Commentary: “The Political Games Proxy Advisors Play With Workers Retirement Security”

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.

SEC Shareholder Move Angers Institutions

This article, written by Brian Croce, originally appeared in Pensions & Investments on October 5, 2020.

New amendments adopted by the Securities and Exchange Commission to raise the thresholds for submitting and resubmitting shareholder proposals in subsequent years has drawn the ire of investors large and small.

“The amendments weaken the voice of investors and jeopardize faith in the fairness of U.S. public capital markets by making the filing process more complicated, constricting and costly,” said Amy Borrus, executive director of the Council of Institutional Investors in Washington, in a statement. “The result will be fewer shareholder proposals — and that is precisely the goal of the business lobby that pressed the SEC to make these changes. Simply put, CEOs and corporate directors do not like being second-guessed by shareholders on environmental, social and governance matters.”

In a 3-2 vote, with the commission’s two Democrats dissenting, the SEC on Sept. 23 amended Exchange Act Rule 14a-8 by replacing the current ownership threshold to submit a shareholder proposal, which currently requires holding at least $2,000 or 1% of a company’s stock for at least one year.

Under the new rule, shareholders submitting any proposal for an annual or special meeting to be held on or after Jan. 1, 2022, will have to meet one of three alternative thresholds: $2,000 of the company’s stock for at least three years; $15,000 for two years or $25,000 for one year, among other changes.

With the new rule, which would take effect 60 days after publication in the Federal Register, the SEC also raised the vote thresholds a proposal must get to be eligible for resubmission. Under the amendment, proposals must get at least 5% support in the first year, 15% in the second and 25% in the third in order to be resubmitted within a five-year span. That is up from the current thresholds of 3%, 6% and 10%, respectively.

The final amendments will apply to any proposal submitted for an annual or special meeting to be held on or after Jan. 1, 2022.

New York state Comptroller Thomas P. DiNapoli, trustee of the $216.3 billion New York State Common Retirement Fund, Albany, said in a statement that the SEC’s action will “negatively impact investors and make it harder for shareholders to hold corporations accountable. These changes are unwanted by investors and may silence those challenging corporations to address issues like gender and racial pay equity, workplace diversity and racial discrimination.”

Patrick McGurn, special counsel and head of strategic research and analysis at proxy advisory firm Institutional Shareholder Services Inc., Rockville, Md., said the vote “shows that the comment period doesn’t count for much at the SEC anymore because if you look at the comments it was overwhelming from an investor perspective. Most of the changes that were adopted by the commission were not only not welcome, but were thought to be unnecessary by the vast majority of commenters on the investor side.”

The SEC originally proposed modernizing the rules concerning shareholder proposals in November, at the same time it proposed amendments to the rules governing proxy advisory firms that require those firms to disclose conflicts of interests to clients and allow companies that are the subject of voting advice to be able to access that advice prior to or at the same time as the advice is disseminated to clients.

The proxy advisory firm rules were finalized in July. But both of the SEC’s proxy-related initiatives have broadly garnered similar reactions: support from the business community and opposition from the investor community.

Striking a balance

SEC Commissioner Elad L. Roisman, who spearheaded the commission’s efforts on the issue, said at the Sept. 23 meeting that the shareholder proposal amendments aim to strike a better balance by ensuring that a shareholder who submits a proposal to a public company has interests that are more likely to be aligned with the other shareholders.

It was a sentiment struck by other supporters, including SEC Chairman Jay Clayton. “A shareholder proponent should not be able to command the time and attention of the company and other shareholders to review, consider and vote on a proposal if 9 out of 10 votes cast by their fellow shareholders have been against the proposal after it’s been submitted for a vote three or more times in five years,” Mr. Clayton said at the meeting.

Christopher Burnham, president of the Institute for Pension Fund Integrity in Washington and founder of venture capital firm Cambridge Global Capital, who has previously served as Connecticut state treasurer and as a member of the Trump administration’s transition team for the State Department, noted that the resubmission thresholds in place today were adopted more that 60 years ago, which is why he said they must be updated. “The market has changed dramatically since 1954, participation has changed dramatically,” Mr. Burnham said. “We must not allow a small, teeny, activist minority to impose a personal political agenda on the majority.”

