Board Diversity: Not a Slogan, It's Your Bottom Line

Board and C-Suite diversity have long been a priority focus of the California State Teachers’ Retirement System’s (CalSTRS) corporate governance program. Diversity is good for business and specifically good for CalSTRS’ investments. CalSTRS is a passive investor but an active owner concentrated on issues that affect the long-term value of our more than $225 billion portfolio.

Studies published by McKinsey and Credit Suisse over the last few years make a strong case for board and company diversity, reinforcing the positive link between diversity and company financial performance. Beyond the direct economic value to shareholders are the ancillary benefits of board and workplace diversity—including the findings that heterogeneous teams are more likely to remain objective, lean toward innovation and re-examine facts. Board diversity is critical to the proper oversight of managements’ business and risk mitigation strategies; after all, it is the proper execution of the strategies that protect shareholders’ interests.

Pushing the issue of diversity requires a multipronged approach: building relationships with companies, working with like-minded organizations, and using the power of the proxy vote and shareholder proposal. As an active owner, through private engagement, we seek first to understand the barriers to diversity and how a company is working to break them down.

One of CalSTRS’ key initiatives to building relationships is direct portfolio company engagement in concert with other institutional investors and coalitions. The initiative has five components: the California Initiative, the Coalition of 5, the Enhanced Diversity Initiative, updates to our Corporate Governance Principles and filing shareholder proposals.

This initiative goes beyond words—here’s the action:

87 letters sent to California-based companies with no women on their boards resulting in 23 companies appointing 25 women;
61 letters sent to S&P 500 companies with zero or only one woman on their board by a coalition of five global investors;
an engagement strategy that started with 10 select financial and tech companies related to the companies’ pipeline of diverse human capital;
voting against directors on the Nominating Committee—and possibly the full board—if after engagement, no action has been taken to address the lack of board diversity, which is a new CalSTRS CG Principle (in the 2017-18 proxy season, the implementation of this principle could affect 20-26 companies and 60-78 directors);
filing shareholder proposals that highlight our commitment to improving board diversity, including asking companies to expand director searches to nontraditional environments like government, academia and nonprofit organizations.
In 2017, CalSTRS’ proposal on board diversity at Hudson Pacific Properties passed with 84.8 percent support. Andrea Wong was recently appointed to HPP’s board.

CalSTRS recognizes that gender, ethnic and racial parity on corporate boards and at the executive and staff levels remains unattained. But as a result of actions by CalSTRS, other large institutional investors and equality-focused organizations, there’s been a fundamental shift from seeing board diversity as politically correct to financially necessary.

Anne Sheehan

Director of Corporate Governance, California State Teachers' Retirement System