This op-ed originally appeared in TownHall and affiliated outlets on October 19, 2020.
Over the next several weeks, the Department of Labor will begin to sift through the public comments on their recently proposed rule “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” seeking the best course of action to ensure that pension beneficiaries across this country receive the benefits they deserve. This rule reaffirms the fiduciary obligations that ERISA-backed pension fund managers owe to their beneficiaries, and puts forward much needed reforms in a proxy advisory industry that for too long has neglected to serve the best interest of pensioners.
In this tumultuous election season, where even non-controversial issues have become political, it is reassuring to see the Department take steps to codify the bedrock fiduciary principles that have guided pension fund management for decades. Pension fund investment decisions must remain apolitical, driven solely by the financial benefit they can provide. As a former Treasurer of the State of Ohio, I have had firsthand experience overseeing a pension system and I take seriously the responsibility of a fund’s management team to provide financial security to the men and women who worked hard their entire lives with the promise of a secure retirement. For pension beneficiaries across the country, this proposal by the Department of Labor is a positive step toward ensuring that accountability and fiscal responsibility take precedent. Based on the overwhelming proportion of public comment letters in favor of the proposal, it seems that most people agree.
The proxy system has long been taken advantage of by those without fiduciary responsibilities, preventing sound advice from reaching the nation’s pension and investment funds. There is currently a duopoly in the system, in which two companies, Institutional Shareholder Services (ISS) and Glass Lewis, guide the decisions of the entire proxy advisory market. The limited number of proxy firms compared to the multitude of institutions seeking their assistance has limited responsiveness and the ability of investors to critically evaluate the advice they receive. Despite their influence, they are, unlike fund managers, under no obligation to uphold a fiduciary duty to the clients they represent, or to provide insight into whether their decisions are made based on the desire to maximize value for shareholders. Flawed recommendations are prevalent, and there is limited transparency into the decision-making process.
Beyond the scope of the current proposal, I believe that more should be done by the Department to counter the unaccountable practice of “robo-voting,” in which some fund managers have simply accepted the voting recommendations of proxy advisors automatically without considering the broader fiduciary impact of the proposals. Unfortunately, this practice has become more and more widespread at the expense of transparency to beneficiaries. Recent research from the Ohio State University notes that 400 of the top institutional investors – including many pension funds – automatically voted in line with the recommendations of ISS and Glass Lewis at least 99.5% of the time. This is a grave divergence from the managerial obligations that fund managers should have toward plan participants and beneficiaries.
The Department of Labor should take additional steps to clarify and codify stronger regulations on the practice of robo-voting within this rule. Several months ago, the Securities and Exchange Commission adopted guidelines on the practice of robo-voting which, among other things, require asset managers to take into consideration information released after proxy advisor vote recommendations are made, as well as providing access to company rebuttals of proxy firm recommendations. Short of banning robo-voting entirely, measures should be implemented which prohibit its use in instances where there is a contested proxy vote recommendation. Pension beneficiaries deserve transparency into the processes impacting their money, and the current widespread prevalence of robo-voting is standing in their way.
At the end of the day, pension fund investment must remain an apolitical decision. At the Institute for Pension Fund Integrity, where I sit on the board, we are focused on that objective in order to protect the financial security of America’s workforce. I applaud the Department of Labor’s efforts to further codify these most basic tenets of fiduciary duty, and as they work toward finalizing this regulatory proposal, they should remain singularly focused on ensuring a generous, stable retirement for those who have paid into the system.