Despite getting a lot of comments criticizing the proposal, the SEC largely “stuck to their guns,” said Julie Mediamolle, a Washington-based partner with Alston & Bird LLP. “At the end of the day I think the SEC understands this could deter some proposals but on the opposite side (it’s) trying to encourage more engagement throughout the year, not just in connection with annual meetings,” she said.

At the SEC’s Sept. 23 meeting, Commissioner Allison Herren Lee, a Democrat who opposed the proposal, said the amendments, coupled with the SEC’s rules concerning proxy advisory firms, “collectively put a thumb on the scale for management in the balance of power between companies and their owners.”

Fewer proposals

When looking at the 2020 proxy season, of the 455 shareholder resolutions that made it onto a ballot and for which vote results are available to date, 64% earned at least 25% support, according to data from ISS. However, that figure does not take into consideration the number of times that a proposal has appeared on the ballot nor the number of times that boards may have decided to sit down with proponents to negotiate the possible withdrawal of proposals due to the existing resubmission thresholds, Mr. McGurn noted.

Research from CII found that the SEC’s new thresholds for resubmitting shareholder proposals would have more than doubled the number of excluded governance proposals from 2011-2019. In 2020, CII noted that several governance proposals that would have been eligible for resubmission in 2021 would be blocked by the new resubmission thresholds, including resolutions to require independent board chairs at Facebook Inc., Southwest Airlines Co. and Tenet Healthcare Co.

“Shareholder proposals play an invaluable role by providing a low-cost method for shareholders to talk to management and to each other about the future of their company and important policy issues affecting the company,” said Lisa Woll, CEO of Washington-based US SIF: The Forum for Sustainable and Responsible Investment, in a statement. “The votes on shareholder proposals provide more precise information about shareholders’ views of the given topic. In our view, the commission should not be in the business of reducing these lines of communication. Such reductions will likely be unavoidable now.”

But there is an election looming and depending on the results, there could be more traction on proxy-related issues, sources said. “I would think that if Democrats take over the White House and retake the majority of the SEC that these rules would be revisited fairly quickly,” Mr. McGurn said.

The president gets to nominate an SEC chair; currently the commission has a 3-2 Republican majority with Mr. Clayton at the helm.

Research Shows Disparate Private Equity Fees are Erasing Public Pension Gains

While public pension funds face dire financial circumstances due to the impact of COVID-19 on the economy, the fees paid to private equity firms reflect another reason public pensions may be losing money at a record rate. According to recent research by Stanford University, some pension funds pay more than others through privately negotiated fee structures with private equity firms—resulting in an overall loss of an estimated $45 billion.

Public pension funds are increasingly moving their assets into private equity—a tactic used by fund managers to project higher short term gains to offset long term concerns over a lack of pension funding. This strategy might work in the short term, but when an economic downturn hits, the results can be disastrous for public pensions. At the same time, this research also suggests that the different fee structures paid by different pensions for the same services depends on the size, relationship, and governance of the pension. 

The research claims that public pensions could have made up to $8.50 more per $100 invested if they had a similar fee structure to other public pensions with the same private equity firm. Even after controlling for size, the research demonstrated that these fee disparities remain, suggesting a variety of possible reasons. First, public pensions may prefer certain fee structures depending on their level of risk aversion. They may also prefer certain private equity firms because they have information about that firm’s effectiveness. Second, private equity firms may consider public pensions to be more costly to run due to public disclosure requirements, convincing them to charge higher fees. At the same time, private equity firms may give certain funds fee breaks if they already have an existing positive relationship with the pension or its managers.

These fee disparities do not reflect malpractice on the part of public pension managers. The practice of investing increasing amounts into private equity, however, is purely a result of poor long term fund management. Managers feel the need to invest in riskier options to produce return estimates that look more favorable for the fund to make up for losses. In this case, the drive for investing in riskier private equity options also creates losses through exorbitant fees. These are all aspects of an investment strategy that public pension managers need to keep in mind when deciding where to allocate their funds.

