ESG Versus Impact Investing

This article originally appeared in Forbes on February 28, 2020.

There is absolutely nothing wrong with senior management and directors of companies across America reviewing, analyzing, measuring and integrating into company operations, a focus on environmental, social, and governance (“ESG”) considerations. Nor is it a new concept. As one general counsel of a Fortune 200 company told me last summer, “We’ve been integrating ESG into our operations for the past 40 years.”

The reason is, of course, that embracing ESG adds value to companies. This is especially true in the emerging markets, where independent directors, outside audits and anti-nepotism policies all indicate a company’s embrace of good governance. On environmental issues, look no farther than BP or Brazilian-based Vale S.A. to see the damage of what reckless neglect of sound environmental policies can do to the value of a company—BP lost 54% of its value after the oil spill disaster in the Gulf of Mexico, and Vale has plunged in value after the dam holding back mine tailings failed last year, and also faces criminal and murder charges for the more than 250 deaths that happened as a result of the dam failure.

The “S” of ESG speaks for itself. Taking care of your employees, including offering those aspects of 21st century benefits—such as maternal and parental leave, or allowing employees to work remotely, are now essential elements of attracting and retaining good workers. Ten years ago, the consulting world warned us of the impending “war for talent.” That struggle is only intensifying as a new generation is not just embracing but redefining “work-life balance.” Even Goldman Sachs, long known for its brutal work schedule, changed their rules after the suicide of one of their young telecom analysts in 2015. Simply stated, embracing ESG adds value to a company.

Impact Investing on the other hand, does not add value. Impact investing is a nice way to re-label “political investing”—investing with a specific political agenda—be it against the companies that supply our military, coal companies, gun companies and many others. Impact Investing is the antithesis of the utilitarian principles on which, the United States was founded—the greatest good for the greatest number of people—and instead is based on “investing to force change based on my personal political agenda”, and “I certainly know more than you so I will impose my will upon you.”

The absolute worst example of this is allowing politics to undermine fiduciary duty in the management of our public pension funds. From California to New York City, governors and mayors have tried to pad their liberal credentials by forcing public pension trustees to abdicate fiduciary duty to their political whims. However, in the case of California, state employees and retirees pushed back last October when they voted to toss the sitting CALPERS board president in favor of Jason Perez, a Corona, CA police officer who ran on removing politics from the management of California’s public employee pension fund.

In 2001, California stripped tobacco companies from the CALPERS portfolio thereby leaving almost $4 billion of performance (alpha) on the table. More recent proposals have targeted oil companies and private prison companies. One has to assume, that should Mike Bloomberg be elected president, his crusade as mayor of New York against sugar and soda companies will continue. But play politics in the legislature not in our public pension plans.

Now banks and money managers, seeking to appease their own activist clients and shareholders, are trying to put lipstick on the hog by advocating for ESG when what they are doing is advocating for a political agenda. We must not, however, allow them to advance political investing by calling it “ESG.” Again, ESG is used around the world as a way to help both large and small companies increase shareholder value by good governance, being good stewards of the environment and taking care of their employees. ESG is not about forcing pension funds, or banks, to stop funding soda companies, coal companies, private prison companies, defense industry companies or anything else that offends politicians, activists, elitists or scared bank CEOs seeking to impose their supercilious arrogance over fiduciary responsibility.

The Misguided Movement to Divest

At the World Economic Forum in Davos, Switzerland, Greta Thunberg demanded an end to all investments in fossil fuels. While Ms. Thunberg may have good intentions, her demands are indicative of the economic ignorance found in today’s activists. Unfortunately, BlackRock CEO Larry Fink has fallen victim to the same flawed reasoning. Just ahead of the Davos summit, Fink announced that his company would divest entirely from fossil fuels. The head of the world’s largest money manager should know that selling stock is an ineffective vehicle for change. Instead, it provides an opportunity for major oil and gas companies to buy back their stock. In the end, it’s the pension plan members who have committed a portion of every paycheck to funds that invest in these industries that wind up suffering. 

Public servants who hope to one day collect a livable retirement expect that their dollars will be invested based on proven, traditional strategies that yield maximum returns. But many of the industries that can deliver on this expectation now face widespread attacks. The fact is divestment doesn’t work. The large-scale selling of a company’s stock only brings the price down briefly. This makes it more attractive to investors less concerned with the political implications of a particular company. Divestment has little impact on the actual operations of a business. Even AIG CEO Brian Duperreault, who supports impact investing, stated during a Davos conference that AIG is not prepared to cancel business with “low ESG score” companies.  

