Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

In this story:



<ul><li>PERA casts about 60,000 votes on company ballots every year</li><li>PERA&#8217;s Board regularly updates its Proxy Voting Policy, which guides staff who review proposals </li><li>The Board last updated this Policy in February</li></ul>



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As a shareholder of billions of dollars in thousands of publicly-traded investments, PERA casts a lot of votes on company ballots.



In a recent story, we <a href="https://peraontheissues.com/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/" target="_blank" rel="noreferrer noopener">followed one ballot through the entire process</a>—from the day it arrived in Denver to the day the election results were announced. “Voting is our way to communicate to companies and to other shareholders,” said Luz Rodriguez, PERA’s Senior Analyst in the Investment Stewardship division.



Guiding this entire process is the Board’s <a href="https://www.copera.org/proxy-voting-keeping-policy-current" target="_blank" rel="noreferrer noopener" class="broken_link">Proxy Voting Policy</a>. The first edition of this document was created in November 1979. Since then, the Board has made updates 19 times. While the policy changes to meet the needs of evolving issues, the goal remains the same. As the opening to the Policy states:



“We will continue to seek alignment of corporate management interest with PERA’s investment interests, with the ultimate aim of encouraging companies to adopt sound practices in aspects of business that can enhance profitability and long-term shareholder returns.”



<h4 class="wp-block-heading">Issues That Matter</h4>



The 60,000 votes PERA casts annually cover a wide array of subjects. Although it’s a detailed document, the Policy does not specifically address every issue that comes to ballot.



“Governance has always been our focus,” Rodriguez said. “The core governance issues of a company include things like director elections, executive compensation, and audit.”



Over the years, the ballot topics the Policy covers have grown. The Board updates the Policy for a variety of reasons, including: changes to government or industry regulations; industry trends; the need for further clarification of an existing policy; an uptick of a certain issue on company ballots; and new or more data on an issue.



Crafting a good policy takes work, too. “The policy needs enough guidance to be useful but enough flexibility to do a proper analysis of each issue,” Rodriguez said.



<h4 class="wp-block-heading">An Addition to the Policy</h4>



The Board last updated the Policy in February 2021. One topic on the agenda: Human capital management. As Rodriguez explained: “Interest has been growing about how companies are managing the relationships existing throughout a business: Who are their suppliers? How are they managing employees? How do they interact with their customers? How are they impacting the communities in which they operate?”



It’s a complicated topic. But the COVID-19 pandemic underscored the importance of human capital management in markets, business, and communities. “Companies are confronting social externalities of their businesses that were once difficult to conceptualize,” Rodriguez said. 



For example, effective hiring and retention practices at a company can lead to long-term financial benefits and can lead to resiliency when confronted with unforeseen events. The inverse is true as well. Rodriguez said that investors are increasingly considering a company’s human capital management when thinking about its long-term profitability.



Human capital issues can present real financial risks and opportunities to a company, and are appearing on more and more ballot proposals. “This isn’t about taking a stance,” Rodriguez said. PERA staff reviews each proposal in its own context. “We might support a proposal at one company but vote against the proposal at another one.”



So what does staff look at when analyzing a proposal? “Proposals need to be well-targeted and relevant to the company’s operations, and seek financially material disclosures” Rodriguez said. “We need to be able to assess how the company is managing risks and opportunities related to human capital management. We do not support proposals that are overly prescriptive or overly burdensome.”



<h4 class="wp-block-heading">Voting with Purpose</h4>



PERA does not exist to change the way businesses operate. And, while PERA does cast a large number of votes every year, it can’t singlehandedly dictate the outcome of an election. But voting is still a crucial part of the investment operations at PERA.



Voting is part of being a responsible, engaged investor. When the ballots come in, PERA staff must be prepared to vote on every issue, whatever the issues happen to be. The goal of every vote is to align corporate interests with long-term investor interests. Investors benefit from business practices that drive long-term financial performance. And at PERA, these results ultimately benefit PERA members and retirees.

Proxy Voting: Keeping Policy Current

Chipotle’s original store is in Denver, just a few blocks west of the University of Denver. Its quaint corner location has withstood more than 27 years of branding changes; a green sign that vaguely resembles a space-age burrito with a bite taken out of one corner comes across as a family-owned business more than a nationwide chain worth $37 billion.