Public Pension Funds Key to Addressing Savings Disparities Among Black Retirees

As the COVID-19 crisis ravages state public pensions across the country, the disparities in retirement savings among American’s of different races has been pulled into sharper focus. In 2016, the typical Black household had only 46% of the wealth of a typical white household, with Hispanics having 49% of the typical wealth of a white household. The economic destruction brought on by COVID-19 will likely only exacerbate these disparities.

Slavery and Jim Crow-era policies served as barriers for Black Americans to accumulate wealth, and the long-term effects of those institutions live on today. Social security, one of the great levelers in terms of retirement savings, is facing chronic shortfalls and further steps to eliminate this disparity—such as providing baby bonds to all Americans—have made little headway. One area where Black Americans and other people of color could see the greatest gains, however, is in the bolstering of public pensions.

Shrinking public pensions are hurting Black Americans more than any other group. 21.2% of Black women and 15.4% of Black men work in the public sector, compared to 17.5 and 11.8 percent of white women and men, respectively. At the same time, the gap between wages for Black and white Americans is significantly smaller in the public sector than the private sector: Black people make 90% of the income of their white counterparts in government jobs, but only 78% of their income in private jobs. Most importantly, the public pensions provided by public sector jobs have proven to be some of the most influential in raising retirement savings for Black Americans. Black retirees with public pensions face a poverty rate 20 percent below the rate of Black retirees without a public pension. Black Americans overall benefit from public pensions more than any other racial group in the U.S.

This recognition of the benefit public pensions can have, especially for racial minorities in the U.S., is crucial especially as our nation grapples with a reckoning over police brutality and other forms of racial inequality. Pension funds need to be secured, well funded, and properly managed to support the well-being of Black Americans’ retirements. As public pension liabilities continue to grow at an astounding rate in the current COVID-19 economic downturn, elected officials should recognize the importance of stabilizing public pensions—not only because retirees deserve the savings from the fund they have invested in, but also because of the potential public pensions have for ameliorating racial inequalities in our current system.

IPFI Advisory Board Weighs In on Proposed Department of Labor Rule on Proxy Advisory Firms, Provides Recommendations for Action on Robo-Voting

Institute for Pension Fund Integrity advisory board members and former pension fund officials have submitted comment letters on a proposed regulation by the Department of Labor concerning the role of proxy advisory firms in ERISA pension investment. If it is put into place, the rule would have a significant impact on the reach of proxy voting, the power that proxy advisory firms have on pension investment decisions, and the extent to which politicized decision making has undermined the fiduciary obligations of pension fund managers.

Coming in the wake of the Department’s recent proposed rule on environmental, social, and governance (ESG) investments, as well as guidance from the Securities and Exchange Commission, this new rule reinforces the principle that fiduciaries can consider proxy decisions based only on economic considerations and not on “unrelated objectives.” The proposal rightly also takes aim at the costs of the proxy advisory decision process – costs that are ultimately borne by the ERISA pension beneficiaries.

IPFI President and former Connecticut State Treasurer Christopher Burnham states in his letter that “One of the most significant aspects of the proposed rule is the fact that plan fiduciaries will no longer have to vote on all proxy matters – specifically, that ‘fiduciaries must not vote in circumstances where plan assets would be expended on shareholder engagement activities that do not have an economic impact on the plan.’ … For pension beneficiaries, especially those in smaller plans who may lack the resources to pour into evaluating every proxy firm recommendation, the added convenience and lower costs stemming from this reform cannot be underestimated.”

IPFI Advisory Board member and former Ohio State Treasurer Ken Blackwell notes that “The proposed rule seeks to address the outsized roles that proxy advisory firms have in investment decisions and examine whether their recommendations are always economically beneficial to pensioners. 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 and retail shareholders.”