The dangerous trend of ESG activism compromises returns on the pensions of over 14 million Americans. Divestment movements have become a favored tactic of activists who are unable to effect change in the legislature. In turn, they attempt to circumnavigate democracy by wielding the funds at their disposal in a manner they believe will help their cause, all while attacking investors who employ investment strategies geared toward maximizing returns, their fundamental obligation as a fiduciary. ESG investing, on the other hand, is incompatible with maximum returns.  A recent study by Pacific Research Institute found that ESG funds underperform standard S&P 500 index funds by 43.9 percent over 10 years.  To advocate in favor of an investment strategy that so profoundly limits returns is irresponsible and a violation of an asset manager’s fiduciary duty, and America’s pension funds would be the victims.

Pension funds and other financial assets are amoral entities. They are best served by considering all investment options, not just the ones that fit into a third party’s political agenda. 

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.

Case for Proxy Reform Glaringly Evident After Latest Debate

On January 27, the Bipartisan Policy Center hosted a discussion on the SEC’s proposed reforms to the proxy voting process. Tom Quaadman, Executive Vice President of the U.S. Chamber Center for Capital Markets Competitiveness and Pat McGurn, Special Counsel and Head of Strategic Research and Analysis at Institutional Shareholder Services examined the key elements of the proposed reforms and debated their ramifications before an audience that IPFI was privileged to be a part of. 

Mr. Quaadman spoke to how the proposed rule addressed widespread concerns around accuracy, conflicts of interest, and the need for more transparency. Specifically, he cited the 2.5% error rate in proxy reports on companies, which he partially attributes to a lack of communication between proxy advisory firms and companies. Since the 2014 SEC-issued guidance on proxy advisory firms, an annual survey revealed that the level of company-initiated interactions with proxy advisory firms has been steadily declining due to the inability to correct factual errors promptly.  Quaadman added, “A financial analyst who doesn’t interact with the company and just makes industry-wide pronouncements isn’t going to last five minutes on Wall Street.” 

The discussion later turned to automatic voting, or robo-voting as it is commonly known. Quaadman referred to the observation that at least a third of the vote coming in within the first 48 hours, with 95% of those votes following the proxy advisory recommendations. McGurn swiftly noted that the majority of ISS’ client recommendations are based on custom reports tailored to that client. But, by ISS protocol, the term ‘custom’ may indicate a configuration as simple as, “vote in-line with ISS on everything except X.” Unquestioningly following recommendations save for one factor is an insufficient deployment of fiduciary duty. 

Finally, the two keynote speakers explored how conflicts of interest may arise. Mr. McGurn argued the SEC’s reforms compromised the integrity of the firewall between consulting and proxy voting firms. Calling this firewall “leaky” Quuadman pointed to the fact that many companies who receive poor recommendations from proxy advisors are soon after contacted by their colleagues on the consulting side of the business. In other words, their proxy recommendations in some cases can be confused as business development. Quaadman also reminded the audience that proxy firms do not publicly disclose if shareholder or director slate proponents are clients.

ISS clients cast 8.5 million ballots and 3.8 trillion shares annually. Under the current arrangement, rife with factual errors, robo-voting, and conflicts of interest, ISS and Glass Lewis operate as “de-facto standard setter[s] in corporate governance.” The prevailing argument against SEC regulation maintains that it’s simply not necessary. 

McGurn failed to provide any examples to alleviate concerns raised about ISS’ violation of fiduciary duty, need for greater transparency, and their clear conflicts of interest. The discussion summarized here demonstrates that the proposed rules are not only necessary but integral to the performance of our markets and the safeguarding of America’s public servants’ future retirements. 

IPFI Issue Brief: SEC Rulemaking and What It Means for Proxy Advisory Firms

In November 2019 the U.S. Securities and Exchange Commission (SEC) voted 3-2 in favor of proposing two new rules regarding proxy advisory firms. These rules, S7-22-19 Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice and S7-23-19 Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 build on the SEC’s November 2019 interpretive release, which clarified that proxy advisory firms are subject to anti-fraud rules and outlined best practices investors can employ when utilizing proxy advisory services.