But it’s not family-owned, at least not anymore. It’s been publicly traded since 2006. In fact, PERA is a shareholder in this homegrown company. At the end of May 2021, PERA owned 4,808 shares—worth about $6,823,000. That’s a lot of guac. &nbsp;That means PERA gets 4,808 votes when the board of directors of Chipotle Mexican Grill, Inc., holds their annual shareholder meeting.



Shareholder voting might seem removed from PERA’s core mission. But it’s an integral piece of being an engaged investor. PERA votes in more than 6,000 annual meetings, casting more than 60,000 votes backed by billions in publicly-traded investments.



<h4 class="wp-block-heading">The Making of a Ballot</h4>



Four to five months before Chipotle held its annual meeting on May 19, 2020, shareholders submitted proposals to be considered. At the most fundamental level, these shareholder proposals are ideas to improve the company’s governance, reduce investment risk, and strengthen long-term shareholder value.



Not every shareholder proposal gets a spot on the ballot, however. A company may challenge a shareholder proponent and attempt to exclude the proposal from its ballot. This is when the Securities and Exchange Commission (SEC) steps in to settle the dispute. The SEC reviews the challenge to determine if the proposal(s) <a href="https://www.natlawreview.com/article/sec-finalizes-changes-to-requirements-submission-shareholder-proposals-prepare-2022" target="_blank" rel="noreferrer noopener">qualify to be on the ballot</a>. Among other things, a proposal must not interfere with “ordinary business.” In other words, a proposal must not overstep the authority given to staff and to the board of directors. The SEC relies on rules and precedent to make a determination on each ballot proposal.



Once the approved measures are finalized, the ballot, which in most cases includes items like the election of board members, is sent to shareholders. The ballot for Chipotle’s May meeting contained seven proposals, four of which came from shareholders. Companies typically include information such as a description of the proposal and the rationale behind the Board’s position, if applicable, similar to the Blue Book that Coloradans receive before elections. You can see the full ballot from Chipotle’s May 2020 meeting <a href="https://www.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal" target="_blank" rel="noreferrer noopener" class="broken_link">here</a>.



<h4 class="wp-block-heading">The Ballot Arrives at PERA</h4>



With tens of thousands of proposals to sort through every year, voting season never ends for institutional investors like PERA.



Luz Rodriguez is PERA’s Senior Analyst in the Investment Stewardship division. She spends a part of each day reviewing proposals and submitting votes. It’s a monumental task. To aid in the research and analysis for every vote, PERA employs the help of a proxy voting service. In addition to research, this service also provides a digital platform that helps manage and organize the constant inflow of ballots.



When a company sends a ballot to PERA, it gets routed through this digital platform where the Investment Stewardship staff can review and submit PERA’s vote. How does PERA staff know how to vote? PERA’s Board has established a <a href="https://www.copera.org/proxy-voting-keeping-policy-current" target="_blank" rel="noreferrer noopener" class="broken_link">Proxy Voting Policy</a> that guides staff on how they make voting decisions.



For example, if a board member of a company attends less than 75 percent of board meetings and committee meetings, PERA will not support that board member’s reelection. Policies like this, which call for a specific vote for or against, are coded into the digital platform PERA uses to vote. For other ballots issues that do not fall into this category, the Policy guides staff to vote on a case-by-case basis.



The best position for PERA to take on any given proposal is sometimes tough to discern, even after being filtered through PERA’s voting policies and procedures. About one in ten shareholder proposals requires a case-by-case review. In these instances, PERA’s Investment Stewardship team reviews each one and performs a more in-depth analysis. Depending on the topic, they might consult with other investment staff and even with other shareholders on occasion. They also reach out to the company directly if they need clarification.



<h4 class="wp-block-heading">Considering Each Vote</h4>



In April 2020, proposal #6 on Chipotle’s May 2020 ballot landed on Rodriguez’s desk. The shareholder proposal, which Chipotle’s board of directors opposed, was titled “Shareholder proposal requesting a report on arbitration of employment-related claims.”



The proposal, if passed, would require Chipotle to do the following:



<ul><li>Report on its use of <a href="https://www.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal" target="_blank" rel="noreferrer noopener" class="broken_link">mandatory arbitration</a> provisions in employee contracts</li><li>Specify the percentage of its workforce subject to these provisions</li><li>Specify how many claims employees initiated and how many claims were decided in favor of employees</li><li>Share how Chipotle updated policies after California proposed banning mandatory arbitration in employment agreements</li></ul>



Chipotle’s board opposed this proposal, saying it would be too costly, offer few benefits, and cited privacy and speed as reasons arbitration was a preferable alternative to taking disagreements to court.