Beyond the scope of the proposed rule, IPFI believes that more action should be taken to address the outstanding issue of robo-voting and the negative impact that it has had for pension beneficiaries – the process by which asset managers and other investors automatically vote in line with the recommendations provided to them by proxy advisory firms. While many major institutional investors do spend considerable resources evaluating proposals from management and shareholders, this is certainly not the case overall. An overwhelming number of fund managers have outsourced the oversight and decision-making process to proxy advisors. Specifically, IPFI’s board members recommended that the Department of Labor prohibit robo-voting in controversial and contested matters or for ESG-related shareholders proposals that do not prioritize pecuniary objectives for pension beneficiaries.

Board member and former New York State AFL CIO Board Vice President Richard Brower notes that “one powerful option could be to place stronger limits on robo-voting in instances where there is a contested proxy firm recommendation…If there is no contestation, proxy voting may go forward unimpeded. Ultimately, the goal should be to provide pension beneficiaries with all of the insight they need into how their money is managed, while simultaneously finding avenues for cost-savings when available.”

The Institute for Pension Fund Integrity believes that ERISA standards must be modernized in order to set in stone the underlying fiduciary principles that have been the cornerstone of responsible pension management. While individual investors, endowments, and corporations should be free to pursue whatever investment strategy they see fit based on their needs, the unique nature of pension funds requires that fund managers steer clear of any political agenda.

The Department of Labor should be applauded for taking this necessary step toward clarifying and correcting guidance on the fiduciary obligations of pension fund managers as far as their relationship with proxy advisory firms is concerned, and it is our hope that leaders in business, finance, and public policy will voice their support for this initiative.

Click here to read the comment letter by IPFI President and former Connecticut State Treasurer Christopher Burnham.

Click here to read the comment letter by IPFI Advisory Board member and former Ohio State Treasurer Ken Blackwell.

Click here to read the comment letter by IPFI Advisory Board member and former New York State AFL CIO Board Vice President Richard Brower.



Ohio Police and Fire Pension Shifts to Gold Amidst Uncertainty

In wake of the stock-market drop off early this year due to COVID-19, state and local investment funds lost an estimated $1 trillion dollars in assets, even as it’s hidden from beneficiaries due to a lack of transparency in reporting earnings. As states have continued to fall behind on their pension obligations since the recessions of the 2000s, they have steadily increased their proportion of investments in risky asset classes to make up for years of consistent underperformance. Additionally, with the decrease in business activity caused by the virus, states have lost significant tax revenue to help cover the expanding shortfall.

Changes in US monetary policy are effecting how institutional investors look at removing risk in their portfolios. The Federal reserve announced its intention to maintain low interest rates, even if inflation rises above its traditional benchmark of 2%, through at least 2024. The potential for higher inflation than interest rates removes some of the appeal of traditional fixed income bonds and treasury notes. To protect against this inflation risk, pension funds are now looking increasingly at gold and precious metals as an asset class.

Responding to these trends, the Ohio Police & Fire Pension decided to shift 5% of its allocation into gold by increasing its leverage to try to protect its beneficiaries against a downturn in the bond market. They join Texas Teacher Retirement Systems as the only two state or local pension systems to hold precious metal investments. Wyoming had a contentious public debate earlier this year between a newly elected state treasurer and his career deputy over the possibility of investing in gold, after the state lost $300 million investing in third world debt.

Ultimately, the decision to invest in bonds remains hotly debated within the investment space. However, many of the factors that might deter retail investors, including storage issues and higher capital gains rates, do not apply to pension funds. For gold to provide a better counterweight to equities, it requires a downturn in the bond market. Thus, a pension fund diversifying its low-risk assets by adding gold alongside traditional fixed income could further hedge risk against a downturn in the bond market. However, given the consistency with which their active management strategies fail to keep pace with general market recovery, an increased allocation into low-risk assets, including gold, could help pension managers protect assets.

Ethical Investing’s Shifting Winds Force Law Firms to Be Nimble

This article originally appeared in Bloomberg Law on September 25, 2020.

