The California Public Employees’ Retirement System (Calpers) is the big ($294 billion) public pension fund in California, and it has an important message for corporate board members: “It’s time to retire.” Calpers is introducing new policy that is determined to add more women and an array of minorities to key positions at the biggest companies in the United States. Calpers recently targeted Lee Raymond, who is the 77-year-old lead director at JPMorgan Chase & Co. Raymond is five years older than the bank’s typically recommended retirement age of 72, and as a white male, exemplifies the group of leaders Calpers is trying to change.
Anne Simpson is the director of corporate governance at Calpers. Simpson explains that, “We’ve got board stagnation. We’re not going to create an opportunity for new members for diversity to progress unless there’s some space.” Just 3 percent of companies, “on the Standard and Poor’s 500 Index have term limits for non-executive directors.”
Activist investors are beginning to make these companies their battleground for improving shareholder rights. “Directors’ independence can be compromised after 10 years, and companies should either classify them as non-independent or provide an annual explanation why, Calpers said in a set of principles released Thursday. Routine discussions about replacing directors would ensure boards have a ‘necessary mix of skills, diversity and experience,’ Calpers said in the document.”
When investors take issue with things like diversity, they force companies to pay attention. S&P 500 boards, “replace about 7 percent of their members annually and the average tenure is 8.5 years…Among those boards, only 3 percent set an explicit term limit for directors and 73 percent have a mandatory retirement age, typically age 72 or older.” However, retirement ages are not often respected, which allows many to remain in their position longer.
There has been increased pressure from investors and the public for big companies to analyze the diversity of their boards, and make changes to increase the variety amongst their leadership. “Board composition has become easier to track, and high-profile examples of homogeneous boards at Facebook Inc. and Twitter Inc. drew attention to the issue.” As pressure grows, companies have begun to comply by considering a wider range of candidates. In response, there have been modest increases in gender diversity on boards.
In 2013, a report by the Alliance for Board Diversity noted that white men occupy 73 percent of the 5,488 board seats in Fortune 500 companies. However, the only way to bring new people into boardrooms is to make sure there are seats available to accommodate the new talent. The only way to make sure new seats are available is to limit terms and mandate retirements. However, a one-size-fits-all approach will not do big companies big favors. It’s important to also appreciate that many board members also have years of experience and talent—and losing them may cause a major loss of institutional knowledge.
Investors have a lot of say when it comes to big companies, and new opportunities are emerging for new people because of the demand for diversity. Assessing changes at major companies is important for your portfolio. Our experts at Apex Financial Advisors stay on top of the latest developments with big companies to make sure our clients have portfolios that reflect great opportunities. If you’re interested in diversifying your portfolio, or have questions about financial strategies, contact an expert at Apex Financial Advisors today!