Because this issue dealt with corporate governance but was not specifically addressed in PERA’s voting guidelines in effect at the time of vote, a case-by-case analysis was performed. &nbsp;



<h4 class="wp-block-heading">Making a Decision</h4>



PERA staff does not analyze proposals like this in a vacuum. PERA’s investment goal—to maximize risk-adjusted long-term investment returns—remains at the center of every analysis prior to voting. Proposals are assessed on whether and how they affect the long-term financial stability of a company.



PERA’s analysis of proposal #6 concluded the following:



<ul><li>The proposal was reasonable, sufficiently narrow, and would not infringe on Chipotle’s judgment on the appropriateness of arbitration</li><li>PERA generally opposes forced arbitration as it diminishes shareholder and other stakeholder rights</li><li>Employment-related claims can lead to significant legal, human capital, and reputational costs. Receiving more information about the use of arbitration would be useful to assess risk.</li></ul>



PERA ended up voting in favor of this proposal.



<h4 class="wp-block-heading">The Long-term Impact of Stewardship</h4>



Think about the ballot you cast last November. You likely remember who you voted for president, and you probably remember which Senate candidate got your vote. How many other issues, offices, and ballot measures do you remember?



It’s easy to lose sight of the potential impact that lies behind each vote when your ballot runs three, four, or five pages long. When an institution like PERA casts hundreds or thousands of votes every month, the magnitude of this task can have a blinding effect to outside observers; it’s almost impossible to comprehend, so it is easy to look away and move on.



But PERA takes each vote seriously. This work is done transparently as every vote is <a href="https://viewpoint.glasslewis.com/WD/?siteId=COPERA" target="_blank" rel="noreferrer noopener">published online</a>. To stay current, the Board reviews and updates its voting policies on a regular schedule.



Being an engaged shareholder of more than 6,000 publicly-held companies is an action that connects the sometimes abstract idea of investment stewardship to the tangible mission of providing retirement security to PERA members and retirees. Shareholders don’t run the companies they invest in, but they can help make sure that elements crucial to a company’s long-term success, like effective governance and strong stakeholder rights, are attended to.



In the case of proposal #6 on last year’s Chipotle ballot, PERA voted in line with the majority of investors. It <a href="https://www.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal" target="_blank" rel="noreferrer noopener" class="broken_link">was close</a>: the final tally was 11,552,113 votes for and 11,098,669 against. Earlier this year, Chipotle <a href="https://www.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal" target="_blank" rel="noreferrer noopener" class="broken_link">released the information</a> this ballot proposal called for.



<h4 class="wp-block-heading">The Results of Voting</h4>



Shareholder ballots allow PERA to be an engaged investor, voting on issues that can affect a company’s long-term sustainability and investment returns. Voting also allows PERA staff to continually learn about emerging issues that can affect shareholder value.



For example, the issue at the heart of proposal #6, managing human capital effectively, is not unique to Chipotle. In fact, more and more ballot proposals like this have appeared in recent years. In response, PERA staff made a recommendation to the Board to update its Policy to include guidance for human capital management disclosures and mandatory arbitration provisions.



The Board’s Proxy Voting Policy was formalized and established in 1979 and has been updated many times since. It’s a dynamic document, the product of a continual flow of information among the Board, PERA staff, and the companies in which PERA owns shares. It’s also a plus for PERA members. As this year’s <a href="https://content.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/" target="_blank" rel="noreferrer noopener">Stewardship Report</a> states: “The Policy acts as a public statement on why and how we make voting decisions, and can guide conversations with companies, peers, and stakeholders around PERA’s stance on a variety of issues that can affect financial value. The Policy parameters seek to encourage public companies to adopt sound business practices that align with sustainable shareholder value creation.”

Burritos, Boardrooms, and Ballots: The Story of One Shareholder Proposal

The year so far has been marked by changes—unexpected, difficult, and sometimes disorienting changes. Colorado PERA has been around since 1931. It has been through a world war and a cold war, the dotcom crash and the digital revolution. In other words, while 2020 has been tough, it is neither the first nor the last year of seminal change.



