Christopher Ailman has been CalSTRS’ Chief Investment Officer since October 2000. With 37 years of institutional investment experience, he leads an investment staff of more than 200 and oversees a portfolio valued at $319.8 billion as of Jan. 31, 2022.
His service on boards and advisory boards in the U.S. and U.K. includes representing institutional investors on the MSCI Index Editorial Advisory Board, the PRI Asset Owners Advisory Committee, the Sustainability Accounting Standards Board (SASB) Investor Advisory Group and the Toigo Foundation. He chairs the 300 Club and co-chairs the Milken Global Capital Markets Committee. In 2016, he was part of the first cohort to achieve a Fundamentals of Sustainable Accounting (FSA) credential.
Mr. Ailman is recognized as one of the top CIOs both in the U.S. and globally.
At the California State Teachers’ Retirement System (CalSTRS), we are focused on diverse representation in the boardroom because diversity, equity and inclusion (DEI) are important issues within the workplace of Corporate America and will be critical factors for corporate success moving forward. Board diversity is an essential tool to improve corporate accountability and enhance the long-term, sustainable value of companies for shareholders. Having a diversity of thought, background and experience drives business success and allows organizations to be more adaptable in our ever-changing world.
The COVID-19 pandemic has demonstrated that the future is more uncertain than we had ever dreamed. Challenges such as climate change, a digital generation and geopolitical issues are just a few examples that will require corporate boards to measure and mitigate long-term operational business risks, also known as environmental, social and governance (ESG) risks. Boards will be tested in the coming years, with shareholders demanding a wider range of experience and knowledge to navigate the hazards and challenges that lie ahead.
For the past two decades, CalSTRS has collaborated with investors who also view corporate board diversity as a priority, and 2022 will be another critical year of that journey.
David Outlaw is a Director at Equity Methods and leads the firm’s HR advisory and valuation practices. He is an expert in long-term incentive compensation design and modeling, proxy best practices and fair value measurement and accounting under ASC 718. Other areas of expertise include corporate transactions, equity award modifications and employee stock purchase plans. His clients span North America and Europe and from Fortune 500 to pre-IPO.
Mr. Outlaw is a regular speaker on compensation topics at national conferences and is one of Equity Methods’ most prolific authors. Mr. Outlaw graduated summa cum laude from the Barrett Honors College at Arizona State University with a BS in finance and a BS in economics. He serves on Arizona State University’s finance advisory board and is a Certified Equity Professional (CEP).
Pay for performance has long been central to most companies’ compensation philosophies. Rigorous performance requirements, though, are often at odds with the retention power of the compensation portfolio. This tension between performance and retention has been put into stark relief by the events of the past two years. These include a global pandemic and subsequent supply challenges slamming many companies’ revenue and cost structures, plus a war for talent that’s hotter than ever in the midst of the Great Resignation.
An interesting trend for 2022 will be how companies navigate this tension. A strong performance linkage is undoubtedly good governance. But to many companies we work with, it can feel like a luxury when decades of institutional know-how are at risk of walking out the door. And while shareholders may not love a less rigorous performance requirement for compensation, they would be far more hurt—directly and financially—by the volatility of high turnover.
Of course, this trend won’t mean the end of performance-based incentive compensation. One alternative might be slightly lower weighting of performance metrics and greater reliance on time-vesting instruments like RSUs, especially outside of the named executive officers. Another avenue may be award structures that are more stable, trading less upside for more downside protection to serve retention goals better. A third possibility is maintaining current structures, but at a higher pay quantum to make up for the risk—a larger “carrot” for retention.
We already see this risk-reward tradeoff manifesting in other ways. For example, there has been a recent increase in outsized special grants for top executives. These involve very high payouts for excellent performance, and they have been common both in turnaround situations and in the large number of companies going public via IPO, direct listing or SPAC. In these cases, it’s the desire to deliver a potentially large quantum of pay that drives the rigorous performance goals. The reverse can also be true, with rigorous performance goals requiring a larger quantum to be effective at retention.
Executive compensation is at an inflection point as companies look for the best way to navigate the new economy and stage themselves for success. Whatever a company’s goals, balancing the dual needs of retention and good governance will be a key problem to solve.
Jane Elliott serves as Chief Communications and Human Resources Officer and is a member of the Executive Leadership Team, joining Deluxe Corporation in April 2019.
Ms. Elliott brings over 20 years of experience in the payment technology space, serving as the Executive Vice President and Chief Administrative Officer at Global Payments prior to Deluxe and also spent nine years at First Data. Ms. Elliott started her career with Laventhol & Horwath Certified Public Accountants in New York City and received her CPA. She holds a BS in accounting with high honors from the Rochester Institute of Technology.
