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 www.ipfiusa.org.


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.

COMMENTARY: Safeguarding the pensions of public employees; With proxy reforms the SEC takes a first step in improving the health of U.S. pension funds

This op-ed originally appeared in The Washington Times on October 8th, 2019.

Nearly a year after it held a roundtable on the topic, the Securities and Exchange Commission on Aug. 21 issued “an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a ‘solicitation’ under the federal proxy rules.”

This is a big deal. Proxy advisers have become the most powerful players in corporate governance. The field is dominated by just two firms, Institutional Shareholder Services (ISS) and Glass Lewis. They provide recommendations to funds on how to vote on proxy questions that come before them as owners (on behalf of their investors) of shares of thousands of different companies. Those proxy questions include electing board members and engaging accounting firms but, more and more, funds are called on to vote on environmental, social and governance issues that are subsumed under the shorthand acronym “ESG.”

The advisers have been criticized for making decisions — especially in the ESG arena — using ideological rather than strictly financial criteria. They have also been accused of making factual errors and not correcting them quickly, of using one-size-fits-all approaches to questions rather than considering the needs and strengths of individual companies, and of conflicts of interest.

And they’ve been criticized for forcing a practice often called “robo voting.” Specifically, “robo-voting” takes place when pension fund managers and other fund managers automatically vote in alignment with proxy advisory firm recommendations. This practice undermines the First Amendment rights of public pensioners and retail investors since their voice has been disenfranchised in the shareholder resolution votes by fund managers. This practice is most problematic if the resolutions advance a political agenda instead of prioritizing financial returns. J.W. Verret on the SEC Investor Advisory Committee and George Mason Law School called attention to this issue in a recent Financial Times op-ed when he wrote, “This kind of automatic voting in line with unregulated third parties’ guidance is undermining the fiduciary duty that advisers owe to investors.”

While the SEC’s “interpretation” or “guidance” is not a rule-making or a regulation, it “could have significant impacts on how proxy firms and investment advisers conduct business,” wrote Peter Rasmussen on BloombergLaw.com. Nor is the SEC finished with the matter. Great oversight may be coming.

The SEC made it clear that the recommendations of proxy advisers are subject to legal anti-fraud provisions under the SEC’s Rule 14a-9. Previous SEC actions had given the investment community the distinct impression that proxy advisers had special protections and that investment funds, including public pension plans, could shift responsibility for making proxy-voting choices onto the advisers without either group assuming the sort of responsibility that traditionally extends to advice giving and receiving in the securities world.

The SEC warned that Rule 14a-9 “prohibits any solicitation from containing any statement which … is false or misleading with respect to any material fact.” And the commission stated that proxy advisers would have to disclose information which “extends to opinions, recommendations, or beliefs” in order to avoid a potential violation.

It appears that proxy advisers will have to justify their voting recommendations much more rigorously than they do now. If so, millions of Americans will benefit.

We cannot expect to safeguard the retirements of the 14 million-plus public servants contributing to pension plans if the SEC fails to assign proper accountability to the firms that are responsible for more and more pension-fund decisions. A Manhattan Institute study has shown that a portfolio of ESG investments performs more poorly than the market as a whole, and the recent returns of the largest public-employee pension fund CalPERS, which is a prominent practitioner of ESG investing, have been especially dismal. For the fiscal year ending June 30, returns of the public equity portfolio of CalPERS’s portfolio were just 6.1 percent while S&P 500 index funds returned 9.7 percent.

This emphasis on ESG, driven by proxy advisers, poses disastrous consequences for our nation’s already-suffering public pensions. Americans deserve better. After sacrificing a portion of every hard-won paycheck in order to secure financial stability for their families’ futures, plan members need to receive what was promised to them in retirement.

According to the SEC’s own language, its mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” There’s nothing fair about a market skewed by trending political causes advanced by vocal minorities.

On Aug. 21, the SEC took a good first step at reviving the principles of fiduciary responsibility. Lack of transparency and accountability both enable the practices that can lead to recommendations that harm the performance both of corporation and pension funds.

Public pension funds are already underfunded and underperforming. The SEC is in a unique position to address a serious problem. Now is the time for leading officials to ensure that investments are based, in the SEC’s own words, on “timely, comprehensive, and accurate information,” not on blanket recommendations steeped in ideology.

Ken Blackwell has served as treasurer and as secretary of State of Ohio, as well as mayor of Cincinnati. He serves on the Advisory Board of the Institute for Pension Fund Integrity.



