VEA Vice Chair Nell Minow has submitted a comment to the Department of Labor on proxy advisory firms and proxy voting by pension fiduciaries. This is a follow-up to two previous letters on the issue and in response to a letter from the Chamber of Commerce calling for the same kinds of restrictions on proxy voting and proxy advisors they are pushing for at the SEC.
October 19, 2019
Assistant Secretary Preston Rutledge
Department of Labor
200 Constitution Ave, NW, Ste S-2524
Washington DC 20210
Re: Executive Order on Energy Infrastructure/Rulemaking
Dear Assistant Secretary Rutledge,
Of course it is no surprise that the CEOs behind the national Chamber of Commerce would do everything they can to prevent their shareholders from having access to the sole source of independent research and analysis on proxy issues, but it is nevertheless disappointing that their letter to you of September 20, 2019 is so slanted, sloppy, self-serving, and superfluous. It would be a terrible mistake for EBSA to ignore the interests you are charged with protecting, the pension plan participants who are the beneficial holders of securities, to further promote the insulation from oversight of corporate insiders. The best guarantee of pension security over the long term is to make sure that shareholders, especially those who act as fiduciaries and thus have the expertise and the obligation — and the ability — to protect shareholder value have the resources and ability to engage with portfolio companies. The fact that the CEOs behind this comment are willing to spend so much time, effort, and (shareholder) money to stop shareholders from a tiny fraction of non-binding, advisory-only proxy votes contrary to managements’ recommendations makes it clear that their goal here is extinguishing even the mildest of shareholder response.
The Chamber tries hard to spin the SEC’s recent initiative on proxy advisory firms as a significant recognition that there is a problem and a significant action in response. Both are serious mischaracterizations. Indeed, it is far more accurate to say that the SEC took no significant action even after a multi-million-dollar lobbying effort including creation of a CEO-funded fake dark money front group cheekily named the Main Street Investors Coalition, despite having no connection to Main Street or investors and not being a coalition. The fact that its initial director was a former energy industry lobbyist with no previous connection to or expertise in corporate governance makes it clear what it was intended to do — get rid of non-binding shareholder resolutions and initiatives on the subject of climate change at a fraction of a percent of listed companies. (We note that he also served as an officer of another fake front group created by the same funders, also dedicated to eradicating pension fund oversight on corporate governance and related matters.)
This exponentially disproportionate reaction shows that the CEOs behind it know that they cannot make a case against these initiatives on the merits and were terrified of even this modest market response. We note that they make vague claims about “political” votes but are unable, even after repeated requests, to give a single example of a proxy vote cast “incorrectly,” inconsistent with “exclusive benefit” or fiduciary standards, where any trade-off was made between feel-good policies and shareholder value or where any vote was “wrongly” or improperly or even disproportionately influenced by a proxy advisor. Any self-reported, unaudited claims of expense from shareholder resolutions are vague and unsubstantiated and highly suspect. As shareholder resolutions are non-binding, even a 100 percent vote in favor does not require companies to take any action whatsoever.
Proxy advisory firms are the essence of and vital to the free market. They produce research no one has to buy and recommendations no one has to follow. Their clients are sophisticated financial professionals subject to the strictest fiduciary standards, and those clients have a choice of providers. It is the very definition of prudence for these experts to avail themselves of independent research relating to buying/selling or voting securities. The data show that (1) proxy advisor policies are more influenced by their clients than the clients are influenced by the proxy advisory firms (this is another example of a robust free market) and (2) proxy advisor clients are more likely to follow the recommendations on routine matters like re-election of unopposed directors and approval of auditors than they are on more complex issues like CEO pay (another advisory-only vote), business combinations, and shareholder proposals.
That is a textbook example of free market efficiency and the exact opposite of a justification for government intervention.
The data show that (a) overwhelmingly — well over 90 percent of the time — the proxy advisory services recommend votes consistent with the recommendations of the issuer boards and executives, and (b) when they do not, the financial professionals who purchase the reports make up their own minds about how to vote. If the proxy advisory firms were as influential as their critics claim, the critics should be overjoyed at the strong level of support they have for management-recommended votes. As noted above, the more complex and controversial the proxy issue (with business combinations at the top of both lists), the more the votes vary, showing that critics of the proxy advisory services have it exactly wrong; proxy advisory services are guided by their clients more than the clients are guided by the proxy advisory services.