In June, PERA released its <a aria-label="undefined (opens in a new tab)" href="https://peraontheissues.com/pera-releases-2019-financial-returns/" target="_blank" rel="noreferrer noopener">Comprehensive Annual Financial Report</a>. It answers, among other things, a common question about PERA: “How did PERA’s investments perform last year?” This is an important question to ask. Another question, asked a little less frequently, is this: “How is PERA positioning its investment portfolio for the future, a future that will continue to see changes?&#8221;



That question is answered in the recently released <a href="https://content.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/" target="_blank" label="undefined (opens in a new tab)" rel="noreferrer noopener">2020 Investment Stewardship Report</a>. Stewardship means “taking care of something.” In this case, “something” is members’ dollars. This report helps demonstrate the ways in which PERA is continuously evolving, adapting to an ever-changing environment, while keeping its fiduciary duty to members at the center of decision-making processes.



Highlights of the report include:



<ul>
<li>PERA created the Investment Stewardship Division. Having resources dedicated to formalizing and advancing investment stewardship initiatives demonstrates PERA’s commitment to this organizational priority.</li>



<li>By consistently focusing on the most compelling expected risk-adjusted returns, PERA’s <a href="https://content.copera.org/the-importance-of-stewardship-in-uncertain-times/" target="_blank" label="undefined (opens in a new tab)" rel="noreferrer noopener">Real Estate portfolio</a> has generally earned strong returns from investments in green buildings and affordable housing, as well as local Colorado properties, among many other investments.</li>



<li>As an institutional investor, PERA uses its voice to advocate for transparency and disclosure in financial markets. Making information about PERA’s investment activities more accessible to our members and others who have a stake in PERA’s success is equally important. To that end, PERA is also increasing the transparency of its own investments by producing a number of short videos, hosted on <a href="https://www.copera.org/" target="_blank" aria-label="undefined (opens in a new tab)" rel="noreferrer noopener">copera.org</a>.</li>
</ul>



Change seems especially acute in 2020, but the truth is that it’s an ever-present factor. Building an organization that can nimbly adapt to change and that takes the initiative to integrate a variety of considerations into investment decisions helps keep PERA relevant, innovative, and, ultimately, a source of value to our members.



You can find the complete 2020 Investment Stewardship Report as well as the Executive Summary <a href="https://content.copera.org/the-importance-of-stewardship-in-uncertain-times/">here</a>. 



PERA On The Issues will be highlighting key sections in the coming months.

The Importance of Stewardship in Uncertain Times

Stewardship is a central concept at PERA. It’s a concept that
has tangible, observable outcomes when put into practice. This can mean
protecting member assets by reducing costs and being cost conscious. It can
mean advocating for fair, robust markets. It can mean integrating relevant
environmental, social and governance considerations that may be financially
material. 



PERA On The Issues has reported on stewardship before, including <a rel="noreferrer noopener" aria-label=" (opens in a new tab)" href="https://peraontheissues.com/pera-releases-stewardship-report/" target="_blank">introducing the 2019 Stewardship Report</a>, highlighting the ways in which PERA <a rel="noreferrer noopener" aria-label=" (opens in a new tab)" href="https://peraontheissues.com/investment-stewardship-protecting-assets-by-watching-costs/" target="_blank">saves member dollars by lowering costs</a>, and exploring the virtuous cycle a <a rel="noreferrer noopener" aria-label=" (opens in a new tab)" href="https://peraontheissues.com/the-virtuous-circle-of-investment-stewardship/" target="_blank">commitment to stewardship</a> can create.



In the video below, PERA Executive Director Ron Baker and
Chief Investment Officer Amy McGarrity discuss these and other ways PERA approaches
this important topic.







<figure class="wp-block-embed-youtube wp-block-embed is-type-video is-provider-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio"><div class="wp-block-embed__wrapper">
<iframe loading="lazy" title="Colorado PERA: Investment Stewardship (2020)" width="640" height="360" src="https://www.youtube.com/embed/WzBWR6vKoAI?feature=oembed" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen></iframe>
</div></figure>

Colorado PERA Leaders Discuss Investment Stewardship

Investing requires an objective, just like charting a course on a map requires having a destination. A trip to Peru is not a successful trip if the objective had been Norway. Both destinations are viable options when you’re planning a trip, but they can’t both be the objective when you leave home: You can’t travel north and south at the same time. Investment objectives are no different. 