Companies looking to tap into the $12 trillion market for sustainable and socially responsible investments face myriad challenges—including moving targets and shifting political winds.

That’s where the lawyers come in. The boom in investors looking to bankroll companies advancing certain environmental, social, and governance priorities has ramped up demand for law firms that can help businesses live up to the wide array of expectations.

“There’s no uniform body of criteria or objectives” for gauging a company’s commitment to ESG principles, said Heather Palmer, a partner at Sidley Austin LLP. There are plenty of acronym-heavy organizations that recognize companies for voluntary ESG commitments, but no “coalescence around a specific standard,” she said.

Nimble law firms are responding by creating specialized legal teams across practice areas to demystify current ESG standards, from diversity and executive compensation obligations to global pollution initiatives. They’re also helping prepare for new U.S. restrictions on ESG investing from President Donald Trump’s administration.

ESG-related assets topped $12 trillion in 2018—an 18-fold increase from the $639 billion in play two decades ago—according to the Forum for Sustainable and Responsible Investment, which has been tracking ethically motivated investing since 1995.

BlackRock Inc. CEO Larry Fink declared sustainable investing the “strongest foundation for client portfolios going forward,” in a January letter.

“We’ve really reached sort of a tipping point,” Melissa Bender, an asset management partner at Ropes & Gray, told Bloomberg Law. “ESG integration is here to stay.”

New Kids on the Block

Some firms are treating ESG as “the next new thing,” Ropes & Gray strategic transactions partner Michael Littenberg said. But the principles have been steering financial decisions for decades, he said.

Whether they’ve been parsing ESG for a few weeks now or grappling with the underlying issues since the Watergate era, the number of Big Law firms assembling one-stop shops to quell fears about the multifaceted investment strategy keeps growing.

Winston & Strawn LLP joined the fray in August, unveiling a new ESG advisory team dedicated to making sense of it all. Partners Mike Blankenship and Eric Johnson tapped nearly a dozen attorneys who’ve made careers out of troubleshooting issues like shareholder activism, regulatory compliance, and crisis management.

The new team is the “culmination of issues around human capital that we’ve seen for many, many years,” employment litigator Cardelle Spangler said. She said diversity and inclusion initiatives, as well as campaigns to bolster equality are increasingly part of ESG analysis.

In a pandemic-ravaged world where money is already tight and politically motivated investors vote with their wallets every chance they get, Blankenship urged companies to embrace ESG or risk irrelevance.

A recent McKinsey & Company report polling nearly 600 C-suite executives and investment professionals supports Blankenship’s theory.

ESG programs “will contribute more shareholder value in five years than today,” 80% of respondents said. And 83% said they’d pay a premium—up to 10% more—to acquire a company with a positive ESG record over one with failing marks.

The Trump administration, however, is throwing cold water on ESG investing.

A proposed Labor Department rule aims to curb ESG investing by forcing fiduciaries to justify including the popular funds in work-sponsored retirement plans. The department said federal law requires fiduciaries to put financial security above “non-pecuniary” goals like combating climate change, human rights, or shunning weapons manufacturers.

Littenberg said Ropes & Gray is currently working with more than 200 clients, ranging from asset managers to influential trade groups, on ESG-related issues. Latham & Watkins LLP also has an ESG task force that features attorneys with various specializations around the world.

Watchdog Soup

Meanwhile, stakeholders keep moving the goalposts—on a constantly shifting playing field.

The United Nations Principles for Responsible Investment, for instance, asks individuals to consider ESG factors as part of their decision-making process, while the Global Reporting Initiative urges companies to report the social and environmental impact of their operations around the world.

The nonprofit Institute for Pension Fund Integrity called for clarity about ESG-centric business dealings in its Aug. 27 brief. “Companies should take the extra step to convey how they define ESG and how it impacts their investment strategies,” the group wrote.

If only it were that simple.

