DOL throws curveball into its approach to governing shareholder rights

DoL questions purpose of shareholder voting

The US Department of Labor (DoL) has thrown a new curveball into its approach to governing shareholder rights, questioning the need for asset owners to have their voices heard by companies at all.

Following its recent proposals around how asset managers obtain and validate information on the companies they hold in their portfolios, which drew significant criticism from large institutional investors, the US department has introduced an additional proposal.

In a filing, the DoL said it was “proposing to amend the ‘Investment duties’ regulation” to examine how investors were applying the rights and duties introduced under the Employee Retirement Income Security Act of 1974 (ERISA) to obtaining and using information gathered on their portfolio companies.

The department said it was increasingly concerned that proxy advisers and other organisations “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 used for the payment of benefits or plan administrative expenses”.

The filing states that “the department wishes to be clear: there is no fiduciary mandate under ERISA always to vote proxies appurtenant to shares of stock”.

This new proposal goes further to undermine efforts being made by a huge number of institutional investors – including many large US state and corporate pension funds – to use their power as shareholders or owners of debt to push for better corporate governance.

Not only is there a growing amount of evidence that companies that score well on ESG factors tend to perform better over time, but many investors have assumed a responsibility to uphold the highest standards to their stakeholders.

The proposal also sits in stark contrast to others in the European Union and UK, which obliges investors to take responsibility for their portfolio companies.

A significant area of concern highlighted by the DoL proposal is around environmental issues.

“The department’s concerns about plans’ voting costs sometimes exceeding attendant benefits has been amplified by the recent increase in the number of environmental and social shareholder proposals introduced,” the proposal said.

It added that between 2011 and 2017, shareholders submitted 462 environmental proposals and 841 social shareholder proposals, with plenty being resubmitted.

The DoL is critical of many of these proposals for only calling “for disclosure, risk assessment, and oversight, rather than for specific policies or actions, such as phasing out products or activities”.

It adds that few received majority support – apparently unaware that pension funds and other institutional investors usually do not control major stakes in companies and can only use their vote to air concerns to larger, often internal, stakeholders.

The DoL said it was concerned that all this activity around exploring and voting on proposals was costing pension funds, rather than adding to their overall value.

It added that it was also worried that these investors “may incur substantially larger costs to exercise shareholder rights more vigorously, such as by sponsoring or campaigning for shareholder proposals”.

Crucially, the DoL believes the issues many shareholders feel strongly enough about to voice at company AGMs “have little bearing on share value or other plan interests”, meaning activities around it “may deliver little or no benefit to plans”.

Therefore, it proposes that shareholders vote in line with the “recommendations of management of the issuer on proposals or types of proposals the fiduciary has prudently determined are unlikely to have a significant impact on the value of the plan’s investment”.

However, it does not explain how the fiduciaries – or trustees – should come to this conclusion.

It also suggests trustees only vote on matters that are directly associated with a company’s business activity, that are “likely to have a significant impact on the value of the plan’s investment”, such as share buy backs and mergers.

Finally, for the companies in which a pension fund or other investor does not have substantial holdings, the DoL suggests “a policy of refraining from voting”, as the cost of doing so may outweigh the benefits it could bring to its overall investment portfolio.

Asset owners and other interested parties have until the end of September to comment. Further details can be found on the DoL website.

Last Updated: 8 September 2020
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