In January 2019, Colorado PERA’s Board of Trustees <a rel="noreferrer noopener" label=" (opens in a new tab)" href="https://www.copera.org/pera-board-of-trustees-updates-divestment-policy-statement" target="_blank" class="broken_link">stated</a> that “PERA serves the singular purpose of ensuring the retirement security of Colorado’s current and former public servants.” That objective not only includes ensuring a secure retirement for the 82-year-old retired teacher who relies on PERA today, but also for the 25-year-old CDOT employee who doesn’t plan to retire until 2059. 



To reach that overall objective, the Board stated that “PERA seeks to maximize long-term risk-adjusted investment returns while incorporating the fund’s liability characteristics.” In other words, PERA must make investments that, altogether, are most likely to provide security for more than 600,000 members.



The Board’s statement continued, “A central component in managing investment risk is diversification&#8221;. This allows an investor, like PERA, to spread out risk (as in “don’t put all your eggs in one basket”) by looking into the widest number of possible investment opportunities.



The Divestment Dilemma



In recent years, outside organizations have suggested that institutional investors like PERA adopt a new objective: Use pension fund dollars to make political or social statements. Over time, these divestment requests have included industries such as mining, fossil fuels, meat, tobacco, guns, and more. 



Each divestment proponent seeks to do good as they define the term. And, in September, PERA staff met with one such group to hear their concerns. But making divestment an objective is problematic. Issues PERA’s Board has raised include:



<ul><li>Limiting the investment opportunities available to PERA could lead to a less diversified portfolio. By accepting potentially more risk or smaller returns, this objective could conflict with PERA’s primary objective to provide retirement security to its members.</li><li>Calls for divestment span many issues. Over time, proponents have identified various industries as candidates for divestment. Deciding which of these to act on would be extremely problematic given PERA’s investment objectives. PERA invests in companies, not causes. Becoming an arbiter on issues like meat consumption or guns is not within PERA’s purview. </li><li>Divesting PERA’s existing holdings within an industry could lead to unintended outcomes. For example, PERA invests for the long term. Some investments might not be profitable today, but are expected to be in months or years down the line. Abruptly selling shares of a company, perhaps at a loss, would be in direct conflict with PERA’s main objective. </li></ul>



An Alternate Reality



Calls for divestment are gaining momentum. Proponents suggest that divesting from certain industries or companies will better enable PERA to achieve its long-term investment objective.



To demonstrate this, some organizations have proposed the following thought experiment: What if PERA had divested from a certain industry in the past and reinvested those dollars elsewhere? These thought experiments suggest PERA could have made millions or billions of dollars by investing differently in the past. 



This type of thought experiment implies PERA could have made investment decisions years ago based on information only available today. That model does not reflect reality. While it’s always possible to find one company or industry that did better than another in hindsight, that isn’t a helpful guide when investing in the real world, where the future is unknown. 



Investing for the Future



Finally, PERA does take into account that environmental, social, and governance factors can indeed affect a company’s long-term profitability. The ability to adapt to a changing world, do business in a sustainable way, and use resources in a way that ensures long-term success can be indicative of a quality company worth investing in. 



Factors like these are part of a mosaic of factors PERA’s investment team considers when making any investment decision. Making investing decisions based on multiple pertinent data points instead of singling out one factor and ignoring the rest is the most responsible way <a rel="noreferrer noopener" label=" (opens in a new tab)" href="https://content.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/" target="_blank">forward</a> for PERA and its members.

PERA’s Investment Objective: Ensuring Retirement Security

Over the <a href="https://www.copera.org/investment-stewardship-protecting-assets-by-watching-costs" class="broken_link">summer</a>, Colorado PERA
released its 2019 <a href="https://content.copera.org/investment-stewardship-protecting-assets-by-watching-costs/">Investment Stewardship Report</a>, which demonstrates how PERA’s commitment to <a href="https://www.copera.org/investment-stewardship-considering-relevant-issues-like-esg-factors-in-investment-decisions" class="broken_link">cost-conscious investment strategies</a> and <a href="https://www.copera.org/advocating-for-stronger-markets" class="broken_link">investment decisions that consider a range of factors</a> preserves the value of contributions to the plan for the longterm
and protects the plan’s financial sustainability for generations to come.



