CII criticizes DoL fiduciary voting proposal

Oct 06, 2020
Department wants to bar fiduciaries from voting proxies unless the issue has an economic impact on the plan

The Council of Institutional Investors (CII) has urged the US government to drop a plan the group says would muzzle Employee Retirement Income Security Act (Erisa) plan participants.

The US Department of Labor (DoL) on August 31 proposed a rule addressing the application of the prudence and exclusive purpose duties under Erisa with respect to proxy voting and exercising other shareholder rights.

The department stated at the time that it has issued guidance over the years to the effect that plan fiduciaries must consider factors that affect the value of the plan’s investment and not ‘subordinate the interest of participants and beneficiaries in their retirement income to unrelated objectives.’

The DoL says in the proposal that it has tried to convey in its guidance that fiduciaries need not vote all proxies. But the department states that aspects of this guidance may have caused confusion or misunderstandings. The proposal would bar fiduciaries from voting any proxy unless they determine that the matter has an economic impact on the plan.

‘The proposed proxy rule would ensure that individuals responsible for the retirement savings of millions of American workers are voting proxies only where it is financially in the interest of the plan to do so,’ said Secretary of Labor Eugene Scalia in announcing the plan.

SHAREHOLDER RIGHTS CONCERNS
In a recent comment letter, CII general counsel Jeffrey Mahoney writes that the proposal ‘demonstrates an unwarranted prejudice against fiduciaries’ exercise of shareholder rights and would impose such burdensome obligations on fiduciaries that Erisa plans would be [in effect] disenfranchised.’

CII disputes the DoL assertion that there is ‘a persistent misunderstanding among some stakeholders that Erisa fiduciaries are required to vote all proxies’ and that ‘some fiduciaries and proxy advisory firms…may be acting in ways that unwittingly allow plan assets to be used to support or pursue proxy proposals for environmental, social or public policy agendas that have no connection to increasing the value of investments.’

Mahoney insists that plan fiduciaries generally understand that voting proxies is a fiduciary obligation that must be carried out taking into consideration the costs and benefits to the plan and says the DoL’s reference to ‘environmental, social or public policy agendas’ is evidence of what he calls ‘a continuing and unjustified skepticism about Erisa plans’ [ESG] investing practices.’

CII regards the voting of proxies as an important mechanism for shareholders to monitor and hold management accountable and to create and protect long-term value. Most proxy votes take place on the election of directors, and in doing so they communicate shareholder views and affect companies’ decisions about who should serve on their boards, Mahoney writes. Shareholder votes on proposals such as majority voting for directors, declassifying boards and proxy access have led to widespread voluntary adoption of such changes, he notes.

The DoL argues that there is ‘mixed’ evidence of proxy voting’s effectiveness. But CII says that, for example:

  • Shareholder resolutions can provide insight into emerging material risks and externalities
  • Shareholders’ adoption of governance-related shareholder proposals has been found to create positive short-term returns as well as long-term performance improvements
  • The adoption of majority voting was associated with positive abnormal returns and an increase in boards implementing majority-supported resolutions
  • Say on pay led to increases in companies’ market value and improvements in long-term profitability.

‘Even if it were true that the research on proxy voting is mixed, that does not lend support for a new rule that effectively discourages proxy voting by plan fiduciaries,’ Mahoney says. ‘Instead, fiduciaries should be afforded the flexibility to make their own prudent determinations about the efficacy of proxy voting overall and in particular circumstances.’

Overall, CII believes the proposal would create an overly burdensome and unjustified process for considering the voting of proxies that would, in many cases, effectively prohibit Erisa plans from exercising their shareholder rights.

‘Under the proposed rule, every single proxy vote would require a fiduciary to not only analyze the importance of the vote to the economics of the investment but also conduct a second layer of detailed analysis to determine how the vote impacts the plan as a whole,’ Mahoney writes. ‘This second layer of analysis would be complex, difficult to conduct and often be based on indeterminable facts. And it essentially tells fiduciaries for the first time that, in many cases, they cannot act to protect their investments and enhance long-term value.’

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