Opinion/Letter: NY pensions deserve protection – Richard Brower in New York Daily News

This Letter to the Editor originally appeared in New York Daily News on September 21, 2019.

Rockville Centre, L.I.: Re “Don’t be fuelish, Tom,” (Sept. 2): New York’s retirees served the state all of their lives. As a former vice chairman of the FDNY Pension Fund and advisory board member for the Institute for Pension Fund Integrity, I know that it’s up to the public pension fund fiduciary to be able to hold up their end of the bargain and ensure retirees’ financial security is well-funded. As state controlleroverseeing New York State Common Retirement Fund (NYSCRF), Tom DiNapoli has been doing just that. But the recent outcries to divest our public pensions from fossil fuels are based purely in politics and will harm our retirees.

The NYSCRF oversees $210.5 billion, which benefits more than one million members, retirees and beneficiaries. Taking steps like divestment are futile and only jeopardize the financial security of the pension recipients.

Climate change is obviously an important issue, which is why DiNapoli released the Climate Action Plan. The plan seeks to double the fund’s commitment to its sustainable investment-climate solutions program to $20 billion over the next decade.

Currently, New York’s pension fund is 94.5% funded, which is above the 69% average for state pension funding. The NYSCRF is clearly performing well based on the current investment allocations. If DiNapoli is forced to divest from profitable investments, the fund’s financial integrity may be jeopardized. Through its current course of action, New York has ensured that pension recipients will receive their hard-earned retirement.

I applaud and support DiNapoli as he prioritizes his fiduciary responsibility over political whims. Activists’ and politicians’ actions only risk our well-deserved retirement.

IPFI Issue Brief: Reforming The Proxy Advisory Firm Duopoly: An Analysis of Recent SEC Guidance and Its Implications for Public Pension Retirees

Since 2018, the U.S. Securities and Exchange Commission (SEC) has been evaluating the role that proxy advisory firms have regarding shareholder engagement. This has resulted in recent Commission-level guidance to clarify the relationship between proxy advisory firms and institutional investors. At the end of the day, public pension retirees rely on their pension systems and fund managers to make smart investment decisions to ensure a secure retirement. But is that possible when proxy advisory firms provide biased recommendations on shareholder resolutions that may not prioritize financial returns? 

In light of the SEC’s recent guidance and ahead of an upcoming House Financial Services Committee hearing on September 24 that will feature all four SEC Commissioners and the Chairman, the Institute for Pension Fund Integrity (IPFI) has released its latest report analyzing the rise of proxy advisory firm influence and the actions that the SEC has taken to date. 

The SEC is taking proactive measures to reform what has, over time, become a convoluted process that yields questionable results for public pension retirees and other retail investors. However, stronger action is still needed. The IPFI brief details the following:

  • Prior SEC guidance has produced a complex set of unintended consequences. Oftentimes, guidance that sought to clarify the responsibilities of investment managers and proxy advisory firms inadvertently led to the consolidated power of proxy advisory firms we see today. 
  • Lack of transparency and conflict of interest remain of paramount importance when it comes to reform. Only two major players, Glass Lewis Co. and Institutional Shareholder Services Inc. (ISS), dominate the proxy advisory market. Insufficient oversight and ambiguity surrounding recommendations provided by proxy advisory firms raise the question of how susceptible these firms are to outside influence. 
  • Institutional investors who manage public pension funds face unique challenges. Particularly, activists have attempted to exploit the proxy advisory system and impose an Environmental, Social, and Governance (ESG) agenda when they are unsuccessful in advancing their causes through the legislative process. But these investment strategies do not always produce profitable return margins as would other traditional investment strategies.
  • The SEC issued two interpretive releases in August 2019 that set a clear agenda for future reforms. One release defines proxy advisory services as “solicitations” which affects the extent to which proxy voting recommendations are subject to anti-fraud rules. The second release pertains to an investment adviser’s fiduciary responsibility as he or she employs proxy voting on a client’s behalf. This Commission-level guidance sets a clear tone on the SEC’s position that proxy advisory reform demands immediate attention and substantial re-evaluation. 
  • Robo-voting disenfranchises public pension retirees and retail investors and goes against their financial interests. “Robo voting” is a system that many public pension funds and institutional investors use to automatically dispense their responsibility to execute proxy votes to proxy advisory firms. When ISS or Glass Lewis advances an ESG-related shareholder resolution that prioritizes a political, social or environmental agenda over financial returns, the public retiree’s interests have been disenfranchised due to robo-voting.