Given its size
and reputation, PERA knows it can have a meaningful impact in creating
financial markets that are designed for the benefit of all investors. PERA’s
advocacy is rooted in three principles:



<ul><li>Fairness – markets should treat all
investors in a fair and equitable manner.</li><li>Alignment – company success in the long run
depends on aligned interests of companies and investors.</li><li>Disclosure – investors deserve
robust, accurate information about financial and operational results of the
firms in which they are owners and creditors.</li></ul>



Fair and
equitable markets are in the best interest of PERA members. Staff and PERA Board
members participate in advisory and advocacy groups in order to develop, share,
and promote best practices for improving global capital markets for all
investors. In fact, PERA holds seats on 223 different advisory boards to
promote ethical and professional practices in the industry and on the majority
of its private investment funds.



PERA Executive
Director Ron Baker <a href="https://content.copera.org/advocating-for-stronger-markets/">serves on theBoard of Directors of the Council of Institutional Investors</a> (CII) and, in
2018, PERA collaborated to create and co-sign letters regarding shareholder
rights.



Other advisory
groups in which PERA is involved, such as the <a href="https://www.sasb.org/">Sustainable Accounting Standards Board</a> (SASB), the <a href="http://www.pii.law.harvard.edu/harvard-institutional-investors-forum.shtml">Harvard Law
School Institutional Investor Forum</a> (HIIF), and the <a href="https://www.copera.org/advocating-for-stronger-markets" class="broken_link">University ofColorado Burridge Center for Finance</a> promote stronger investment practices and more
efficient markets. SASB, for example, develops standardized metrics that help
investors analyze a company’s ability to operate sustainably, which PERA
believes will have considerable impact on how the investment industry thinks
about the financially material aspects of sustainability in the future.



Ideally, company
interests are aligned with investors’ interests through sound corporate
governance. However, there is an-ever present temptation for management to act
in ways that benefit themselves over their investors, harming the returns of
their investments and impacting shareholder value. To keep companies’ interests
aligned with those of PERA and other investors, staff directly engage with
corporate management and look for partners with a track record of strong
corporate governance. 



Staff also review
external managers, analyze management track records, and <a href="https://content.copera.org/advocating-for-stronger-markets/">vote by proxy</a> as the
shareholder of investments made on behalf of PERA members and retirees.



As an institutional
investor, PERA depends on accurate and timely information from companies in
order to assess and project the overall performance of its investments. Yet,
there are clear gaps in the availability and quality of financially material
disclosures. This is why PERA supports developing and promoting transparent,
accurate disclosures of companies’ operations and financial positions.



Calculating the
financial impact of environmental sustainability is an example of intangible
asset value that is hard to measure. That’s why PERA supports SASB’s efforts to
develop standardized metrics to help investors analyze a company’s
sustainability.



Advocating for strong corporate governance and fair, equitable
markets is another critical
component of PERA’s investment stewardship philosophy. More on PERA’s four-part
stewardship approach is available <a href="https://www.copera.org/investment-stewardship-protecting-assets-by-watching-costs" class="broken_link">here</a>.

Investment Stewardship: Advocating for Stronger Markets

Earlier this <a href="https://www.copera.org/investment-stewardship-protecting-assets-by-watching-costs" class="broken_link">summer</a>, Colorado PERA
released its 2019 <a href="https://content.copera.org/investment-stewardship-protecting-assets-by-watching-costs/">Investment Stewardship Report</a>, which demonstrates how PERA’s investment program pursues the
plan’s long-term financial sustainability.



PERA’s approach to sound investment
stewardship includes protecting members’ assets through cost-conscious
investment management. This, in turn, protects the long-term value of the PERA
portfolio, benefitting members and retirees. Knowing that many PERA members
will retire decades, even a generation into the future, PERA adheres to a
financial stewardship approach that limits costs today, preserving the value of
its assets for years into the future.



Investing sustainably for the
long-term: PERA’s investment portfolio must meet
the perpetual needs of its membership. With this long-term investment horizon,
the portfolio must be sustainable, requiring a broad and diverse range of
assets in different classes, markets, and sectors. And PERA must navigate excess
volatility created in the markets by investors who react to short-term signals.
One way to achieve this is by seeking companies with strategies built for
longevity. These are high quality firms that adapt their business models to
meet the expectations of stakeholders, including investors. In the long run,
this focus is intended to boost PERA’s investment performance and contribute to
its sustainability.



Managing assets internally: PERA staff manage more than 60 percent of total fund assets
internally, at a cost of less than 0.06 percent of those assets. Managing public equity and public fixed
income investments in-house saves an estimated $45 million per year over the
expected cost of outsourcing to other investment managers. PERA also selectively
partners with external experts who add value and help PERA to earn better
risk-adjusted returns at lower overall costs. Whenever possible, PERA
negotiates with those external partners for lower management fees as well.



