CalPERS' Simpson keeps a close eye on investments

Anne Simpson is embarking on a mission to make sure all managers and investments connected to CalPERS toe the line on ESG

Snapshot

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Anne Simpson

  • Current position: Senior portfolio manager, investments and director of global governance at California Public Employees' Retirement System, Sacramento, Calif.
  • Fund assets: $254.9 billion
  • Personal: 3 children
  • Age: 55
  • Education: Bachelor's in politics, economics and philosophy. Oxford University.
  • Hobbies: Cooking, gardening, growing lemons and making them into English marmalade.
  • Other activities: Board of directors, Council of Institutional Investors; co-author, with Jonathan Charkham, of “Fair Shares: The Future of Shareholder Power and Responsibility.”

Anne Simpson began directing the California Public Employees' Retirement System's corporate governance efforts four years ago. In 2011, the senior portfolio manager became director, global governance, a subtle but important change from her previous title of director, corporate governance.

The new name reflects a broader mission at the $254.9 billion Sacramento-based pension fund. The program Ms. Simpson directs is no longer just about engaging companies on environmental, social and governance issues. In the next several years, the fund's external money managers and internal investment teams also will be called on to make sure their investment processes take into account ESG factors.

The CalPERS board approved in 2012 a multiyear plan to implement ESG standards across the retirement system's entire portfolio. A key step in that plan will be a symposium in June.

Ms. Simpson was also responsible for convincing the CalPERS investment committee to introduce a concentrated portfolio of investments in the companies it is engaging. This portfolio is in addition to the shares of the companies CalPERS already owns in its index strategies.

Before joining CalPERS, Ms. Simpson had served as executive director of the International Corporate Governance Network in London and as head of the secretariat at the Global Corporate Governance Forum at the World Bank.

How will you be determining what new ESG standards should be applied to CalPERS' investments? There are groups saying “climate change”; there are others saying “human rights”; there are people talking about biodiversity, innovation, water stress. And we can say “Whoa. Yes, we see all of that out of there, but how do you pull that together into a strategy which is about risk and return over the long term?” So the first thing we've done is step back ... we really need to go about this in a very thoughtful way; so we've commissioned this research project. It's being co-chaired by Columbia Law School — we have (Associate Professor of Law Robert Jackson Jr.) from Columbia Law School and (Steven C. Currall, dean of the) UC Davis Graduate School of Management.

We've issued the call for papers and there will be an academic selection committee and the best papers will be debated at a symposium on June 7th. So that's the first thing, that's going to be what matters: What's relevant? How do we define it?

I understand all managers will be subject to a manager expectations document. How will this work? We're going about this research symposium first because we want to make sure that the questions we're asking of our managers are actually going to be relevant. The manager expectations document will apply to private equity, hedge funds, fixed income, everything — and it will apply to our internal managers as well as to our external managers.

What kinds of things are managers going to be expected to document? I don't want to jump too far ahead, but an obvious question is: Do you have a policy on the following issue? Let's say you have a private equity manager that is specializing in investments in a sector like mining or extractives.

So if (that manager does) not have a policy on, let's say, human capital, which includes health and safety, that manager is going to have to explain why they consider this not relevant. And I suggest that that process is going to be a fruitful way to engage with managers on this whole agenda.

Right, because if you're buying a mining company that has an awful safety record, even if their performance is great, it may blow up tomorrow. Absolutely right. That's exactly the thinking based on our real experience with companies like Massey (Energy) or BP or Bank of America. Or UnitedHealth (Group). We've got real-life examples from our own investment experience where we can see that boards not paying attention to financial risk, to human capital and to physical capital, have blown up. It's a risk. So the way to get at this — and this is a big project and it will take time to do it properly, but we're committed to quality, not speed — (is) commissioning this research. We'll have the symposium on June 7th; we'll then have a board workshop to debate the results. We will then start developing the questions that we'll include in our manager expectations document and they will relate to issues to do with the management of human capital, to do with environmental risk, as well as normal governance questions ... We'll pilot (an initial project) with a number of our internal and external managers to make sure that we're not missing things and we've got this all fine-tuned in a good way.

How has CalPERS changed its corporate governance approach since you arrived in 2009? It was clear to me in that first year, and of course this is in the wake of the financial crisis, that we're in the midst of wreckage and the inquiry is not just on governance. It became clear that we also needed to be broadening the agenda of the conversation with companies to consider risk management. We needed to be thinking about what it means to support a company in developing a long-term strategy. We also shortly thereafter had disasters like BP, Massey — companies where environmental and social risks translated into a collapse in share price.

After joining CalPERS, you eliminated the “name-and-shame” list. Why? So two things became clear: the first was that if we can engage companies in private, we will often come to agreement. That was my experience in year one. So we commissioned a study from (CalPERS consultant Wilshire Associates Inc.) to ask a question, which was: For the companies CalPERS engaged in private, vs. the name-and-shame list, over a 10-year period, what were the results financially? And my sort of intuitive sense of what's effective was in fact borne out. The companies that had been engaged privately had made a more effective financial recovery. And this isn't claiming that CalPERS has credit for restoring these companies to health. Our role is not to attempt to interfere with the running of the company; it is to hold the board accountable and for the board to oversee the management strategy. But that group of companies that were engaged privately, their performance was actually significantly better after the engagement process than the companies that had been on the name-and-shame list.

So that was a compelling piece of evidence and we decided, therefore, that instead of a public naming of companies, it would be better ... to have a genuine exchange of views. But if it's an important issue and it needs to be addressed, we should follow up with filing a shareholder proposal. And that's what we've done.

Is there resistance by some corporations to improve corporate governance despite your intervention? Let me give you an example. Hospitality Properties Trust is a company we've engaged for some time due to performance issues and poor governance. The issue here is that a director lost the vote and the board immediately reappointed him. It's a perfect example of what we've just said. So he lost the vote, he stepped down and that same afternoon they (the board) said: Well, he's so well-qualified. And the other thing they said, which I loved, was: “We've got a vacant seat on the board because this person has lost the vote. Who should we appoint? Ah! You're here, and you know so much about the company, please come back.” And so he went straight back in.

This article originally appeared in the March 18, 2013 print issue as, "Keeping a close eye".