In our latest report, the Institute for Pension Fund Integrity (IPFI) has returned to this topic to assess the rulemaking process and the implications of these two rules, in particular. Proxy advisory firms play a critical role in determining how institutional investors, such as those who manage public pensions, vote on shareholder resolutions. As fiduciaries, these individuals are obligated to prioritize fiscal returns above all else. However, proxy advisory firms compromise that duty through several avenues, such as:

  • Lack of transparency – Those interested in obtaining information on the basis of proxy voting recommendations will find it nearly impossible. Furthermore, proxy advisors provide a technological platform for fund managers to utilize. This encourages compliance with recommendations in a closed system, resulting in a practice of “robo-voting.” This phenomenon disenfranchises public pension plan members from having a say over how their own investment dollars are allocated.
  • Conflicts of interest – Proxy advisory firms advise institutional investors on how to cast their votes. These firms also advise companies on how to obtain a more favorable score as awarded by the proxy advisory firm. Such a practice directly violates the Sarbanes-Oxley Act of 2002, which requires the separation of parts of financial institutions that provide ratings on companies and those that conduct advisory work for those same companies.
  • Politically-motivated voting – In addition to the Taft-Hartley voting guidelines, which prioritize financial returns, proxy firms deploy a range of specialty reports to inform institutional investors on how to vote, including socially responsible, faith-based, and sustainability guidelines. These guidelines allow for third parties to hijack pension funds in an attempt to advance arbitrary political or social causes while providing cover for the proxy advisory firms who have been entrusted with providing independent recommendations. Recommendations that give weight to any of the above considerations are far from independent.
  • Outsized and Unwieldy Influence – Institutional Shareholder Services Inc. and Glass Lewis Co. control 97% of the market. The voting policies of these firms have become so enormous that corporations have adopted a practice of tailoring their policies in advance to avoid lengthy “vote no” campaigns.

IPFI President Christopher Burnham wrote in Forbes, “These firms advise pension plans on how to vote on a variety of corporate issues that impact returns, sometimes with a focus on ‘impact investing,’ meaning they are also advocating for a specific political agenda… Our public plans, politicized, mismanaged and underfunded are a time bomb ticking away.”

IPFI maintains that investment advisers must place the financial considerations above any other factor. The necessity of introducing appropriate proxy reform to a seriously lacking regulatory scheme is apparent. While illuminating the major flaws that need addressing, we hope that this report serves as an accessible reference to public pension plan members when advocating for an unwavering commitment to fiduciary responsibility. No public servant should have to worry about their retirements after a lifetime of contributions.

Read the latest issue brief, SEC Rulemaking and What It Means for Proxy Advisory Firms.

LACERS Must Stand Up Against Divestment Pressure

As the new year begins, fiduciaries must remain vigilant against misguided abuse of our nation’s pensions. Those in charge of California’s retirees have a duty to manage the Los Angeles City Employees’ Retirement System (LACERS) with the sole objective of increasing returns. Forced divestment and politically-motivated financial decisions have been shown to compromise that outcome. Yet Los Angeles City Councilman Bob Blumenfield has irresponsibly ignored past financial research by using LACERS to forward a flawed and uninformed plan to revise his fellow citizens’ retirement funds.

IPFIUSA’s groundbreaking report last April on the faults of restrictive and politically motivated investment strategies seems to never have made it to Councilman Blumenfield’s desk. The report details how ESG-style funds in the style of the Councilman’s suggestion consistently underperform other more responsibly researched and managed funds, if only for a basic explanation: “an investor who is picking stocks from a limited pool of choices will be outperformed by one who is picking stocks from a broader pool.” It is not only a simple and fundamental investment theory that Councilman Blumenfield is ignoring but also carefully compiled data.

The same report details how the S&P 500 — an all-encompassing index fund thought to mimic the general economy — beat the oldest ESG fund in “seven of the past nine calendar years.”  For one five-year period, the S&P beat the ESG fund by more than 0.75%. This margin is significant to any informed investor, and it can especially make a difference to those who rely on pensions for a liveable income after retirement.

LACERS deserves a City Council that prioritizes public pensions over the private political beliefs of its members. Councilman Blumenfield suggests creating watchlists and labeling certain companies (with a demonstrated history of profitable returns that strengthen pensions) as “uncooperative.” This does nothing but harm to the future of Los Angeles. Further, there is no evidence that such a practice alters the behavior of entities deemed politically unfavorable. We are concerned for those who can’t afford to waste their retirement on simply proving a point, and we urge Councilman Blumenfield to leave politics aside to protect the pensions of Los Angeles’ public employees.