Unbundling equity research and
transaction costs: As an
institutional investor, PERA is also concerned with research and transaction
costs, which have implications for large and small investors alike. As
discussed in previous <a href="https://www.copera.org/investment-stewardship-protecting-assets-by-watching-costs" class="broken_link">PERA on the Issues posts</a>, staff have
repeatedly called for increased pricing transparency through clear guidance
that would allow U.S. investors to pay directly for research, rather than
receiving research as part of a bundle of services paid for by equity trading
commissions. This is one part of PERA’s ongoing advocacy for fair markets and
fair costs.



Lowering 401(k), 457, and Defined Contribution
plan fees: For members who choose to participate in PERA’s 401(k) plan, the all-in costs have dropped by 68 percent
since 2011. This includes a reduction of the administration fees from 0.50
percent of assets in 1995 to 0.03 percent of assets in 2018, which also extends
to PERA’s 457 and Defined Contribution plans. These lower investment costs should
encourage PERA members to participate by allowing them
to retain more of their retirement savings, while increasing efficient plan
management.



Protecting members’ assets by watching
costs is a critical component of PERA’s investment stewardship philosophy. More
on PERA’s four-part stewardship approach is available <a href="https://www.copera.org/investment-stewardship-protecting-assets-by-watching-costs" class="broken_link">here</a>.

Investment Stewardship: Protecting Assets by Watching Costs

On July 22, Colorado PERA released its 2019 <a href="https://content.copera.org/investment-stewardship-protecting-assets-by-watching-costs/">Investment
Stewardship Report</a>, highlighting PERA’s commitment to long-term
financial sustainability through investment cost stewardship.



PERA’s approach to investment stewardship is straightforward: Seek
out quality investments that are expected to provide the best risk-adjusted
returns to PERA’s portfolio over the long term. As fiduciaries to PERA’s
active, inactive, and retired members, PERA has a responsibility to achieve
financial performance in order to provide retirement benefits to its members.
Stewardship encompasses all risk and opportunity factors that are important to
consider when making investment decisions.



The report, now issued for a second year, outlines PERA’s efforts
to keep costs low, advocate for strong and fair markets, and incorporate
relevant factors into its investment decisions.



PERA uses a four-part stewardship approach to achieve financial
sustainability over the long term:



<ul><li>Protect
the assets under management through cost savings and cost consciousness; </li><li>Integrate
relevant factors into investment decisions, including environmental, social and
governance (ESG) considerations that may be financially material; </li><li>Advocate
for robust markets using PERA’s voice, vote, and authority as a long-term
institutional investor; and</li><li>Evaluate
the exposures in PERA portfolios, including exposures to ESG factors, to
identify value drivers.</li></ul>



PERA diligently manages investment costs on behalf of its members,
recognizing that the costs of investing should not outweigh the benefits of
investing. The report considers three avenues for investment cost stewardship: 



<ul><li>Reducing fees for investment options
available to members through participant-directed defined contribution plans
including the <a href="https://www.copera.org/women-face-unique-challenges-in-retirement" class="broken_link">401(k),
457, and Defined Contribution</a> options;</li><li>Managing assets
internally and partnering with external experts where partnerships add value;</li><li><a href="https://www.copera.org/investment-stewardship-protecting-assets-by-watching-costs" class="broken_link">Unbundling
trading costs from research costs</a> in public equity
markets.</li></ul>



Prudent investments at fair costs translate into the retirement
security that PERA is charged with attaining for its members.



As a long-term investor, PERA’s investments must be positioned to
deliver value for members both today and in the future. Factors that impact the
long-term performance of investments, which may include, but are not limited
to, environmental, social and governance issues, are critical to PERA’s
investment strategy. Issues ranging from consumer trends to climate change to
corporate culture may all have the potential to impact the financial
profitability of an industry or business. PERA investment professionals are experts in their field and fully consider all
financially material factors when evaluating investment risks and opportunities.
PERA invests in companies with competitive advantages which can offer financial
rewards that outweigh risks over the long run.



PERA is committed to improving disclosure, and the 2019 <a href="https://content.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/">Investment
Stewardship Report</a> is one to deliver on that commitment. View
the Investment Stewardship Report <a href="https://www.copera.org/investment-stewardship-protecting-assets-by-watching-costs" class="broken_link">infographic</a>. Financial
performance, information about management fees, voting guidelines and voting
records are all available at <a href="http://www.copera.org/">copera.org</a>.