Ning Chiu of Davis Polk reports, “On shareholder proposals, ISS recommended for social and environmental proposals 55.4 percent of the time, but funds only supported those proposals 25.2 percent of the time. Overall, ISS was in favor of shareholder proposals 64.7 percent of the time, yet funds voted for them only 34.6 percent of the time. But average support for shareholder proposals during the 2017 season was 39 percent,” indicating that of that 39 percent, a substantial group, may not be ISS clients at all or are clients who read the analysis and vote contrary to the recommendation.
The best determiners of the value of proxy proposals are shareholders and the best determiners of the value of proxy advisory services are the financial professionals who are freely able to decide whether to buy the reports, who to buy them from, and whether to follow their recommendations. Proxy advisory firms are the only independent source for evaluation of proxy issues. To reiterate, shareholder proposals and say-on-pay votes are non-binding, so even if proxy advisors are as powerful as critics say (but are unable to prove as the data is all to the contrary), and even if there is a 100 percent vote against the wishes of management, the corporation does not have to do anything about it. Worst case scenario is that if all of the wild (and unsupported) allegations of proxy advisory firm critics are true, there is no risk of harm other than the hurt feelings of corporate insiders; and that is literally the reason we pay them the big bucks – to be able to respond to challenges with courage and integrity and, when their shareholders do not support them, to either do a better job of communicating or change their direction.
The very last people we should ask to evaluate the worth of proxy advisory services are the people they evaluate: corporate executives and board members. We don’t let students grade their own papers, and we don’t let manufacturers decide what toxins to pour into the air and water. We cannot let the squeamishness of corporate insiders about assessments they do not control (plus the millions of corporate dollars they divert from creating shareholder value to spend on lobbyists and fake front groups) lead to any impediment to that independent assessment. The real question the Department, as vigilant protectors of pension value, should investigate here is why executives and directors do not want to hear from their shareholders in the most low-key, low-risk, low-cost manner possible.
We strongly endorse the Department’s guidance dating back to 1988 that proxy voting and other elements of stock ownership are plan assets and, like the buy/sell/hold decision (as well as decisions about filing or participating in shareholder lawsuits, submitting shareholder resolutions, or engagement with board members or executives) must be made for the exclusive benefit of plan participants. Indeed, we would welcome enforcement actions based on this critical fiduciary obligation. Any other characterization of proxy voting would have to be thoroughly documented, and that is not possible, given that the items put to a shareholder vote have only become more significant and value-impacting since those letters were issued.
Indeed, shareholder votes are unique because unlike other decisions fiduciaries make concerning shares of stock, proxy votes are subject to the problem of collective choice, sometimes known as “the prisoner’s dilemma” or “the tragedy of the Commons,” and the subject of a robust literature including Nobel Prize-winning work in economics. Any individual proxy vote, whether cast by a person who owns a dozen shares or a fiduciary acting on behalf of thousands of beneficial holders, is of little value unless the vote reaches critical mass. It does not have to be a majority to send a meaningful message, but it does have to be significant. In the past, the Investor Responsibility Research Center and others documented the problems with institutional investors voting proxies to placate or market to executives of portfolio companies instead of voting for the exclusive benefit of plan participants. This was one of the most important factors leading to the 1988 Avon letter, sent after CEOs at Avon and other companies lobbied investors to vote against shareholder resolutions asking for a shareholder vote on poison pills, a then-popular antitakeover device, created by Martin Lipton in the midst of the era of hostile takeovers and LBOs and greenmail, when both activists and insiders were diverting corporate assets from shareholders to themselves. The implied pressure — vote with management or lose our business — was what led the Department to remind fiduciaries that their duty is to beneficiaries, not corporate customers. As you well know, that is a reminder that must be constantly and consistently communicated.
This is why proxy advisors provide an essential service in making independent research available to a wide range of institutional investors, thus substantially reducing the costs to reduce the risk and increase the benefit of voting proxies to increase shareholder value.
Any complaints the Chamber makes about the quality of proxy advisory service products is highly suspect, including the “studies” that they fund and the allegation of conflicts of interest. We would challenge the members of the Chamber to show that they can meet the same standards for conflicts, error rates, and renewal rates that the proxy advisory services do. Their letter provides zero evidence of any kind of harm to the plan participants, the employees that Chamber members always claim to be the companies’ most significant asset. In any event, the assessment of the quality and value of proxy advisory firm products is best made by market forces, meaning the customers, not the subjects of the data and analysis.
We also ask the Department to keep in mind that the proxy advisory services are publishers of independently produced data, analysis, and recommendations and any effort to limit the content of their reports would have to be reviewed and approved by DOJ’s Office of Legal Counsel for its supportability as a limit on the First Amendment rights of free speech and free press.
