We have been making a huge effort to engage small and mid-cap companies

An Interview With Janice Hester-Amey, Portfolio Manager, Corporate Governance, California State Teachers’ Retirement System (CalSTRS)

OPTIMIZER: Tell us about some of the issues that REALLY require a reaching out to important investors like CalSTRS.

Hester-Amey: If you had a low Say-On-Pay approval vote last year, or if you had a high NO-vote against you on any matter last year, or any passing vote on a proposal, like a majority voting pro- posal, that your board has failed to implement, you really ought to be “really reaching out” to your investors. And if you are chang- ing the metrics, or making other changes to your compensation plans – and here I mean to include improvements as well - like making them more performance oriented, or increasing vesting and holding periods – you should be reaching out to investors like us – to let it be known.

OPTIMIZER: What about the failure to implement majority voting provisions, or other shareholder proposals that achieve a majority: Isn’t that like a death sentence with you, that would make reaching out kind of futile?

Hester-Amey: Not necessarily. We always want to talk, and sometimes there may be a story there, and we are willing to listen. The worst effort a company can make is to make no effort at all.

OPTIMIZER: Is there a particular way, or do you have an ‘opti- mal way’ for investors to reach out to you?

Hester-Amey: Most times a phone call is a fine way to start a dialogue. But ideally, we like to get the whole team together, and to involve our Director of Corporate Governance, and to move the dialogue up to an in-person visit. We like to look each other in the eye - to get a strong sense of assurance that we really can rely on what we’re hearing. That is always one of our biggest concerns.

OPTIMIZER: What about the participation of Directors: Is this a big thing for you?

Hester-Amey: It’s very hard to get Directors to speak to share- holders. We know they are very busy, and we want them to be busy. But if there are issues that involve Board structure, diversity, Director selection and Director evaluation – and sometimes there are – a company should make a Director available. This is eas- ily done, and there are no F-D issues to worry about, by the way, since we focus on governance issues only. Not every shareholder can or should have a way to discuss things with a Board member. But if a Director has a dialogue with a large investor like us, the company can discuss it on their website, or in their proxy materi- als, and achieve very broad disclosure that should contribute to shareholder understanding and general satisfaction.

OPTIMIZER: How about advisors, like comp-consultants or proxy advisors? Are they welcome to attend?

Hester-Amey: We are OK if they come, and we are OK if maybe they chime in on ‘process issues’ or to help clarify a point. But we want to hear directly from the people who pay the piper and, we want to be sure, really call the tune.

OPTIMIZER: Do you have any tips on what NOT to do?

Hester-Amey: The biggest thing not to do is to continue to ignore issues that are important to large shareholders. We represent the bulk of the investments made by small shareholders – and their investments produce the currency that gives the market confi- dence in you – or not. You need to keep people investing in your company.

OPTIMIZER: What are some of your top ‘hot-buttons’ these days?

Hester-Amey: The Board’s role in risk management and the way the board is staffed; Are Directors truly independent? Do they pro- vide close oversight of the management team?

OPTIMIZER: Don’t you think that most large-cap companies have gotten the message by now?

Hester-Amey: There are still a lot of of people at large companies who have not gotten it or were not getting it – like at Chesapeake. There are still boards that seem to be afraid of the very people who fund their business, and whose allegiance they should be seeking. That said, we have been making a huge effort to engage small and mid-cap companies. We have filed well over 200 shareholder pro- posals with such companies in the last few years, but we always try to engage first. We much prefer to negotiate a good outcome if we possibly can.

OPTIMIZER: Where do you stand on so-called social issues?

Hester-Amey: We have to be guided by fiduciary restrictions, but many social and environmental issues do create business risks and can have a strong financial impact. We have been focusing on sus- tainability issues – and on greater disclosures here for 10 years now. We vote on everything; no abstentions - unless there may be a brand new issue that we haven’t fully analyzed yet.

OPTIMIZER: What are the top tips you’d offer readers who are thinking about “reaching out”?

Hester-Amey: DO really reach out. Be serious. Think of us as partners. We are holders forever.

OPTIMIZER: Can we push back a bit on this? Don’t you think that sometimes it might be better to make a “noisy withdrawal” – and say, “Hey…you folks just don’t get it and we are voting with our feet”? It would sure make a point with us, whether we were a Director or an investor.

Hester-Amey: This might work for individual investors, or for a smaller fund, whose horizons are shorter, but if we see a company with governance issues we have to hang in there, and get them fixed up.