By Richard F Lacaille, Global Chief Investment Officer, State Street Global Advisors
The DoL’s new proposal to curb proxy voting rights of plan fiduciaries is likely to adversely affect the long-term performance of retirement plans. If implemented, the proposal will not only drive up the cost of various investment plans but also disenfranchise plan participants. We urge the DoL to withdraw the proposal to keep costs low, to maximize the value of plan assets and to protect the interests of plan participants and beneficiaries.
On 4 September 2020, the United States Department of Labor (DoL) proposed a new rule that could negatively affect the private sector retirement plans that come under the ambit of the Employee Retirement Income Security Act of 1974 (ERISA). The objective of the proposed Fiduciary Duties Regarding Proxy Voting and Shareholder Rights rule is to impose certain requirements on proxy votes made by plan fiduciaries – individuals or entities who manage an employee benefit plan and its assets under ERISA. According to the proposed rule, plan fiduciaries cannot participate in shareholder voting and engage with portfolio companies unless these activities are understood to be enhancing the economic value of the plan.
State Street’s Stance on the Proposed Rule on Proxy Voting
State Street’s assessment regarding the proposed rule is that it will materially reduce the impact of proxy voting, which we deem to be a vital tool in creating long-term shareholder value. The rule also has the potential to eliminate proxy voting in certain cases by seemingly prejudging the voting of proxies as imprudent unless the applicable proposals relate to certain enumerated events. These include corporate events, corporate repurchases of shares, issuances of additional securities with dilutive effects on shareholders or contested elections for directors.
Considering these consequences, State Street sent a comment letter to the DoL, where we argued that by imposing requirements that will discourage proxy voting in retirement plans covered by ERISA, the financial interests of ERISA plan beneficiaries will be compromised in the long term. We additionally elaborated that the proposed rule would increase, rather than decrease, costs for ERISA plans, thereby further eroding the long-term value that plan participants and their beneficiaries can potentially realize.
It goes without saying that voting rights held by shareholders have a positive value – it is easy to understand this by comparing the value of voting and non-voting shares in companies that have dual class structures. It is equally clear to shareholders that some voting opportunities are more effective in terms of value than others. But the steps mandated by the rule have the consequence of rendering votes on categories other than the ones enumerated for proxy proposals as imprudent. We therefore believe that the value of plan assets is best maximized by the withdrawal of this proposal.
Unintended Consequences of Regulation
The unintended consequences of regulations are often the most damaging. In the case of this proposed rule, the effect at the margin is likely to be a shift in influence from informed fiduciaries working within an ERISA framework to other shareholders. This means, some shareholders will be deemed “more equal” than others with unpredictable consequences for the silenced disenfranchised minority of ERISA shareholders.
Although there might have been an intent to design the rule to reduce the likelihood or impact of relatively frivolous or costly proposals, these are no less likely to succeed (unless they would have been overwhelmingly supported by ERISA fiduciaries). It goes without saying that along with the frivolous, there are the genuinely important resolutions that have the potential to increase long-term value and may get affected on account of this proposed rule.
Such important shareholder resolutions may include those that relate to Environmental, Social or Governance (ESG) considerations. It should be remembered in this context that State Street had taken exception to a June 2020 DoL proposal that discouraged pension plans from considering ESG parameters when choosing investments. In fact, when it comes to proxy voting, considering ESG as an example, State Street judges each proposal on its merits and casts its votes independently and frequently differently from other plan fiduciaries who may or may not consider the importance of ESG in driving long-term shareholder value.
Conclusion
Our belief is that ERISA plan fiduciaries are well equipped to make the judgements necessary to maximize the value of their assets by appropriately voting their proxies. Although we see the value in undertaking a cost-benefit analysis in deciding when and how to vote on certain matters, we believe that the barriers created by the proposed rule would increase costs significantly for our clients without providing any new benefits beyond the analysis we already undertake today.
We are accountable to our clients – for instance, our Global Proxy Voting and Engagement Guidelines for Environmental and Social Issues ascertain that our primary fiduciary obligation to clients is to maximize the long-term returns of their investments. We also believe that a healthy system should enable the flourishing of debates and discussions regarding the materiality of each resolution. Unfortunately, the proposed rule will not only curb healthy debates but also lessen the advantages that an open and public financial market confers on a sophisticated economic system such as that of the United States.
Originally published by State Street Global Advisors, 10/14/20
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