Harvard Case - CalSTRS and Relational Challenge Occidental's Governance A
"CalSTRS and Relational Challenge Occidental's Governance A" Harvard business case study is written by Robert G. Eccles, George Serafeim, Sarah E. Farrell. It deals with the challenges in the field of Accounting. The case study is 23 page(s) long and it was first published on : Feb 7, 2013
At Fern Fort University, we recommend that CalSTRS engage in a multifaceted approach to address Occidental's governance issues. This approach should involve a combination of direct engagement with Occidental's Board of Directors, public advocacy, and a review of the investment's alignment with CalSTRS's broader investment strategy and ESG (Environmental, Social, and Governance) principles. This strategy aims to ensure that Occidental's governance practices are aligned with CalSTRS's expectations and contribute to long-term shareholder value.
2. Background
The case study focuses on the relationship between CalSTRS, a large public pension fund, and Occidental Petroleum Corporation (Occidental). CalSTRS holds a significant stake in Occidental and has expressed concerns about the company's governance practices, particularly regarding the appointment of Vicki Hollub as CEO and the subsequent restructuring of the company. The case highlights the challenges faced by large institutional investors in influencing corporate governance decisions, particularly when dealing with companies in the energy sector, which has faced significant changes in recent years.
The main protagonists are CalSTRS, represented by its CEO, and Occidental, represented by its Board of Directors and CEO, Vicki Hollub. The case explores the dynamics between these parties and the different perspectives they bring to the table.
3. Analysis of the Case Study
This case study can be analyzed through the lens of Corporate Governance and ESG Investing.
Corporate Governance:
- Board Composition and Independence: CalSTRS raises concerns about the independence of Occidental's Board of Directors, particularly in light of the appointment of Vicki Hollub, who was previously a member of the Board. This raises questions about the Board's ability to effectively oversee management and make decisions in the best interests of all shareholders.
- Executive Compensation: The case highlights the significant compensation awarded to Vicki Hollub, which has been criticized for being excessive and not aligned with company performance. This raises concerns about the potential for conflicts of interest and the lack of accountability for executive performance.
- Shareholder Engagement: CalSTRS's attempts to engage with Occidental's Board have been met with limited success. This highlights the challenges faced by institutional investors in influencing corporate governance decisions, particularly when dealing with companies with entrenched management.
ESG Investing:
- Environmental Sustainability: Occidental's operations in the oil and gas sector raise concerns about its environmental impact. CalSTRS's investment strategy emphasizes ESG principles, and the company's environmental record may be a factor in their investment decisions.
- Social Responsibility: The case mentions concerns about Occidental's labor practices and its impact on local communities. These factors are important considerations for CalSTRS, which seeks to invest in companies that operate responsibly.
- Governance: As discussed above, CalSTRS's concerns about Occidental's governance practices are directly related to its ESG investment strategy. The company's governance structure and practices are crucial for ensuring long-term shareholder value and responsible business practices.
4. Recommendations
CalSTRS should pursue a multi-pronged approach to address Occidental's governance issues:
1. Direct Engagement:
- Formal Letter to the Board: CalSTRS should send a formal letter to Occidental's Board of Directors outlining its concerns about the company's governance practices, specifically addressing the Board's composition, executive compensation, and the lack of transparency in decision-making processes.
- Shareholder Proposal: CalSTRS should consider submitting a shareholder proposal at the next annual meeting, focusing on improving Board independence, enhancing executive compensation alignment with performance, and increasing shareholder engagement in governance decisions.
- Private Meetings: CalSTRS should request private meetings with individual Board members to discuss their concerns and explore potential solutions.
2. Public Advocacy:
- Public Statements: CalSTRS should issue public statements expressing its concerns about Occidental's governance practices, drawing attention to the issues and mobilizing other shareholders to join the call for change.
- Engagement with Media: CalSTRS should engage with the media to raise awareness about the issues and build public pressure on Occidental to address its governance shortcomings.
- Collaboration with Other Investors: CalSTRS should collaborate with other institutional investors who share similar concerns about Occidental's governance practices.
3. Investment Review:
- Portfolio Alignment: CalSTRS should review its investment in Occidental to ensure it aligns with its broader investment strategy and ESG principles.
- Performance Analysis: CalSTRS should conduct a comprehensive financial analysis of Occidental's performance, considering factors such as profitability, cash flow, and return on equity.
- Risk Assessment: CalSTRS should assess the risks associated with its investment in Occidental, considering factors such as environmental liabilities, regulatory changes, and potential litigation.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: CalSTRS is a large institutional investor with a fiduciary responsibility to its beneficiaries. This responsibility includes ensuring that its investments are made in companies with sound governance practices.
- External Customers and Internal Clients: CalSTRS's beneficiaries are the public employees and retirees who rely on the pension fund for their financial security. It is crucial for CalSTRS to ensure that its investments are made in companies that operate responsibly and sustainably, contributing to long-term value creation.
- Competitors: CalSTRS is competing with other institutional investors for investment opportunities. By taking a proactive approach to governance, CalSTRS can differentiate itself and attract investors who prioritize responsible investing.
- Attractiveness ' Quantitative Measures: CalSTRS's investment decisions are guided by financial considerations, including profitability, cash flow, and return on equity. These factors should be considered in the context of Occidental's governance practices and their potential impact on long-term value creation.
- Assumptions: These recommendations are based on the assumption that Occidental's governance practices can be improved through constructive engagement and dialogue with the company's Board of Directors.
6. Conclusion
CalSTRS's engagement with Occidental presents a critical opportunity to influence corporate governance and promote responsible investing practices. By pursuing a multi-pronged approach that combines direct engagement, public advocacy, and a thorough review of the investment's alignment with its ESG principles, CalSTRS can effectively address its concerns and contribute to positive change within Occidental.
7. Discussion
Other alternatives not selected include:
- Divesting from Occidental: While this option would send a strong message, it might not be the most effective way to address the governance issues. It could also result in financial losses for CalSTRS.
- Filing a Lawsuit: This option could be costly and time-consuming, and it might not guarantee a positive outcome.
Key risks and assumptions:
- Risk of Alienating Occidental: CalSTRS's actions could alienate Occidental's management, making it difficult to engage in constructive dialogue.
- Assumption of Board Responsiveness: The recommendations assume that Occidental's Board of Directors is responsive to shareholder concerns and willing to make changes.
- Assumption of Public Support: The recommendations assume that the public will support CalSTRS's efforts to improve Occidental's governance practices.
8. Next Steps
- Immediate Action: CalSTRS should send a formal letter to Occidental's Board of Directors outlining its concerns and requesting a meeting to discuss these issues.
- Timeline: CalSTRS should develop a timeline for implementing its recommendations, including milestones for engaging with Occidental's Board, conducting public advocacy, and reviewing its investment in the company.
- Monitoring and Evaluation: CalSTRS should monitor Occidental's progress in addressing its governance concerns and evaluate the effectiveness of its engagement strategy.
By taking these steps, CalSTRS can demonstrate its commitment to responsible investing and contribute to positive change in corporate governance practices.
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