Stacey Mitchell, a partner at Akin Gump Strauss Hauer & Feld LLP, said bringing companies up to speed on ESG often involves highlighting “potentially overlapping, or at times, conflicting legal obligations” they hadn’t considered. Taking a holistic approach is critical, she said, because ESG considerations stretch far beyond corporate boardrooms.

Mitchell called middle management the “front-line workers when it comes to ESG issues,” mapping out scenarios where environmental compliance managers at mining companies and HR leaders at technology firms make judgment calls that have ripple effects throughout the supply chain.

Recent moves by the Trump administration also throw plan retirement administrators into the mix. The proposed Labor Department rule would impose significant new reporting requirements on retirement plan administrators that consider ESG in investments.

Josh Lichtenstein, a Ropes & Gray partner, said the additional reporting requirements could ensnare “funds that just include ESG considerations as part of their risk evaluation framework” rather than the activist entities the administration appears to want sidelined.

“If all funds that consider ESG factors at all in investing are caught up by the rule then almost every fund would be subject to it,” Lichtenstein said.

That could mean new litigation risks for plan sponsors.

“Any time you require fiduciaries to take additional steps you run the risk of plaintiffs saying they didn’t do that additional work,” even if they have an excellent investment process,” Lichtenstein said.

Winston & Strawn benefits lawyer Mike Melbinger said he’s been monitoring another ESG crackdown, from the Securities and Exchange Commission. That agency, along with the Labor Department, is moving to regulate proxy voting power by ESG investors.

The new regulations are unlikely to put a dent in ESG investing, according to Melbinger.

“The real world has kind of moved on and is doing this,” he said.

The SEC Takes Much-Needed Steps Toward Modernizing the Shareholder Proposal Rule

The Securities and Exchange Commission (SEC) met today to finalize proposed changes to the Exchange Act Rule, which sets standards for companies subject to federal proxy rules to include shareholder proposals in their proxy statements. These updates come in the wake of extensive work done by SEC staff to evaluate the proxy process and shareholder proposals across the board, and represents a major step toward modernizing the shareholder engagement process to reflect modern investment trends and set up more productive company-shareholder engagement.
The new rule would update the criteria for the inclusion of shareholder proposals in proxy statements, setting a time commitment of three years of investment in a company before a shareholder’s proposal may be considered. Furthermore, the rule would increase the level of shareholder support a proposal must receive to be eligible for resubmission at a company’s future shareholder meetings. Shareholder proposals may also be excluded from proxy statements if a proposal does not meet certain eligibility or procedural requirements. Finally, the “resubmission” threshold under which a proposal may be reconsidered after being voted on previously is significantly increased.
The Institute for Pension Fund Integrity commends the SEC for taking action to build greater constructive engagement between shareholders and the companies that they have invested in, ensuring better-functioning capital markets that prioritize long-term financial stability while at the same time reducing misuse of the shareholder proposal process. According to research from Harvard University, only ten filers accounted for 74 percent of all shareholder proposals in 2019. This lopsided trend indicates that real shareholder engagement has been diluted, and instead a select group of activists are attempting to game the system by using the shareholder proposal process to meet their personal agenda. Today, the SEC rightfully acknowledged the cost imposed to shareholders for proposal proponents’ actions as justification for the change to this rule.
Under these updated regulations, we believe that there is less likelihood of special interests sidetracking the agenda of public companies with little regard to broader shareholder interests and investment returns. By facilitating better communications between shareholders and companies, investors will be able to make more informed decisions and the influence of outside proxy advisory firms, which have not been shown to act in the best fiduciary interest of their clients, will be curbed. As noted previously by IPFI President Christopher Burnham, “A process for review and rectifying flaws in the research and recommendations by proxy voters better legitimizes the process and ensures that shareholders are voting with accurate information.”
As stated by SEC Commissioner Elad Roisman, “The proposed amendments would facilitate constructive engagement by long-term shareholders in a manner that would benefit all shareholders and our public capital markets.” With little change to rules governing the proxy submission process in over fifty years, and a troubling decline in publicly traded U.S. companies over the past several decades, this proposal is welcomed and well-overdue.

