The Advisors' Blog

CalSTRS recently announced that its Investment Committee has approved changes to the pension fund’s Corporate Governance Principles and Stewardship Priorities – both of which will be in place for a three-year cycle.

CalSTRS is the largest educator-only pension fund in the world – with assets totaling approximately $327 billion as of the end of last year​​. If your company is one of the 9,000 in the CalSTRS’ portfolio – which you can check on this page – then you should know that these principles will be used as a voting framework at your AGMs – and the stewardship priorities will guide engagements. For executive compensation, CalSTRS says that one of the main changes is to include a provision ESG metrics. Here’s what it says:

ESG Incentive Metrics: Companies should determine how to best incorporate material environmental, social or governance risks into compensation plans. Metrics should be measurable and linked to a company’s ESG risks or key priorities.

Another change that will affect compensation & human capital committees is that the updated principles include detailed expectations on board responsibilities for human capital management and human capital disclosure. Here’s a paraphrased excerpt:

– Human Capital Management: Boards should have an active role in setting company culture and oversight of the company’s approach to human capital management, which comprises employee wellbeing; incentives and compensation; retention and development; health and safety; fair labor practices; commitment to diversity, equity and inclusion; pay equality; employee development; providing a workplace free of sexual harassment and other forms of harassment; and promoting ownership and accountability. Companies should ensure they employ effective oversight of human capital management practices for domestic and international employees, as well as employees throughout their value chain.

– Human Capital Reporting: Comprehensive reporting on human capital incorporates the practices noted above alongside strategy considerations and can be tailored to each business. However, there are metrics that are foundational to all companies and provide investors with a baseline for understanding human capital management quality. Four foundational metrics that are necessary in reporting include: workforce headcount, total workforce cost, workforce stability metrics, and workforce diversity data.

– Employee Diversity Disclosure: Companies should annually disclose their EEO-1 report, to enable shareowners to understand the composition of the workforce and provide context for workforce investment and strategy decisions. This information would also allow investors to assess the board’s diversity, relative to its workforce

On the hot topic of clawbacks, like Glass Lewis and ISS, CalSTRS’ principles also say that they expect companies to have policies that allow recoupment for situations beyond what is legally required.

Both the principles and the stewardship priorities show that CalSTRS is holding steady with ESG-related topics. CalSTRS says that engaging on these topics is consistent with its fiduciary duties:

The Stewardship Priorities lay the foundation for corporate engagements and market-wide efforts to mitigate potential risks to the portfolio. These priorities are designed so staff can use the influence CalSTRS has as a significant global investor to promote sustainable business practices and public policies that drive long-term financial success on behalf of California’s public educators.

– Liz Dunshee