Corporate Engagement

Studies [1,2,3] have shown companies with diverse boards and executives tend to have better financial performance than less diverse companies. Better financial performance leads to better investment returns, which improves our ability to pay benefits.

Objective

In August 2016, our Board's Investment Committee adopted the Total Fund Governance & Sustainability 5-Year Strategic Plan (PDF) which identified improving corporate board diversity and inclusion as one of six strategic priorities of the Investment Office. The objective of this initiative is to improve corporate board diversity to enhance our total fund performance.

Consistent with our Governance & Sustainability Principles (PDF), we believe a company's board should reflect a diverse mix of skills, characteristics, backgrounds, and experiences. Our long-term goal is to ensure that all public companies we invest in have a level of board diversity that reflects each company's business, customer base, workforce, and society in general.

Proxy Voting Strategy

On a case-by-case basis we will withhold from nominating/governance committee members at companies that don't make commitments to improve board diversity. Separately, we generally support diversity proposals requesting the company to provide additional information and disclosure at the board, management and employee levels, and where its diversity lags those of its peers or the population.

Shareowner Campaigns

Additionally, we consider the following activities:

• We may run “Vote No” campaigns targeting individual directors at non-responsive companies surrounding our board diversity requests.
• We may file shareowner proposals and run proxy solicitations related to corporate board diversity at portfolio companies as appropriate.

Outcomes

• In fiscal 2022-23, globally we voted “against” 768 directors (nominating/governance committee members) at companies where staff identified diversity concerns related to board composition. This represents an increase in comparison to the 133 directors that we voted “against” in fiscal year 2021-2022.
• Since fiscal years 2017-2023, we've engaged 800 companies in the Russell 3000 index requesting they improve diversity on their boards (Figure 1). Of the 800 companies engaged, 629 companies (approximately 79%) have since added elements of board diversity that they did not have prior to our engagement.

Climate risk presents systemic physical and transition risk to CalPERS' investments. This can affect investment returns.

Background

Our climate risk oversight work dates back to 2015 when we conducted a carbon footprint evaluation of the 10,000+ public companies within our portfolio. We found that the emissions were heavily concentrated – less than 100 companies were responsible for over half of the portfolio's greenhouse gas emissions (scope 1 & 2).

Presently, our engagement and proxy voting work related to climate risk oversight is organized into two initiatives:

• Top Emitters
• Climate Action 100+ (CA100+) Initiative

Top Emitters in Our Portfolio

Objective

We aim to hold directors accountable on climate risk oversight just as we do with diversity and executive compensation. The objective is to encourage top emitters in our portfolio to adopt climate risk best practices, consistent with the CA100+ engagement objectives.

Process

In 2023, we expanded our consideration of specific climate-related criteria to hold directors accountable at our highest 350 emitting companies in the portfolio. These companies account for over 85% of total portfolio scope 1 & 2 emissions and over 50% of scope 3 emissions.

Proxy Voting Strategy

In 2023, for the largest greenhouse gas (GHG) emitters in our portfolio, we implemented a voting practice to withhold votes from relevant committee members (and/or board leadership) who serve on a board that demonstrated a lack of board oversight related to climate-related risks. Consistent with our Climate Action 100+ engagements, we may use the Climate Action 100+ Benchmark to help inform our director votes.

Outcomes

In 2023, we voted “against” 289 directors at 97 of the top 350 highest-emitting companies in our portfolio.

Climate Action 100+

The CA100+ is an investor led initiative to engage systemically-important GHG emitters and other companies across the global economy that have significant opportunities to drive the clean energy transition and help achieve the goals of the Paris Agreement. The CA100+ dates back to 2017 and has more than 700 signatories with more than $68 trillion in assets. We lead engagement at 20 of the 171 focus companies, plus leadership responsibilities.

Objective

The objective of the CA100+ is to engage each focus company to seek the following:

1. Improve the governance oversight of climate-related risks and opportunities
2. Curb GHG emissions across the value chain to be consistent with net-zero by 2050 or sooner
3. Strengthen climate-related financial disclosures in line with the Task Force on Climate-related Financial Disclosure (TCFD)

Proxy Voting Strategy

In 2022, we implemented an enhanced voting practice to consider specific climate-related criteria to help inform director votes at all CA100+ companies in our portfolio.