COMMENTARY: Senate Banking Hearing with SEC Chairman Must Address Proxy Advisory Firms

This article originally appeared in Morning Consult on December 10th, 2019. 

On Dec. 10, the Senate Committee on Banking, Housing and Urban Affairs will hold an oversight hearing on the Securities and Exchange Commission. Among all of the SEC’s priorities, the Senate Banking Committee should raise the topic of proxy advisory reform. With the public comment period open on proposed rule S7-22-19 Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, this hearing is an ideal opportunity for Chairman Jay Clayton to address the implications of this rule, which stands to eradicate numerous flaws, distractions and blatant conflicts of interest inherent in the proxy voting process.

Many institutional investors completely outsource their voting responsibilities to proxy advisory firms by automatically agreeing with recommendations in the absence of a thorough review. This practice, coined “robo-voting,” appeared across 175 investment entities surveyed in a Harvard Law study. These entities manage over $5 trillion and follow proxy advisory firms’ recommendations 95 percent of the time. Absent substantive review of recommendations, proxy advisory firms wield disproportionate influence over the outcome of shareholder resolutions. What’s more, these firms receive payment no matter the outcome of the vote, or how it impacts fiscal performance.

To fuel a business model based largely on opinion, proxy advisory firms tailor recommendations based on various points of interest. Institutional Shareholder Services (ISS) offers five different voting recommendation reports that suit multiple agendas. These include Faith-Based Guidelines, Socially Responsible Investment (SRI) Guidelines and Sustainability Proxy Voting Guidelines. How is it that they are allowed to get away with introducing arbitrary, personal morals into the equation while providing cover for those who should be making decisions on a financial basis? This is the crux of the issue that proposed rule S7-22-19 seeks to remedy.

And frankly, corporate board members are tired of becoming embroiled in these battles. As a former member of the National Commission on Economic Growth and Tax Reform, I’m well-versed in how internal boardroom dynamics affect company performance at large. While topics that fall under environmental, social and governance (ESG) objectives raise important issues that should be carefully considered, prioritizing ESG can sometimes undermine a company’s priority to generate optimal returns.

A recent poll outlines this phenomenon in detail. According to PwC’s latest Annual Corporate Directors Survey, 56 percent of board directors say that investors devote too much attention to ESG investments. This is up from 29 percent in 2018. The fact of the matter is that the boardroom is not an appropriate forum for quarreling over which politicized issue merits a company’s financial backing or withdrawal.

Vocal activists repeatedly call for companies to invest here! — divest there! — appoint this person! — remove this one! Cacophonic cries do nothing but exhaust executives, preventing them from meaningfully engaging any particular topic. This badgering has become self-defeating. The slew of demands has weakened corporate executives’ ability to recognize, much less tackle, what’s important.

The institutional investors who direct funds on others’ behalf also have a hard time cutting through the noise. Increasingly, activists have weaponized institutional investment funds to impose an external agenda onto a private, for-profit entity with little consideration for how these moves will affect those who have invested their own dollars. Proxy advisory firms lend power to these demands. Chairman Clayton has an opportunity to highlight this during his testimony in front of the Senate Banking Committee.

Under Chairman Clayton’s direction, the SEC has finally broken ground limiting the influence of proxy advisory firms. The proposed rule stands to affect millions of Americans who contribute to hedge funds, passive index funds, pension plans and other long-term investments. I, for one, hope that it passes.

While I was the State Treasurer of Ohio, I witnessed how nonpartisan, fiduciary duty benefited our resource pool. Why should private entities, that can sway our economy on a national scale, be any more lax with their strategies? Political agendas have proven to be nothing more than a nuisance in the boardroom. Let’s let executives get back to their job, and leave politics to the politicians.

Ken Blackwell is a member of the Institute for Pension Fund Integrity and a senior fellow at the Family Research Council. He was the Ohio State Treasurer from 1994-99 and has also served as Ohio Secretary of State, Mayor of Cincinnati, Undersecretary in the Department of Housing and Urban Development and as an Ambassador to the United Nations Human Rights Commission.

CalSTRS Need to Focus More on Investment Performance, Less on Proxy Advisory Firms

The issue of proxy advisory reform is at the center of debate now with the SEC entering into a formal rulemaking process to roll back some of these firm’s unchecked powers.