Commentary: The Department Of Labor Takes Much-Needed Steps Toward Ensuring Fiduciary Obligations

This article originally appeared in Forbes on September 22, 2020.

The time to ensure that pension fund managers are bound by their fiduciary obligation to their beneficiaries and not by any other political motives is now. Prioritizing issues other than pure financial returns may be an acceptable strategy for individuals managing their own money or for corporate board rooms contemplating the future of their company, but for fiduciaries, prioritizing any kind of self-interest or ulterior motive over maximizing returns is a dereliction of duty.

Over the past several months, the Department of Labor has begun to take steps to curb this trend, releasing two new regulatory proposals seeking to re-affirm the responsibilities of pension fund fiduciaries. The first proposed rule examines tax-qualified retirement plans governed by ERISA in order to determine the extent to which Environmental, Social, and Governance (ESG) considerations factor into investment decisions. The question at hand is whether the plan managers, bound by fiduciary duty to their beneficiaries, are sacrificing investment returns or increasing risks to meet ESG goals unrelated to participant’s bottom-line financial interests. The second rule seeks to re-evaluate the outsized role that proxy advisory firms have played in pension fund investment and the associated costs that have been passed down to beneficiaries.

As a former state treasurer of Connecticut, I have personally overseen the management of a public pension system. It is not possible to fully protect the financial security of a plan’s beneficiaries if those charged with managing a pension fund are trying to build an investment strategy around nonfinancial considerations. Decisions on new investment strategies, whether they are driven by political reasons or simply as an attempt to chart a new path forward, must be made in the boardroom. There are many laudable social initiatives that individuals, religious endowments, schools, and other private entities may wish to consider. However, it is never correct to impose personal political motives on pension funds. This principle is even more prevalent given the financial ramifications that the economic fallout of the COVID-19 pandemic has had on pensions.

The Department of Labor should be applauded for taking these necessary steps toward clarifying and correcting guidance on the fiduciary obligations of pension fund managers. As Labor Secretary Scalia noted, these actions aim to “remind plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end.”

Despite these efforts, public pensions are still vulnerable to ESG strategies. The trend towards “impact investing” has permeated the proxy voting industry, where two firms effectively control significant numbers of shareholder votes in thousands of publicly traded companies. These votes would be an important weapon against ESG policy that does not serve the shareholders, but under the current rules mostly serve an ideological agenda separate from the interests of retirees and public employees. For this reason, the Department’s second proposed rule clarifying the roles and responsibilities of proxy advisory firms and the obligations that fund managers have toward their proposals is of the utmost importance.

SEC commissioner Daniel M. Gallagher acknowledged the problems with the proxy industry as far back as 2013, noting that the current system is not built to increase company value or generally operate on behalf of shareholders, but rather to serve the interests of the proxy advisory companies themselves. While the proposal is a step in the right direction, it is important to think not only about how pension money is invested, but also how the voice that comes with a stake in any given company is used. Until we reform the proxy voting industry, that voice will be vulnerable to the whims of third parties.

One major issue which is not adequately addressed by the Department’s proposed regulations is the issue of “robo-voting,” a practice which has long allowed for the proxy advisory firm duopoly to pursue a personal agenda with limited scrutiny. Under this practice, some fund managers have simply accepted the voting recommendations of proxy advisors automatically, blindly moving forward on proxy firms’ recommendations without consideration of their overall fiduciary impact on the fund. The growth of robo-voting in the industry is understandable given the cost savings that pension plans can accrue as a result, but the desire to implement sound cost-saving measures cannot be upheld if proxy voting is relied upon to determine the course of action on contested issues. In these instances, fiduciaries should end their reliance on proxy voting in order to ensure that all final decisions are truly in the best interest of beneficiaries.

While more work is needed, it appears that the Department of Labor is finally in a position to implement much-needed reforms to a pension system that has for too long neglected the underlying financial security of its beneficiaries. Given the widespread problem of unfunded pension liabilities, the economic fallout from the pandemic, and increased politicization of pension investments, a re-commitment to fiduciary responsibility is a welcome sight. The retirees of this nation deserve as much.

