The SEC Is Right To Force More Transparency Into Proxy Voting

This article originally appeared in Forbes on January 31, 2020. 

The Securities and Exchange Commission is about to take an important first step in bringing accountability and transparency to the proxy voting world. For far too long pension funds have off-loaded their fiduciary duty to their beneficiaries to proxy advisory firms by outsourcing to them, the review of proxy proposals. These firms, in turn, then make recommendations to plan sponsors but without any oversight and very little transparency. A key point to remember is that fund managers and plan sponsors vote as recommended by the proxy advisory firms almost 100% of the time.

Under SEC Chairman Jay Clayton, the Commission is now trying to “improve [the] accuracy and transparency of proxy voting advice” received from these firms, by focusing on two key areas. If the rule changes are implemented, advisory firms will have to send their recommendations to issuers before they send them to clients. This will allow issuers to review for accuracy, as well as bring a welcomed transparency to the process. Secondly, the SEC is proposing to eliminate frivolous proxy proposals by raising the bar that activist, and those seeking to impose their political view on other shareholders, must reach to force a proxy vote.

What Chairman Clayton is advocating for is not new; the Investment Advisors Act of 1940 required investment advisors to adopt policies and procedures that required them to vote only in the best interest of their clients. What we face today, instead, is an epidemic of supercilious activists who believe they, alone, know what is best for mom and pop investors, and particularly our public pension retirees.

The slippery slope of injecting politics into proxy voting is a clear violation of fiduciary duty. Over the past few decades activists have tried to strip out companies involved in the Vietnam War (almost all of the S&P 500 companies in 1969 sold something to the US Armed Forces) to late last year when the  Charlottesville, VA City Council voted to strip out shares in Northrup Grumman, General Dynamics, and any other company producing systems that protect our country, and maybe, might just bring our children home safely. It can include, cigarettes, energy, guns, sugar and sugary drinks, nuclear energy, and dozens more, depending on your proclivity and personal bias.

In 1995, as the Treasurer of Connecticut, I indexed 75% of the State’s teacher and state employees pension portfolio, which for the previous ten years had been the worse preforming state pension fund in the United States—dead last.  Within six months of indexing, we skyrocketed to the top 10 states in the nation in terms of performance, thereby earning a much higher return for our retirees while decreasing costs at the fund. I also shut down our activist office at the Treasury saving over $1 million a year for the pension fund.

In the past ten years, only six states have outperformed a simple index fund of 60% indexed to the S&P 500 and 40% indexed to the Bloomberg-Barclay’s Bond Index. This means that 44 states waste millions of dollars hiring active and activist managers trying to beat the index, when if they only indexed the portfolio they would beat 88% of the other states. This is pathetic.

In a recent letter to his investors, as quoted in the Financial Times about the new proposed SEC rules, activist hedge fund manager, Dan Loeb, wrote, “Someone has been rigging the public debate and trying to mislead the commission…These endorsements were actually part of a false letter-writing campaign that had been bought and paid for by corporations. This is the ‘swamp’ at its worst.”

No Dan, the real swamp are those politicians who seek to impose their personal political agenda on the retirement accounts of our hard working public employees and teachers. Our fiduciary duty is to ensure the highest return at a reasonable risk, not the highest return after playing politics.

The SEC is about to restore transparency and accountability back into proxy voting and Chairman Clayton should be congratulated for standing up for strict adherence to fiduciary duty.