These firms have been known to make recommendations misconstruing or misinterpreting data, they have been allowed to operate and make recommendations with clear conflicts of interest, and most importantly, they refuse to act as fiduciaries, instead making recommendations to advance their clear political and social goals instead of recommendations that will produce the greatest returns for investors.

It’s unfortunate that the head of one of the most underfunded and politically/socially active pension funds (CalSTRS) is coming to these firm’s defense. In a recent article, Chris Ailman, CIO of CalSTRS, seemed to attack the SEC’s intent of looking out for the average pensioner or retail investor, in favor of the political and social-driven investing that CalSTRS has been known to support.

According to the California Legislative Analyst’s Office, CalSTRS has an unfunded liability of $107.3 billion, which means the $242 billion pension fund is only 57 percent funded. What are California teachers – those who often take less pay during their working years for the assurance of a strong retirement – going to do when the secure retirement they were promised isn’t able to pay the promises that were made during contract negotiations?

This is proof that pension fund managers, particularly those that are not performing well, need to focus less on politics and more on producing solid returns for their investors.

What’s most unfortunate is that CalSTRS’ management – by voting automatically with proxy advisory firms’ recommendations – is silencing the voice of everyday pensioners who are the main beneficiaries of the pension fund.  Reforming this automatic voting status will create greater transparency for all CalSTRS pensioners.

COMMENTARY: Take Politics Out Of Public Pension Plans

This op-ed originally appeared in Forbes on November 4th, 2019. 

Ahead of the Great Recession of 2008-2009, housing prices were increasing by about 5% every year between 1998 and 2006. Yet major publications and almost all pundits missed the signs of impending disaster. More than seven million Americans lost their homes and millions more lost jobs. While it was a failure of fiduciary responsibility by the leaders of our banks and investment banks, I call it “criminal stupidity”. It is a crime against the employees and shareholders—blame is also shared by the rating agencies, Congress and others.

Politicians and financiers are now attempting to perpetrate another fraud—-the way they manage our public pension plans.

In 1995, as the newly elected state treasurer, I inherited the worst performing state pension plan in the nation—Connecticut. With over 68 money managers most of them unable to beat their benchmarks, we were two hundred basis points below the 49th state for the previous ten years. It was a pathetic confluence of politics and incompetence, and it meant that Connecticut left over $2 billion on the table if compared to if they had simply indexed the portfolio to 50% stocks and 50% bonds.

I run the Institute for Pension Fund Integrity, which recently completed a study of most of the states’ pension plans, and found that only five pension funds out-performed a benchmark of 60% stocks and 40% bonds for the previous ten years. In other words, instead of the hundreds of millions of dollars our states spend each year trying to “beat the market,” the vast majority waste those taxpayers’ dollars and employee contributions, and then compound it by failing to produce “alpha”: returns in excess of a reasonable benchmark.

Our politicians then continue the abuse by manipulating the way our funds calculate unfunded liabilities. They do this by failing to use up to date actuarial assumptions, excessively high assumed rate of earnings or returns, known as “ARR”, and then cover up the truth by not complying with the Government Accounting Standards Board (GASB) reporting standards for state and local governments. The current GASB 67 standards require plans to report their assets at market value, which shows actual market fluctuations, instead of actuarially smoothed value. However, public pension plans persist in using the “actuarially smoothed value for funding purposes because it exhibits less volatility” (Figure B1).

The Employee Retirement Income Security Act (ERISA), governs private-sector and Taft-Hartley pensions, and requires that plan managers use a market-driven ARR of between 3-5%. There is no equivalent requirement at the state level.

That means it’s up to the state legislatures and government agencies to determine an appropriate ARR. A higher ARR presumes higher profits on current investments. Using an ARR of around 7%—a level very few states can consistently earn above—means that unfunded liabilities are understated and the amount of money legislatures must annually appropriate during budget debates to their pension systems is reduced.  In other words, it is a gimmick used by our politicians to kick the can down the road.

I have been on a 25-year crusade to keep political investing out of our public pension plans—when old pols like Mayor de Blasio in New York City want to impose their personal political agenda on investment decisions. I guess it did not help his campaign for president too much. In de Blasio’s case, he was trying to divest $5 billion in fossil fuel holdings from the city’s five public pension funds. I wonder: what fuel he was putting into the SUV that he was using to drive his kid to school?