Commentary: Trump’s Labor Department Seeks to Clean Up Left-Wing Abuses of Pensions

This op-ed originally appeared in TownHall and affiliated outlets on September 15, 2020.

For pension beneficiaries across the country, the recent proposals by the Department of Labor are a positive step towards ensuring that accountability and fiscal responsibility take precedence over any other considerations.

Two new rules are currently being weighed. The first, for which the department is currently in the process of sorting through public comment, concerns the role of environmental, social, and governance (ESG) investments in ERISA-backed pension funds. The second takes aim at “proxy voting,” examining the outsized roles that proxy advisory firms have in investment decisions and examining whether their recommendations are always economically beneficial to pensioners.

These rules rightly reaffirm a fiduciary’s obligation to prioritize financial returns over alternative investment strategies in the management of ERISA-managed pension fund assets. As a former Treasurer of the State of Ohio and Mayor of Cincinnati, 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 rely on their pension or 401K for a secure retirement.

Last November, SEC Chairman Jay Clayton remarked that a chief complaint “was the concern that [shareholders’] financial investments—including their retirement funds—were being steered by third parties to promote individual agendas, rather than to further their primary goals of being able to have enough money to lessen the fear of ‘running out’ in retirement or to leave money to their children or grandchildren.” In putting forth these two regulations, the Department of Labor is taking clear steps to also address this concern.

In the case of the first rule, fiduciary duty obliges pension fund managers to only consider ESG investments when they add value to a fund. When such investments will not improve the financial performance of the fund, or the decision to invest in them is based on political motives, they should be forgone. According to a study by the Pacific Research Institute, ESG funds were “43.9 percent smaller compared to an investment in a broader, S&P 500 index fund,” after 10 years. As ESG strategies become more fashionable, there is cause for concern that financial returns will be replaced by politics at the top of asset managers’ considerations.

The question of pensioner’s financial interests is further addressed in the recent proposed rule by the DOL. The proxy system has long been taken advantage of by outside actors without fiduciary responsibilities, preventing sound advice from reaching the nation’s pension and investment funds and retail shareholders. There is currently a duopoly in the system, in which two companies, Institutional Shareholder Services (ISS) and Glass Lewis, control the overwhelming majority of the proxy advisory market. These firms are not obligated to adhere to fiduciary duty like ERISA plan managers, and abdicating authority over proxy voting in such a way violates fund managers obligation to plan participants.

The proposed rule is a good step in the right direction by the Department of Labor, but more should be done around proxy advisors’ role in a process called automatic or robo-voting. Some fund managers allow proxy advisors to vote their proxies, often without the ability or impulse to consider the recommendation. In other words, fund managers blindly vote the recommendation without consideration of the impact to the fun. Such a practice disenfranchises pensioners and should be curbed. The Securities and Exchange Commission issued guidance on this front to asset managers in June of this year, and DOL should adopt this guidance as a part of the rule.

Pensions should be, and once were, apolitical entities. At the Institute for Pension Fund Integrity, where I sit on the board, we are singularly focused on that objective—getting politics out of pensions and protecting the financial security of America’s workforce. I applaud the Department of Labor’s efforts to further codify the most basic tenet of fiduciary duty: investment decisions should be governed by considering risk and returns, not the political agenda of a third party. As I have previously noted, “public pension funds are already underfunded and underperforming.” Let us not exacerbate the issue by appeasing the special interest groups to the detriment of private sector labor workers and retirees across the country.

Pension fund managers need to be reminded that they are charged with acting on behalf of individuals who sacrificed a portion of their wages every payday with the expectation that their money would be handled with care, not used to promote the interests of political actors. The proposed rule changes are an important step towards fulfilling these obligations.

Ken Blackwell served as Treasurer of State of Ohio and as a member of the U.S. Department of Labor Advisory Council on Employee Welfare and Pension Benefit Plans. He is a trustee of the Institute for Pension Fund Integrity.