We are fully in agreement with the opening statement of the Chamber’s letter: ” A fundamental component of our strong capital markets is the existence of responsible corporate governance laws and regulations that encourage companies to stay public and promote long-term shareholder value.” If only the rest of their letter supported instead of undermining that goal. The Department should not engage in any rulemaking on this issue without extensive consultation with fiduciary investors and we strongly recommend a public hearing so they can be heard. Tellingly, the Chamber asks for sub-regulatory action because its members know that their arguments would collapse under the transparency and rigor of a notice and comment proceeding, particularly with regard to their unsubstantiated and unreasonable speculation about cost-benefit analysis of proxy voting, without a single supporting document they have not underwritten themselves.
In summary: the Department should not be swayed by the complaints of corporate insiders about the sole source of independent research on proxy issues, given that:
• well over 90 percent of proxy advisor recommendations are to vote with management,
• even a 100 percent vote against on shareholder proposals or CEO pay is not binding,
• proxy advisors produce reports no one has to buy with recommendations no one has to follow, purchased by the most sophisticated financial professionals in the world,
• data show that fiduciaries review the recommendations of proxy advisors but make their own decisions, and
• neither the Chamber nor any other lobbying group has provided a single example of a proxy issue “wrongly” voted contrary to fiduciary obligation, while before the 1988 Avon letter there was extensive documentation of votes that benefited the fiduciary’s commercial interest instead of being cast for the exclusive benefit of plan participants.
Just to reiterate the basis for my views for the record, I have worked in and studied and taught in the field of corporate governance since 1986, including four years at ISS. But I have not worked at ISS or any proxy advisory firm in over 30 years. I have worked on behalf of shareholders since leaving government in 1986, but currently get no revenue from institutional investors or proxy advisors and do not expect any in the future. Before joining ISS as its fourth employee in 1986, I worked at OMB under David Stockman, President Ronald Reagan, and then Vice President George H.W. Bush, who chaired the President’s Regulatory Relief Commission. It was one of the greatest disappointments of my professional life that the endless stream of corporate executives who came to tell us what they wanted did not, in fact, want regulatory relief. What they wanted was regulatory burdens — imposed on others, especially regulations to limit their liability and impose barriers to entry. Fortunately, Vice President Bush understood that we were there to let the market do what it does best and intercede when there were issues — like the collective choice problem and imposition of externalities — that require it. I trust the Department will do the same.
Should there be a rulemaking, I expect that my firm, ValueEdge Advisors, will file a formal comment. Until then, I am happy to answer any questions about my affiliations, experience, and views on these issues. As I have not yet received a reply to my most recent letter, I attach a copy for your reference and look forward to your answering my questions.
August 18, 2019
Assistant Secretary Preston Rutledge
Department of Labor
200 Constitution Ave, NW, Ste S-2524
Washington DC 20210
Re: Executive Order on Energy Infrastructure/Rulemaking
Dear Assistant Secretary Rutledge,
Many thanks for your response to my letter of May 7, 2019 concerning President Trump’s Executive Order on Energy Infrastructure and its calls on the Department of Labor to consider the role that funds governed by ERISA play in this critical element of our economy and national security.
I am writing to ask for an update on the Department’s review of available data filed with the Department of Labor by retirement plans subject to ERISA in order to identify whether there are discernible trends with respect to such plans’ investments in the energy sector and review of existing Department of Labor guidance on the fiduciary responsibilities for proxy voting to determine whether any such guidance should be rescinded, replaced, or modified to ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets, as directed by the President’s Executive Order.
I would like to know what kind of data the Department is reviewing for this report and when the data will be available for public review, including a record of any meetings by you or staff with outside groups or their representatives. I would also like to know whether you will make a draft of your report available for comment before the final version is submitted to the President.
This is of particular importance given the “stakeholder” statement released today by the Business Roundtable. While this may be a response to reports that sustainable, responsible and impact investing assets now exceed $12 trillion, it may also reflect concerns that incentive compensation goals tied to stock price may not be as lucrative in a possible recession, so it is essential to be cautious about what metrics will be used to measure progress on stakeholder-based goals. It is more important than ever that investors, including pension fiduciaries, exercise oversight to ensure that compensation is tied to long-term performance. No one is more long-term than pension funds, so the role they play is essential.
As I noted in my previous letter, the complexity of the risks and opportunities for pension investments in energy is unprecedented. It would be a serious mistake to interfere with access to independent research or investment decisions based on the expertise of financial professionals, including proxy issues relating to environmental risk.
