ERISA Interpretative Bulletin:
Proxy Voting & Shareholder Activism
Department of Labor, Washington DC, USA
Executive Summary
- The paper was published in 1994 to consolidate the two pronouncements to date, viz. the Avon Letter and the ISSI letter.
- The paper reiterates the general duty under ERISA to vote proxies.
- It also specifically comments on International Equities making two important points, namely:
i) The general duty to vote proxies extends to non-US equities.
ii) The costs of voting non-US equities have to be taken into account when considering whether to invest internationally.
- The responsibility for voting proxies rests firmly with the plan trustee unless those rights have been delegated to a fund manager.
- An investment manger is not relieved of its fiduciary responsibilities by following directions some other person regarding the
voting .
- The Fiduciary can reserve the right to vote to themselves on named assets, equities or in certain circumstances.
- The paper is very firm on the need for a considered statement on voting behaviour to be included in the Investment Guidelines of
the fund. Such a document should give the 'generally applicable guidelines' on voting rather than 'specific instructions'.
- Following these guidelines does not absolve the Investment Manager from the requirement to be prudent and if there is a conflict,
prudence overrides the guidelines.
- These guidelines are particularly necessary where a scheme employs several Investment Managers to ensure continuity and absence of
conflict.
- The Investment Manager must maintain, and make available to the Fiduciary, documents showing the voting history. The paper is very
emphatic about this...'without such information...not able to determine... fulfilled obligations...justified continuation of the appointment'.
- Pooled Investment Vehicles: Where a manager has several investors in a fund, he is not relieved of his duty of prudence to each
investor individually. Thus he may circularize investors and vote in both directions according to the weights of opinions.
Alternatively, it is acceptable to ask investors in a fund to abide by the Investment Manager's guidelines providing:
The guidelines are clearly stated
This is formally done as a condition of the investment contract.
- The test of prudence then appears to be applied relative to the pooled investment vehicle.
- The 'Prudence Test' seems to be one solely of monetary value. A 'Loyalty Test' is also included in the paper. This means that the
Fiduciary must act solely in the best interest of the beneficiaries etc. and ignore the potential conflicts that could arise (for example, a pension
scheme would have a duty to vote against the three year rolling contract of its chairman regardless of the fact that he signs the pension funding
cheque)
- Shareholder Activism is positively encouraged by the paper by way of increased monitoring and communication between the Fiduciary
and corporate management. Where appropriate the Fiduciary may seek to influence corporate management. Index funds in particular are considered a
special case for positive activism due to their difficulties and total costs of selling stock. Issues considered appropriate for activism include:
- Independence and expertise of directors
- Executive compensation
- Mergers & acquisitions policy
- Debt financing
- Long-term business plans
- Workforce training & development
- Other workplace practices
- Financial & non-financial measures of corporate performance.
- When deciding whether it makes economic sense to vote, the Fiduciary must consider not just the plan's weight of votes in isolation
but the effect of the plan's votes together with others.
- Emerging Markets: Given that voting costs are an investment factor to consider before investment if a fund invests in anticipation
of a very high return then the fund may also be required to make a correspondingly very high commitment to vote
For further information
click here >> for the full text of the Department of Labor Bulletin
29 CFR 2509.94-2 |
