Anne Simpson is described as “one of the world’s most influential investor activists.” She serves as Senior Portfolio Manager and head of Corporate Governance at the California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the United States.
With more than $235 billion in market assets, CalPERS provides retirement and health benefits to more than 1.6 million public employees, retirees and their families.
Prior to joining CalPERS in mid 2009, Anne served as Executive Director of the International Corporate Governance Network (ICGN), an organization that represents investors responsible for $15 trillion in global assets—roughly the value of the entire U.S. or EU economy.
Anne has authored two books on corporate governance, and also serves as a Senior Faculty Fellow and Lecturer at Yale University’s School of Management. She is a graduate of Oxford University, and was a Slater Fellow at Wellesley College.
C-Suite Insight conducted an extensive interview with the London native earlier this year. The first half of our discussion was published in Issue 5, and covered say on pay, as well as the bigger picture of executive compensation, regulation, and institutional investors’ expectations. We now present the second half of the interview, conducted with Anne from her office in Sacramento, CA.
SAY ON PAY & MAJORITY VOTING
C-Suite Insight: Let’s talk a bit more about how say on pay is, in your opinion, not the blunt instrument that it’s sometimes described to be.
Anne Simpson: Oh, absolutely. I mean, as I said, it’s as much of a blunt instrument as a feather duster, good grief.
In the United States, if you don’t like what’s going on, you sell. Hence, much of the regulatory regime is geared up around liquidity and trading. Or you sue, in the grand tradition of litigation in the U.S. So now, with the say on pay provisions in Dodd-Frank, there’s a [new] gentle move. But it’s only a gentle move towards shareholder rights, towards giving the owners—the shareholders —back the ability to hold boards accountable for what’s going on.
CSI: And you don’t think boards are always so accountable. Can you give us an example?
AS: We made a proposal last year—and we’ve got one on again this year—for a company in the hospitality business. The proposal last year won 90% of the votes cast, representing 70% of shares outstanding. But the company’s board [won’t accept it]—the company is still just being stubborn. If you have somebody who doesn’t want to listen to the owners, then majority voting—not just a say on pay—is probably needed. Sometimes you need people on a board who can represent our interests.
CSI: So companies can be screaming bloody murder about this tough new say-on-pay regulation, and politicians can be talking tough. But it doesn’t really add that much, even if it can someday lead to what you think needs to be done.
AS: Yes. Majority voting was briefly in the bill in the House, when it was under Rep. Frank, but it didn’t make it through in the Senate.
CSI: To your chagrin?
AS: Well, what happened is probably sensible, because it would be very difficult to implement a federal method of intervening with state [corporate] law.
CSI: So what do you do?
AS: As I said, we just have to go company by company. We write to them, ask for conversations to discuss the issue, write to them again, and in the end, there’s still a small number of companies that have defied this sensible advice to introduce majority voting. So then we’ll file a proposal [asking] the Board to amend their by-laws. To us, it doesn’t matter if a company is reliant on, say, a brilliant founding entrepreneur. There needs to be a way to allow the owners of the company to have a genuine vote on the election of board members.
CSI: But you can’t nominate anyone directly.
AS: Of course. Because we don’t have proxy access, we can’t always put our own candidate forward. So you face an election in which you can only vote yes, and you can only vote for the people the management puts forward. This is not a process that would merit praise as a model of accountability in any other setting.
CSI: At the end of all this wrangling, what’s the result in terms of your ownership? Your ultimate vote is either to buy up shares, hold steady, or sell them.
AS: Well, the good thing about CalPERS is that we are permanent owners—this may be viewed as a bad thing, if you’re the company. We have the biggest pool of [institutional investor] money in the world, so when we make investment decisions, we are buying shares in order to give ourselves an exposure to broad economic activity. Our investments are there for a very long-time liability, which is to pay future pensions and benefits to 1.5 million people in California. We’re not here for a quick in and out. So as far as the government’s agenda goes, we have patience, we really do have patience. We have the ability to wait and the ability to not go away.
THE UNFORTUNATE NEED FOR CLAWBACKS
CSI: Claw back legislation is also a key part of Dodd Frank. What’s your view here? Another feather duster?
AS: Let me start by saying that having claw back legislation in place is no more than saying if somebody steals something or takes something they’re not entitled to, they must give it back. That’s obvious, isn’t it?
CSI: Seems like it should be, yes.
AS: I mean, isn’t every child told not to take something that doesn’t belong to them? It’s exactly the same with these executives. If they’re rewarded with perks or whatever it might be, shares, to which they are not entitled, it seems to me that it’s not a legal question; it’s a question of common sense that it’s supposed to be given back. What’s useful in Dodd-
Frank is by giving it the holy writ of legislation, you’ve elevated common sense. It’s very sad, in this day and age, that we should require a rule that tells you to give back what you did not earn fairly and squarely.
CSI: But now the Feds can pay you a visit if you violate this rule.
AS: Yes, and I hope this stiffens the spines of Board members. Because a lot of them sat by and let this happen—they let executives put their fingers into the cookie jar and take pretty much what they wanted.
CSI: And some folks got caught…
AS: [At which point] many board members sort of feigned hollering and distress. “Oh, no, oh, no! We have to let them take this because otherwise we won’t be able to ever replace them, they’re so precious and wonderful and marvelous.” That’s not to say that the most lavishly remunerated people aren’t the people who have been bettered in the highest-performing companies. But this is a demonstration of how weak [some] boards have been. If there are no consequences to failing in
your duty, don’t be surprised if people take a pretty sloppy attitude.
FUND MANAGERS & THE SHORT TERM
CSI: So, irrespective of legislation, what can institutional and fund investors be doing?
AS: We need more of the long-term owners to stand up and have a coordinated and coherent approach to tackling these problems. Too often, what happens is that pension funds subcontract the job of investment management to outside fund managers. They think they can delegate their responsibilities, but you know they can abdicate and pass all this onto the
fund manager. And, you know, fund managers are competing on fees. Unlike the liabilities of the underlying owner of the
shares, the fund manager is competing for business on the basis of quarterly fees. He or she is in a beauty parade, competing with other fund managers —this has nothing to do with what’s really happening in the market.
CSI: So this doesn’t sound healthy.
AS: You can find three quarters of active fund managers on the periphery of the market, and charging you mightily for the privilege of working with them. How can that happen? It’s because we don’t have a proper alignment of interests in the fund-management industry. There really needs to be an unbroken chain of accountability for investment professionals—for voting, for making sure that the fund managers are all-in for companies. And we need to make sure that fund manages are rewarded themselves for long-term performance. Otherwise, contagion being what it is, you can be assured that your fund manager will be rewarded on short-term performance. He or she is going to pass that on like a case of head lice, which is then sent onto the board.
CSI: Thus skewing the market.
AS: I think this is where you get the nonsense of quarterly earnings, a tragedy of the commons. It leads to catastrophic
results—a lot of very small, short-term decisions mean companies collectively are not putting the time and the effort and the money into training, R&D, reputation, and all the other good stuff on which healthy economies are based.
