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CalPERS is Say(ing No) on Pay in 2018

The California Public Employees’ Retirement System (CalPERS) is putting its foot down when assessing executive compensation packages in 2018. The US’ largest state pension fund voted against nearly half of executive compensation programs (43%) this past year—amounting to over 900 US companies. One of major catalysts in their increased opposition from last year’s—CalPERS opposed only 18% of executive compensation packages in 2017—is scrutiny on returning value to shareholders over a longer-term horizon. In an interview with Bloomberg, CalPERS’ Simiso Nzima pointed out, “Over one, two or three years, performance might look good, but over 10 years, the relationship sometimes just isn’t there.”

Besides the considerable opposition posed to Say on Pay, CalPERS is zeroing in on harassment/misconduct and board diversity. Just as we’ve seen the #MeToo movement affecting management teams in the mainstream news, CalPERS’ recently updated governance guidelines call for increased disclosure measures and oversight to prevent harassment and other misconduct. In addition, they voted against 438 directors at 141 companies where there were concerns about a lack of diversity in the boardroom.

Bill Requiring Female Representation Passes through California Assembly

California’s board gender quota bill, SB 826, requiring publicly traded companies to have a minimum of one woman on the board by the end of 2019, was amended in assembly last week. Changes were made on the penalties issued on non-compliant companies: $100,000 fine for those that miss the deadline for California Secretary of State’s board member gender information with the pursuant to future-adopted regulations, and a $300,000 fine for a second or subsequent violation. That board diversity threshold would increase from 2022, to two women for boards with five or fewer directors, or three women for boards of six or more. California’s proposition would become the first regulatory mandate in the US. Abroad, countries in the EU have implemented these board quotas.

Major catalysts of this movement include large US pension funds and institutional investors, like CalPERS/CalSTRS and SSGA (who’ve traditionally advocated for increasing female representation on boards), academic research from MSCI and Credit Suisse showing correlation between greater board gender diversity and financial performance, and the realizations of financial impacts stemming from reputational risks and social forces, such as the #MeToo campaign and recent high-profile gender pay discrimination litigation at Alphabet and Oracle.

In a recent Rivel Corporate Governance Council study, North American and, even more so, European investors opined that exhibiting sufficient board diversity aids board effectiveness and helps shape strategic flexibility.


Sen. Warner Presses SEC

Senate Banking and Finance committee member, Sen. Mark Warner (D-VA), pressed the SEC to amend Regulation S-K and require companies to inform investors on their management of the employee workforce. Specifically, in figures scoping issuer’s workforce diversity demographics, employee turnover, employee compensation and business resource group offerings. Ushered in by a 2015 McKinsey report linking companies with more employer on-the-job learning programs to greater financial performance, these figures are argued to add another layer to the investment due diligence process (much like those from increased environmental, social and governance related disclosures). Shareholder proponents, in the past couple years, have stated these metrics could underscore a company’s edge in recruiting and retaining top talent, and provide a look into the breadth of diversity in various tranches of the workforce amid a competitive labour supply crunch.

Last proxy season, the handful of shareholder resolutions calling for reports on gender/ethnic pay gaps, disclosure of federal EEO-1 data and employee diversity reports (mainly repeat proposals) received 36% support on average. Over the last calendar year, about one-third of S&P 500 companies (36%) disclosed the percentage of women in the workforce, the average was 38%. For the fraction of the SPX (13%) that disclosed the percentage of minorities in their workforce, the average was 31%.

UK Gender Pay Gap Figures

As we commented on previously, companies in the UK have now filed information on their gender pay gaps.

The Equality and Human Rights Commission (EHRC) is reporting more than 10,000 companies have complied, with over 1,000 firms reporting figures at the deadline.

They cite a median gender pay gap of reporting companies of 9.7%; 78% of companies pay men more that women on average, with 14% paying women more.  Only 8% reported no gender pay gap.

A pay gap is not the same as unequal pay, which is illegal under UK law, but typically a result of having more highly paid men than women in an organization.

The five sectors reporting the greatest pay gap were:

  • Construction
  • Finance and Insurance
  • Education
  • Mining
  • Communication

The five lowest, all below the median, were:

  • Household Employers
  • Accommodation and Food
  • Health
  • Arts and Entertainment
  • Retail

Two of the companies reporting what has been dubbed a “negative” pay gap, where women are paid on average more than men, are Tesla Motors and Mamas & Papas.

As of this post, the EHRC reports approximately 1,500 companies have failed to comply.

The EHRC has stated it intends to pursue enforcement action against companies that have failed to file.  This will start with a letter to be sent Monday, April 9, advising companies that they have 28 days to comply or face further action. This action will ultimately result in summary conviction and unlimited fines to be set by the court. The EHRC intends to make this a public process, which is likely to prove very problematic for companies and individuals at those firms. They will also be investigating companies with irregular or implausible figures.

With the heightened scrutiny on this issue in both the public and corporate domains, combined with board diversity concerns, increased shareholder resolutions on gender pay equity and other related matters such as EEO-1, the question is how long until we see a push for universal disclosure of this nature in the US?  CEO pay-ratio disclosure could prove to be an insignificant concern if this becomes a mandate of investors and/or regulatory bodies.

The Value of Board Diversity

The Corporate Governance Intelligence Council has just released its latest research conducted among institutional investors, The Value of Board Diversity (the second part of a study on board diversity and engagement with passive investors).

The full report can be viewed for free here: The Value of Board Diversity

This report is based on 97 in-depth telephone interviews with proxy voters at North American and European institutions (65 and 32, respectively), representing approximately $38 trillion AUM.