Ever since the late 1980’s the Department has explicitly acknowledged that stock ownership rights, including proxy voting, are subject to the same fiduciary standard as the buy/sell/hold decisions. The Department has never said that means that pension managers must vote very proxy or that they must review or follow independent proxy advisory firm recommendations. The Department has never fined, or, to my knowledge, investigated any asset manager for failing to vote, failing to obtain independent advice and analysis, or even for failing to prevent conflicts of interest or voting contrary to the exclusive benefit of plan participants. So, the Department will have a difficult time making a case that current rules are in any way restrictive or unable to meet a cost-benefit test.
Furthermore, as I noted in my earlier letter, the Department has always followed the ERISA legislation in refraining from substantive direction (other than diversification) and instead focusing on process, with the primary focus on independence and expertise. To depart from that now would set a dangerous precedent and raise the most serious questions about exceeding the Department’s authority.
The pension system was established to give working people the benefit of expert judgment exercised under the strictest standard of our legal system, “fiduciary plus” to ensure that all assets are managed for the exclusive benefit of plan participants. That judgment and fiduciary obligation apply equally to all aspects of fund management, whether buy/sell/hold, proxy voting, submitting shareholder proposals, or participating in litigation. All of these rights are plan assets and must be managed accordingly.
We are not aware of a single proposal from management or shareholders that has been voted on by pension fiduciaries or other intermediaries that is not explicitly a choice made on the basis of protecting and enhancing share value. Just as one fund may be buying a stock while another is selling, financial professionals will not always agree on how to vote on a proposal, but the goal is always the same, minimizing risk and maximizing long-term returns on behalf of plan participants. Those who complain that fund managers vote for arbitrary or “political” reasons or the recommendations by proxy advisors are not tied to share value are, as far as we have been able to determine, all direct or indirect representatives of corporate insiders. Our many requests for a single example have been met with silence.
The same goes for their complaints about proxy advisory firms. Unlike ratings agencies, which are mandatory and which are paid by the companies they rate, proxy advisory firms produce analysis and recommendations no one is required to buy that are voluntarily purchased by the most sophisticated financial professionals in the world. The data show that (a) overwhelmingly, the proxy advisory services recommend votes consistent with the recommendations of the issuer boards and executives, and (b) when they do not, the financial professionals who purchase the reports make their own minds about how to vote. The more complex and controversial the proxy issue (with business combinations at the top of both lists), the more the votes vary, showing that critics of the proxy advisory services have it exactly wrong; proxy advisory services are guided by their clients more than the clients are guided by the proxy advisory services. Ning Chiu of Davis Polk reports, “On shareholder proposals, ISS recommended for social and environmental proposals 55.4% of the time, but funds only supported those proposals 25.2% of the time. Overall, ISS was in favor of shareholder proposals 64.7% of the time, yet funds voted for them only 34.6% of the time. But average support for shareholder proposals during the 2017 season was 39%,” indicating that of that 39% a substantial group may not be ISS clients at all.
I know the Department is strongly committed to a robust free market and is very aware of the vital role that pension funds play in the capital markets. I share the concerns of Professors Bebchuk and Hirst in their article, “Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy” (I was on the panel of judges at IRRCi that selected it as an awardee). This is an argument in support of the role of the sole source of independent research on proxy issues, proxy advisory firms.
There is no better example of the free market than the proxy advisory firms, which began to play a significant role during the era of hostile takeovers, when both raiders and insiders were acting contrary to shareholder interests. Financial professionals have a range of choices in proxy advisors. A corporate-funded competitor failed, despite a very good product, because it could not overcome the perception of conflicts of interest. This shows that fund managers make informed choices. The burden of proof for intervention by government is unlikely to be met.
I want to add that I appreciate your taking the time to review my background in this field, and I trust that your assessment of my credentials included my departure from ISS in 1990; I have had no professional connection with any proxy advisory firm in almost 30 years. Should I be authorized to write on behalf of my current firm on this matter in the future, I will do so, most likely when the Department publishes a notice of proposed rulemaking. Until then I write only on my own behalf as someone who has followed this field closely since 1986. I do hope you will apply the same scrutiny to the other comments you receive on this issue, as the fake dark money front groups like the Main Street Investors Coalition are not as forthcoming as I am in putting their own names (or their funders’ names) on their comments. I am, of course, happy to meet with staff at any time to give them the benefit of the expertise you so kindly referred to and answer any questions about my background or my views.
I will continue to monitor this issue closely and will submit further comments and questions as the process continues.