IPFI President Christopher Burnham recently wrote in Forbes that “With the new SEC guidance, proxy voting firms, rather than being stealth conduits for politics, will now have to be far more transparent and accountable.” He continued saying, “the Commission-level guidance must still go further to fully address the underlying problem with proxy advisors: that they serve as a conduit for investing with a political purpose, violating fiduciary duty, and historically, negatively affecting public pension fund performance.”

IPFI maintains that investment advisers must place the financial considerations above any other factor. We conclude with recommendations on what steps the SEC can take to ensure that proxy advisory firms do not compromise the financial returns of America’s public pensions. Key recommendations include:

  • Fixing the Lack of Transparency and a One-Size-Fits-All Approach – One notable step proxy advisory firms can take to address concerns about the opacity of their recommendation process is to devise a system that demonstrates their recommendations are issuer-specific. Among the services offered by proxy advisory firms should be the assurance to shareholders and stakeholders that their organization’s needs and objectives were carefully factored into each vote. A public notice-and-comment process would also foster trust and inform proxy advisory firms on the general consensus of those affected by corporate decision-making.
  • Disclosure of Conflicts of Interest – To help reduce the negative financial consequences of potential conflicts of interest, the SEC must clarify the extent of proxy advisory firms’ fiduciary responsibility. Establishing a coherent regulatory guideline on this contentious matter will equip all relevant parties with a framework for assessing the utility and benefit of recommendations made by industry giants like Glass Lewis and ISS. 
  • Reforming Shareholder Engagement – The argument that proxy advisory firms operate in a closed circle without proper shareholder engagement is a common argument in favor of reform. Extended review periods would allow for increased dialogue between the two parties. This would also serve as an opportunity to document dissenting opinions that shareholders may raise. In this sense, the voices of those directly tied to major investments will gain prominence over those being raised from the sidelines. 

Read the latest issue brief, Reforming The Proxy Advisory Firm Duopoly: An Analysis of Recent SEC Guidance and Its Implications for Public Pension Retirees

PRESS RELEASE: California Treasurer Inserts Politics Into the Management of Teacher Retirement Fund


September 12, 2019

California Treasurer Inserts Politics Into the Management of Teacher Retirement Fund 

The Institute for Pension Fund Integrity urges California Treasurer Fiona Ma to prioritize her fiduciary duty instead of politics to optimize state investments.  

Arlington, VA – Yesterday, California Treasurer Fiona Ma, CPA, decided that supporting a political stunt was more important than prioritizing strong fiscal policy to ensure a stable retirement for California’s teachers. During an Investment Committee hearing on September 5, Treasurer Ma and young climate activists urged the California State Teachers’ Retirement System (CalSTRS) to divest its funds from fossil fuel companies as a means of fighting the current climate crisis. While finding sustainable solutions for fighting climate change is important, the Institute for Pension Fund Integrity (IPFI) maintains that divestment based on political instead of financial considerations goes against Treasurer Ma’s fiduciary duty and puts the secure retirement of almost a million Californian teachers at risk. 

Divestment has been shown repeatedly to be ineffective and actually cost funds more than the companies that they divest from. California’s other major pension fund, the California Public Employees’ Retirement System (CalPERS) is a great case study for the cost of divestment. After divesting from tobacco in 2000, CalPERS lost nearly $3 billion over the next thirteen years. In fact, CalPERS has lost almost $7.8 billion since 2001 due to various divestments. Furthermore, while divestment often seeks to impact a company’s bottom line, several studies show that divestment campaigns have minimal to no impact on company finances.  In the end, divestment is simply a political maneuver that has real costs. 

IPFI President Christopher Burnham recently reiterated that “activist investing has a place in personal portfolios but no place in public pension plans.” He continued saying, “the oath of fiduciary responsibility is one of the strongest oaths we can take, and we must focus on keeping politics out of our fiduciary decisions.” 

IPFI’s recent study on public pension fund performance showed that 47 out of 52 pension plans could not outperform a simple index fund of 60% stocks and 40% bonds. To already be grossly underperforming a simple index fund while under active management, to now want to add activist investment, is the height of fiduciary irresponsibility. IPFI encourages CalSTRS and Treasurer Ma to prioritize the dedicated teachers of California, and to ensure that today’s investments result in tomorrow’s secure retirement. 

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