August 3, 2010

Proxy Access Ahead: A Director Database for the Big Three (CalPERS, CalSTRS and CII)

According to this WSJ article, CalPERS, CalSTRS and CII are jointly gearing up for proxy access by establishing a database of prospective directors. The database is tentatively dubbed 3D for “Diverse Director Database.”

Below is an excerpt of an interview recently conducted by Francis Byrd of The Altman Group with Anne Sheehan who runs the governance initiatives for CalSTRS (here is the full interview) that relates to the 3D project:

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?

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.

Here is a guest post on that sets forth an academic’s view of how proxy access might work, with directors colleges run by activist investors serving as the training ground.

CalSTRS & Relational Investors Threaten Occidental Petroleum with a Proxy Fight

As noted in this WSJ article yesterday, CalSTRS (not CalPERS, as erroneously noted in many media pieces) and Relational Investors threatened to launch a proxy fight recently at Occidental Petroleum by sending this letter to the company’s board, complaining about excessive pay practices and poor CEO succession planning. You may recall that Occidental was one of the three companies that lost a say-on-pay vote during this proxy season, as noted in this blog.

Critical FCPA Diligence in Deals Today

We have posted the transcript for the recent webcast: “Critical FCPA Diligence in Deals Today.”

– Broc Romanek