Treasurer Denise L. Nappier established the corporate governance program for the Office of the Treasurer in 1999. The goal of the program is to protect and enhance the economic long-term value of investments made by the Connecticut Retirement Plans and Trust Funds (CRPTF). The program, which is periodically evaluated, was developed in accordance with the Treasurer’s fiduciary responsibility to prudently manage pension fund assets and oversee proxy voting decisions, promote corporate governance best practices, and engage in other activities that are critical to the financial performance of the companies in which the CRPTF invests, often referred to as “portfolio companies.”
Connecticut law requires the Treasurer to consider the economic, social and environmental impact of investment decisions by CRPTF. For example, Treasurer Nappier has sought legislative support for statutes governing investments in companies doing business in Sudan, Iran and Northern Ireland, where issues of human rights and/or global terrorism have raised particular concern.
A key component of the corporate governance program is the exercise of the Treasurer’s fiduciary duty to vote on certain significant items that may affect a company’s future financial performance through ballots presented to shareholders at companies’ annual general meetings. These ballots, referred to as “proxy cards,” are considered pension fund assets with economic value.
Through the proxy voting process, investors may elect nominees to boards of directors, approve equity plans, ratify auditors and approve or reject other items submitted by management. In some cases, investors also may vote on items submitted by other shareholders in the form of shareholder resolutions. Shareholder resolutions asking for changes in executive compensation policies and practices, director election standards, shareholder voting rights, board structure, and a broad range of environmental and sustainability issues are common.
Prior to Treasurer Nappier’s first term beginning in 1999, proxy voting decisions were left to the funds’ individual investment managers, often with conflicting results. In 1999 and 2000, the Office worked with the Investment Advisory Council (IAC) to develop comprehensive domestic and international proxy voting policies; the domestic proxy voting policies were updated in 2011. The domestic and international policies, which are part of the Investment Policy Statement (IPS) as mandated by state law, guide proxy voting and other engagement activities at CRPTF portfolio companies. The voting policies are designed to encourage responsible corporate citizenship by CRPTF’s portfolio companies and cover a wide range of issues, from executive compensation and director elections to board diversity and climate change. The voting policies also guide the type of shareholder resolutions that CRPTF would submit in an effort to enhance value and protect the funds’ holdings among portfolio companies.
The Office seeks to engage directly with portfolio companies on corporate governance issues that may positively impact the value of pension fund investments and set best practice standards. Engagements often begin with discussions between the Office and board members, chief executive officers, and/or senior management of portfolio companies, and may last several years. The CRPTF has also utilized the shareholder resolution process, as an engagement tool with portfolio companies. In recent years, the Office has participated in dialogues with The Walt Disney Company, American Electric Power, EMC Corporation, and Ford Motor Company.
In some cases, the Office will take a more proactive approach to hold portfolio companies accountable for substandard corporate governance practices by withholding on nominees for positions on boards of directors (similar to a vote “no”) or putting forward shareholder resolutions.
Withholding votes on directors is often reserved for some of the most egregious governance behaviors, such as serious failures in the board’s oversight of management. Current proxy voting policies also require the CRPTF to withhold on some or all director nominees under certain circumstances, including the combination of the Chairman and chief executive officer (CEO) positions, a lack of board independence, excessive audit fees, and a sizeable disconnect between pay granted to top executives and the financial performance of the company.
While withholds are intended to address poor governance practices occurring in the past, shareholder resolutions can provide an opportunity for investors to engage with companies prior to the annual meeting in an effort to encourage meaningful governance reform. Shareholder resolutions filed over the past decade by the CRPTF have opened the door to negotiations between the CRPTF, the company’s board and executive management. These negotiations frequently end in settlements and the withdrawal of shareholder resolutions.
The CRPTF has broken important ground through its corporate governance program, leading to substantial progress on issues critical to maintaining and increasing shareholder value. Below is a partial list of corporate governance reforms achieved during Treasurer’s Nappier’s tenure.
Treasurer Nappier has been a leading advocate for executive compensation policies and practices that reflect individual and company performance. The Office continues to work together with portfolio companies on a number of pay issues, including executive severance payments, compensation consultant disclosure, responsible use of company stock, and annual advisory votes on executive compensation (“Say on Pay”). Through its engagement activities, the Office has reached several agreements with portfolio companies, including Citigroup, Goldman Sachs, Bank of America, CVS/Caremark, ExxonMobil, Lockheed Martin, and Merck & Co.
The CRPTF looks to boards of directors to represent its interests as investors, and the corporate and financial institution failures during the 2007-2009 financial crisis only underscores the need for strong leadership at the board level through directors that are competent and independent from management. In previous years, the Treasurer has advocated for the independence of the board Chairman at The Walt Disney Company and Time Warner to promote good governance and rigorous oversight at the board level. Other structural and governance issues pursued by the Office include the ability of shareholders to put director nominees on the ballot (“Proxy Access”), independence of board members, excessive numbers of directorships by nominees, board diversity, and risk management oversight.
Corporate Citizenship and Sustainability
Investors are increasingly recognizing the importance of adopting responsible business practices that may impact investment performance. The Investment Policy Statement requires the Treasurer to adhere to strict guidelines on fiduciary investment prudence and corporate citizenship, including corporate governance and equal employment opportunity. Prudence and the consideration of corporate citizenship are recognized as complementary goals by State law. Pursuant to her fiduciary duty and Connecticut law, Treasurer Nappier may consider the economic, social, and environmental implications of pension fund investments. Treasurer Nappier also is required by Connecticut law to consider the implications of investments in relation to the foreign policy and national interests of the United States.
Environmental disasters, including the Massey Energy coal mine explosion and BP’s massive oil spill in the Gulf of Mexico, and most recently, the impact of Hurricane Sandy have underscored the importance of corporate citizenship on investment performance and long-term sustainability. Risk management and mitigation strategies that address both financial and operational risks can be critical for sectors that rely heavily on capital derived from natural resources, such as the extractive industries, bottling companies, utilities, automobile producers and big-box stores. The Office has engaged with a number of companies on environmental risk and other sustainability issues, including Massey Energy, American Electric Power, Ford Motor Company, The Home Depot, and NV Energy. The Office also was one of the first signatories to the United Nations Principles of Responsible Investment and is a founding member of the Investor Network on Climate Risk.
Treasurer Nappier works closely with a number of coalitions of leading institutional investors both directly and through investor advocacy organizations in the public and non-profit sectors, including the National Association of State Treasurers, the Council of Institutional Investors, the Interfaith Center on Corporate Responsibility, and the Investor Network on Climate Risk. The Treasurer and Treasury staff also have advocated for responsible corporate governance policies before the U.S. Congress, the Securities and Exchange Commission, the New York Stock Exchange and numerous financial and regulatory entities.