Outcomes

• Over 75% of CA100+ companies have now set a net zero by 2050 target or ambition
• Over 90% of CA100+ companies have taken steps to align reporting with Taskforce on Climate related Financial Disclosure (TCFD) recommendations
• Results and progress of the engagements are detailed in the most recent Climate Action 100+ Progress Report
• In 2022, we voted “against” 95 directors at 26 CA100+ portfolio companies

Shareowner Campaigns

If necessary, we will file or co-file climate shareowner proposals at portfolio companies.

• In 2019, we filed and co-filed climate risk shareowner proposals at four Climate Action 100+ companies.
• In 2020, we co-filed on one climate-related shareowner proposal and ran proxy solicitations for climate-related proposals at 10 portfolio companies that were flagged by the Climate Action 100+.
• In 2021, we filed and co-filed climate-related shareowner proposals at three CA100+ companies and ran proxy solicitations for climate-related proposals at six portfolio companies that were flagged by the CA100+.
• In 2022, we filed and co-filed climate related shareowner proposals at two CA100+ companies and ran proxy solicitation for climate-related proposal at one portfolio company that was flagged by the CA100+.
• In 2023, we filed and co-filed climate related shareowner proposals at two CA100+ companies and ran proxy solicitation for climate-related proposal at one portfolio company that was flagged by the CA100+.

In 2019, we launched a new Executive Compensation Analysis Framework (PDF) for evaluating executive compensation plans at our portfolio companies. View our Executive Compensation Analysis Framework: Frequently Asked Questions (PDF) for answers to commonly asked questions from our engagements on executive compensation with directors and management of our portfolio companies.

Process

We use our Executive Compensation Analysis Framework to evaluate and vote on executive compensation proposals. We'll also proactively engage companies where we've identified a potential pay for performance misalignment.

Proxy Voting Strategy

In 2020, we began withholding votes from directors who are compensation committee members in the same year that we voted against the advisory vote on executive compensation.

Outcomes

• During fiscal year 2022-2023, we voted against 49% of advisory vote on executive compensation proposals. Additionally, we voted against over 1,392 directors when voting against the advisory vote on executive compensation.
• During the 2023 proxy season staff engaged 65 large-cap companies with negative absolute one-year returns of -25% or more to discuss pay alignment in light of recent underperformance.

Japan is the second largest investment market in our global equity portfolio. Research shows Japanese companies have historically lagged their global peers on profitability, valuation, and board independence. Consistent with our Governance & Sustainability Principles, we believe that independent, competent, and diverse boards are the foundation to a sound governance structure and could help improve investment returns of Japanese companies. We believe strong governance practices increase the likelihood that companies will perform better over the long-term.

Background

Our work to advance corporate governance best practices in Japan dates back more than a decade. In 2014, we collaborated with a group of international institutional investors and wrote to many of our largest Japanese portfolio companies requesting that the board of directors be comprised of at least one-third independent directors by 2017. Subsequently, in 2015, we publicly supported the adoption of Japan's Corporate Governance Code and were one of the first U.S. signatories to disclose our commitment (PDF) to Japan's Stewardship Code in 2016. Japan's Stewardship Code aims to enhance long-term returns for investors through constructive engagement and dialogue with publicly traded Japanese companies.

Objective

Our goal is to improve board independence at Japanese portfolio companies by moving the market towards majority independent boards consistent with our Governance & Sustainability Principles (PDF).

Proxy Voting Strategy

In 2017, we implemented an enhanced voting practice for Japan to vote "against" non-independent directors when board independence is less than one-third.

New Proxy Voting Practice for 2023: While we acknowledge the increase in Japan board independence levels in recent years, we believe it’s now reasonable to begin applying a 50% minimum independence threshold for Japan. This threshold is consistent with our voting threshold in all other markets.

Outcomes

• We recognize the hard work and leadership by local market constituents that has been put into the corporate governance reforms in Japan. We continue to support their ongoing efforts.
• Independence levels for the 864 companies that we wrote letters to in 2017 requesting that they consider increasing the level of board independence to at least 1/3 have improved on par with the trend of the broader Japanese market.
• The percentage of Japanese companies with one-third board independence rose from 52% in 2018 to about 98% in 2023 (Figure 1).
• The percentage of Japanese companies with majority independent boards increased from 6% in 2018 to about 19% in 2023 (Figure 2).
• During the 2023 proxy season, we voted “against” 3,464 non-independent directors at 560 companies (of approximately 864 companies) due board independence concerns (Figure 3). This was a significant increase compared to our “against” votes in the 2022 proxy season due to our new proxy voting practice that applies a 50% minimum independence threshold for Japan.