In 2020, she joined the boards of Cool Girls, an organization dedicated to empowering at-risk girls in Atlanta, and Fintech Atlanta, becoming the Chairperson in May 2021. She continues to serve on the Board of Junior Achievement since 2015.
There are many key challenges currently facing boards of directors concerning governance, many of which are driven by a shift in expectations and focus by institutional investors, securities/regulatory changes and overall market conditions. Given my personal experience, specifically in leading investor relations and human resources, much of this shift is brought about by the increased need of investors understanding broad-based people issues as a result of the impact of the COVID-19 pandemic and the increased awareness of social justice issues. Investors want to know how all of this has affected companies’ overall ability to successfully compete within the markets served.
In 2022, success will be measured by new factors. Increased disclosure requirements around human capital for U.S. publicly traded companies will be one. Second, the need to further include increased specificity around diversity, equity and inclusion (DEI) measures (more than gender) will be second, driving boards to increasingly ask management to review what activities and initiatives are in place and how this drives overall culture. Third, proxy advisors are pushing sustainability, as seen in their overall company reviews, reports and voting recommendations. For companies that have not implemented a robust environmental, social and governance (ESG) program, now is the time to do so. Boards need to understand that a fulsome program exists that is woven into the very fabric of the company’s culture.
When we talk about governance, we tend to focus on controls and measures, and often, we can forget that companies are made up of people, representing their greatest asset and the “secret sauce.” Past governance duties at the board level always have included succession planning for key roles, but what about the rest of the organization? The war for talent is real, and companies that have strong cultures and engagement will win both in vying for talent and in successfully competing within their market segments.
In order to ensure effective and robust governance over human capital management, DEI and talent strategy, approximately two-thirds of companies1 have expanded the name, role and/or scope of the compensation committee charter. Some company boards are choosing to tackle these issues as a full board while others are using other board committees. Either way, these are important and prominent issues facing all companies today, and this is the new normal. Finally, boards need to understand that many of these issues are a double-click deeper than traditional ESG activities, and they should be establishing an effective oversight process over these areas to assure investors that the company is poised for success.
Kaley Karaffa is the Senior Director of Governance Advisory for Nasdaq. She advises boards and CEOs of public, private and nonprofit corporations on corporate governance and leadership matters. Prior to Ms. Karaffa’s tenure at Nasdaq, she started her legal career in private practice in New York before transitioning to in-house roles, including serving as General Counsel of Clarolux. Prior to attending law school, Ms. Karaffa served as Program Director of Jefferson County Teen Court. Ms. Karaffa serves on the Board of Directors of Horizon Education, as Board Chair of Northside Charter High School in New York City, on the patient advisory board of a pharmaceutical company, on Seattle Cancer Care Alliance’s Patient & Family Advisory Board and Patient Safety Committee, and volunteers with charitable organizations. She speaks publicly and publishes articles on corporate governance matters. Ms. Karaffa is admitted to practice law in the State of New York.
At Nasdaq, we are very excited about our SEC-approved board diversity listing rule that will provide transparency to investors of Nasdaq-listed companies on the company’s approach to board diversity. It is a disclosure requirement at its core, as opposed to a rigid quota, which provides companies with the flexibility to make decisions that best serve their shareholders. Investors and other stakeholders will know who exactly is sitting at the board table and better understand the company’s diversity philosophy. In terms of impact in the boardroom, the rule will help boards have the conversation around, “How do we define diversity?” and “How do we value it?”, and “What standard do we set for how the corporation strives to achieve inclusion?”
Through our corporate governance services and solutions, we work with many corporations (listed on our exchange and others) and are gaining insights into how these corporations are establishing new processes to collect and disclose board diversity. Some companies didn’t have a defined process for what information to collect, how to collect it, and if and what to disclose. They have quickly defined the categories for diversity characteristics, experience and expertise. They are using their annual Directors’ and Officers’ Questionnaires or board evaluation to collect this information from their directors along with their consent to disclose it. In the coming months, we’ll see clearly defined board composition matrices in proxy statements and on company websites. These are the first impacts of our rule.
Moreover, the combination of our Nasdaq listing rule along with other pressures for improvements in board diversity are changing the way boards approach evolving their composition. Boards that have traditionally had a reactive approach to succession planning are now establishing proactive and strategic processes. These new approaches drive boards to assess the many characteristics that are critical to well-balanced composition and cognitive diversity. Sophisticated boards take the additional step of understanding the connection between composition and culture—knowing how an engaged and inclusive board invites constructive dissent and debate. These are some of the catalysts of strong board oversight, deep director engagement and effective governance at its core. We’ll see this coming into play this year, as well as the impact on improved transparency to investors and helping support effective corporate governance.