PERA releases stewardship report

The word “sustainability” is often used to define something environmental. Colorado PERA’s investment professionals see sustainability as a component of investment stewardship, encompassing another important component used when investing nearly $49 billion on behalf of PERA’s membership.



In June 2018, PERA’s investment team released the <a href="https://peraontheissues.com/wp-content/uploads/2018/08/Stewardship-Report_Final.pdf" target="_blank" rel="noreferrer noopener">Colorado PERA Stewardship Report</a>, a comprehensive look at all the ways PERA incorporates the principles of ESG (environmental, social, and governance) stewardship to select, evaluate, and improve the PERA investment portfolio and strengthen the retirement fund.



In addition to environmental issues, the concept of global sustainability can encompass labor rights, executive oversight and corporate culture, and social impact, among many others. By examining how PERA’s investments may be exposed to these categories, PERA tries to identify which investments will provide the strongest long-term results for the fund, and thus for PERA’s members and retirees. “We don’t look one or two years down the road; we look 15 or 20 years, and concentrate on the long-term viability of a company’s business model” said Jared Goodman, a PERA senior equity portfolio manager. “We want to make sure our investments’ sustainability practices will drive strong long-term returns,” he added.



Making more sustainable and responsible investments has become a primary focus and concern for investors and investees alike in recent years. The number of sustainability-aligned investment strategies <a href="https://www.ussif.org/files/Trends/US%20SIF%202016%20Trends%20Overview.pdf" target="_blank" rel="noreferrer noopener">increased 14 times over between 1995 and 2016</a> as more consumers, corporate executives, and investors demanded them.



Organizations that deploy sustainability practices demonstrate considerable long-term productivity and resiliency. Consider the manufacturing firm that buys new equipment to meet its customers’ demand, produce lower carbon emissions, and provide a safer working environment for its employees. This firm is doing its part to protect air and water quality (and avoiding potential fines for environmental negligence) and increasing its workers’ safety and efficiency, all while enjoying the competitive edge the new equipment provides. Similarly, so-called “green” buildings have higher occupancy rates and lower energy costs, making them potentially strong long-term real estate investments.



Another way PERA’s investment stewardship focus helps improve performance is via corporate governance. The most direct way to do this is by influencing organizations, via engagement with their management and boards, to be more proactive in their ESG practices. Given that <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2222608" target="_blank" rel="noreferrer noopener">corporate fraud is estimated to cost the U.S. economy between $180 billion and $360 billion per year</a>, there is ample need to ensure that corporate leadership is always acting in the best interests of its investors. By insisting on fair market practices, alignment between companies and their investors, and robust disclosure procedures, PERA can help promote changes and improve oversight in ways that can make these investments more successful in the long run. “We’ve always stressed corporate stewardship as part of our investment activities because it’s a sound strategy,” said Tara Stacy, a PERA investment compliance and performance analyst and a co-author of the Stewardship report. “This helps us get and stay ahead of the curve as these issues are increasingly highlighted,” she concluded.



For PERA, one more key piece of the stewardship puzzle is the contribution made to the state’s economy. In 2012, PERA introduced the <a href="https://content.copera.org/the-virtuous-circle-of-investment-stewardship/" target="_blank" rel="noreferrer noopener">Colorado Mile High Fund</a>, which provides millions of dollars in investment opportunities for organizations that have a nexus to the Centennial State. (The entire PERA fund currently has more than $515 million invested in the state.) Colorado Mile High Fund investments are primarily private equity and venture capital investments, and they have produced encouraging results. As of December 31, 2017, PERA has sold three of six Colorado Mile High Fund investments since inception of the Fund, helping to achieve further gains for the total portfolio.



PERA will continue to evaluate opportunities for financial sustainability through the recognition of the importance investment stewardship makes to the goal of seeking the best risk-adjusted returns for the long-term sustainability of the Fund and the members PERA serves.



For further reading:



<a href="https://peraontheissues.com/wp-content/uploads/2018/08/Stewardship-Report_Final.pdf" target="_blank" rel="noreferrer noopener">Colorado PERA Stewardship Report</a>



<a href="https://peraontheissues.com/wp-content/uploads/2018/08/Investment-Stewardship6_18.pdf" target="_blank" rel="noreferrer noopener">Investment Stewardship Fact Sheet</a>

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