Recently, the town of Charlottesville, Virginia voted to strip their holdings in companies that support our sons and daughters in our armed forces. As a retired Marine Corps infantry officer, I am particularly insulted by that one.

Another version of this politicizing is letting the two dominant proxy voting advisory firms—one owned by a Canadian holding company—making proxy voting decisions for our pension plans with little transparency to those of us who are beneficiaries of those plans. These firms advise pension plans on how to vote on a variety of corporate issues that impact returns, sometimes with a focus on “impact investing,” meaning they are also advocating for a specific political agenda—such as tobacco, or energy, or firearm manufacturers—-industries that have generated ire by some for political or social reasons.

The problem is that politicians and proxy advisory firms have no stake in how our public pension plans perform. They have no skin in the game. Our public plans, politicized, mismanaged and underfunded are a time bomb ticking away. The State of Connecticut owes me and my fellow pension beneficiaries at least $100 billion to our unfunded pension system. For California’s state pension system it is closer to $1 trillion. By choosing politics over fiduciary responsibility, the politicians have chosen to condemn our state and municipal employees to an insecure retirement, and to my fellow taxpayers, the prospect of huge increases in taxes to make up for their political malfeasance and stupidity.

Among the many solutions, it is time to take the politics out of the management of our public pension plans.

PRESS RELEASE: IPFI Applauds SEC’s Actions Fixing the Proxy Advisory Process


November 14, 2019

IPFI Applauds SEC’s Actions Fixing the Proxy Advisory Process

The Institute for Pension Fund Integrity welcomes the SEC’s latest proposed rules, which seek to restore trust and accountability to the shareholder voting process by addressing a range of negative practices rampant in proxy advisory services.

Arlington, VA – Last week, the SEC voted 3-2 to propose rules that would remedy the unchecked power of proxy advisory firms for the first time in over twenty-seven years—the longest stretch in the history of solicitation rule updates. This comes on the heels of over a year’s worth of deliberation and input on the current framework governing proxy advisory firms. At last, substantial measures to limit their outsized influence have taken form. These principles inform the latest proposed rules:

  1. Offer investors a more streamlined system: Proxy advisory firms currently operate under a “patchwork of exemptions” to the Commission’s solicitation requirements. This rule clarifies that these firms’ obligations to investors remain the same across the board.
  2. Address material conflicts of interest head-on: Information on the basis of proxy advisory firms’ recommendations is notoriously difficult to access. Comprehensive disclosures are especially necessary when proxy advisory firms consult both investors and corporations on how to navigate the shareholder voting process.
  3. Learn from and improve upon current market practices: The proposal increases the opportunities for issuers to review and correct information that proxy advisory firms use to provide voting recommendations, thereby reducing the amount of circulating inaccuracies.
  4. Enhance transparency for investors: Pubic pension plan members and retail investors should no longer be in the dark when it comes to fund managers’ “automatic voting” based on proxy advisory firms’ recommendations. The SEC rightly called attention to this issue in the proposed rule, and the SEC should ensure greater accountability and enhance transparency by prohibiting automatic voting.

Public pension plan members and retail investors have a huge stake in these rules’ outcome. Institutional investors manage many kinds of funds, including public pensions, and own as much as 80% of the market value of publicly-traded US companies. The new rules would force proxy advisory firms, who recommend how pension fund and investment managers should vote on proxy proposals, to comply with stricter oversight. Specifically, the SEC’s proposed rules will ensure recommendations are made absent both misinformation and clear conflicts of interest on the proxy advisory firm’s part. The goal should be that proxy advisors make recommendations that will provide investors with the greatest returns on their investment.

IPFI President Christopher Burnham recently wrote in Forbes, “The problem is that politicians and proxy advisory firms have no stake in how our public pension plans perform. They have no skin in the game. Our public plans, politicized, mismanaged and underfunded are a time bomb ticking away.”

IPFI supports the SEC’s actions and plans to continue pushing for what should be investment fund’s top priority–maximizing investment returns.

For more on IPFI’s positions regarding divestment and fiduciary responsibility, see IPFI’s research available on


The Institute for Pension Fund Integrity seeks to ensure that local, state and federal leaders are held responsible for their choices in investment, led not by political ideation and opinion but instead by fiduciary responsibility. IPFI is a non-partisan, non-profit organization based out of Arlington, Virginia, and spearheaded by former Connecticut State Treasurer and former Undersecretary General of the United Nations, Christopher B. Burnham.