CalSTRS revises corporate governance principles to focus on labor practices

CalSTRS revised its corporate governance principles that guide pension fund officials' stewardship and also adopted a three-year plan that includes a company's workforce and its community as an issue for engagement with portfolio companies.

Among the revisions to its corporate governance principles, the investment committee of the $304.9 billion California State Teachers' Retirement System, West Sacramento, on Jan. 11 added that company boards' role in setting human capital management standards should include incentives and compensation, retention and development, fair labor practices and pay equality. The principles also include four employee metrics companies should report to investors: workforce headcount, cost, stability including turnover and diversity data.

As part of its three-year stewardship priority plan, its new workforce and community priority empowers staff to influence portfolio companies to ensure a healthy and engaged workforce and to be good stewards in the communities in which they operate, according to a report to the committee.

Separately, also on Jan. 11, investment committee Chair William Prezant asked Brian Bartow, CalSTRS' general counsel, to draft a memo on how consideration of diversity, equity and inclusion aligns with the board's fiduciary duty.

During a panel discussion on DEI, board members and panelists expressed concern with the political backlash now focused on diversity, equity and inclusion.

"We live in a society today that is fairly divisive," Prezant said. "When we talk about these issues there is one side of the world that says, 'Oh my God this is woke.'"

On the other side of the world are those that understand that if companies build a more inclusive community they build great products, he said.

Companies that lack diversity, equity and inclusion as elements of their culture and workforce underperform because they have low moral, are less productive and pay inequity leading to lawsuits, said Indhira Arrington, a partner and chief diversity, equity and inclusion officer at Ares Management Corp, speaking as part of the panel.

Jon Winkelried, a partner and chief executive officer of TPG, said that the animus against diversity, equity and inclusion has ratcheted up in the last month where "DEI is associated with words like its 'racist' and 'discriminatory,'" Winkelried said. "The stakes have never been higher."

He explained that the core rationale for TPG developing an impact business was that TPG executives saw that private equity portfolio companies that were "doing important things for society" such as education, nutrition and climate change were attracting more capital and more customers which translates into better returns.

TPG now has a $20 billion impact investment business that he said is on its way to growing to $60 billion or $100 billion in assets under management.

"It's a good business. It's smart … but certainly at risk in the world today," Winkelried said.