018 proxy season.
Simiso Nzima, CalPERS’s investment director of global equity governance, told CIO that the high number of no votes on “Say-on-Pay” was due to the failure of corporate boards to align the pay of a company’s CEO and other named top executives with the company’s performance.
“At the end of the day, what we’re really trying to make sure of is that when CEOs get paid, shareholders also get paid,” he said.
The advisory Say-on-Pay vote was mandated by the Securities and Exchange Commission starting in 2011 after the financial crisis amidst criticism that CEOs and other top executives didn’t share in the downturn that severely affected investors.
Strikingly, CalPERS 43% no vote on Say-on-Pay is up from 18% in 2017 and a five-year average of 16%, retirement system statistics show.
Nzima said the enhanced standards on corporate pay were put in place to hold corporate boards responsible and ensure that top management compensation packages are aligned with shareholders.
“If the CEO pay is going up and the return to shareholders is not, then we do not support that,” he said.
CalPERS’s frequent votes against Say-on-Pay in the latest proxy season goes against the grain of most investors.
Various studies have shown that around 90% of companies have seen Say-on-Pay approved by shareholders, signaling satisfaction with the top corporate pay scheme.
CalPERS did not disclose which companies it targeted on Say-on-Pay.
The new stricter standards on top executive compensation comes as the largest US retirement system, with $357.7 billion in assets under management, also focuses on a new corporate engagement program aimed at putting pressure on Japanese companies and their lack of independent board of director members.
Highly publicized corporate scandals in recent years have drawn attention to the lack of independent corporate governance at Japanese companies, part of an insular culture that goes back centuries.
Japan’s corporate governance code only requires two independent directors on corporate boards, and while that is up from one several years ago, it’s not enough progress for CalPERS officials. The pension plan is voting against the reelection of company board members, unless a company’s board is comprised of at least one-third independent directors.
Investments in the stock of Japanese companies makes up 8.1% of CalPERS’s $176.7 billion global equity program, the second-largest weighting next to US equities, at 54.8%, show plan statistics.
Nzima said the idea is to improve board oversight by moving the standard to a majority of board members being independent, like in the US.
CalPERS began efforts in 2014 to push for Japanese companies to have one-third independent board members but upped the ante last year when it started to vote against non-independent board members in those companies that failed to comply.
In 2017, CalPERS voted against 6,509 non-independent directors at 864 companies, Nzima said.
He said that in the 2018 proxy season, CalPERS voted against 6,124 independent directors at 794 companies.
Nzima said 94 companies that saw negative votes by CalPERS or were part of a letter-writing effort from the 2017 proxy season have increased independent board members to one-third.
But he said a lot still needs to be done, noting that as of June 30, 2018, only 39% of the companies listed on the Japanese stock exchange had at least one-third independent board members.
“We believe director independence is a critical element of corporate board quality,” Nzima said.
CalPERS has been one of a group of institutional investors putting its focus on Japanese companies. It has also been aided by the government of Japanese Prime Minister Shinzo Abe, who took office in 2012. The prime minister has made corporate governance reform a key pillar of his economic policy.
Nzima said CalPERS officials will discuss the results of the Say-on-Pay votes and the Japanese corporate initiative to the system’s investment committee members at its meeting on September 24.
He said a third initative, corporate board diversity and inclusion, will also be detailed.
Nzima said CalPERS staff wrote letters to officials of 504 companies in the Russell 3000 stock index in July 2017 that were identified based on public discloses as having a lack of diversity on their boards. He said the letters urged the companies to improve board diversity,
Nzima said the pension plan followed up in December 2017 to inform boards that CalPERS would use its proxy votes to hold companies accountable for failure to improve diversity.
He said 30% of the companies—150 out of 504—have since added a diverse director to their board.
CalPERS, meanwhile has voted against reappointing directors to boards where no action has been taken on diversity, Nzima said.
CalPERS statistics show that in the latest proxy season CalPERS voted against 438 directors at 141 companies.
The pension plan did not disclose in how many of the votes were successful in removing members from boards.