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‘Another piece of political jiggery-pokery’: US wants investors to vote only for ‘economic impact’

Department of Labour proposal may face barrage of criticism for suggesting ESG is not financially material

The US Department of Labour (DOL) has said it expects trustees and their fiduciaries to vote only on matters that have an “economic impact” on the pension plans covered by the Employee Retirement Income Security Act (ERISA).

The proposed rule implements an April 2019 executive order from the Trump administration which instructed a complete review of DOL’s guidance on fiduciary responsibilities for proxy voting  “to promote long-term growth and maximise return on ERISA plan assets”.

The DOL said it is concerned 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”.

“Proxy proposals for environmental, social, or public policy agendas have no connection to increasing the value of investments” – DoL

According to the consultation document, such issues “have no connection to increasing the value of investments used for the payment of benefits or plan administrative expenses, and in fact may have unnecessarily increased plan expenses".

The document states: “A fiduciary’s duty is only to vote those proxies that are prudently determined to have an economic impact on the plan after the costs of research and voting are taken into account. Nevertheless, a misunderstanding that fiduciaries must research and vote all proxies continues to persist, causing some plans to expend their assets unnecessarily on matters not economically relevant to the plan.” 

The proposed rule is subject to a 30-day consultation and is tipped to face similar widespread opposition as the DOL’s reinterpretation of ESG and fiduciary duty published in June.

Sarah Wilson, CEO of UK governance and proxy advisory firm Minerva Analytics, told RI that the DOL’s move is “just another piece of political jiggery-pokery which aims to dampen demand for proxy voting”.

“There will still be plenty of investors who will continue to vote and vote on ESG issues because they see real value in their efforts. European and UK investors aren’t going to stop their stewardship activities any time soon” – Sarah Wilson

Wilson described the cost-benefit assessment provided by the DOL as “risible”. 

“There will still be plenty of investors who will continue to vote and vote on ESG issues because they see real value in their efforts. European and UK investors aren’t going to stop their stewardship activities any time soon.”

She said the DOL seems to be re-stating and re-interpreting history. “There’s a very deep and wide archive of regulatory bulletins on proxy issues which make it clear that proxies are fund assets, and that it’s a fiduciary responsibility to look after those assets. It does not mean, and never has meant, that all proxies should be voted all the time – but unless you actually read the proxies, how do you know that they are not relevant?”

Kevin McManus, Vice-President and Director of Proxy Services at Egan-Jones, told RI that he doubts the proposed rule would have much impact on ERISA plans that use proxy advisors whose policies are explicitly designed to foster long-term shareholder return.

“It certainly allows and promotes voting with management as a policy,” he said. “I don’t think this will have a direct or immediate impact because, at this point in time, plans vote against management for a number of internal reputational reasons. However, it may allow the DOL to question overly costly contracts with some of the more expensive proxy firms.”

The DOL consultation comes two weeks ahead of a meeting of the Securities and Exchange Commission (SEC) on 16 September, which will discuss whether ownership thresholds should be higher in order to submit shareholder resolutions.

“Fewer plans will propose shareholder proposals. [It] certainly allows and promotes voting with management as a policy” – McManus

Both Wilson and McManus saw implications for shareholder resolutions in the DoL proposed rule. 

Wilson said US issuers want them abolished if possible. “This is why having a political regulator like the SEC in charge of shareholder rights is such a bad idea. In the UK, the FCA cannot interfere with a common law right – voting rights are a property right, not a market-based activity.”

McManus envisages fewer plans proposing shareholder proposals. “They would now have to justify the cost and expected return of such actions, but of course that is very dependent on long-term enforcement and who is in power to do the enforcing.”

Pending a full review of the DOL’s proposal, Fiona Reynolds, CEO of the Principles for Responsible Investment, said the move might impose onerous new legal liabilities for fiduciaries and cost for American retirement savers.

She said: “We are concerned that this will ultimately have a chilling effect on ERISA plans' ability to engage in shareholder votes on environmental, social and governance matters that are material to investment returns.We now know unequivocally that ESG issues are financial issues.” 

David Webber, Professor of Law at Boston University and author of the book The Rise of the Working Class Shareholder: Labor's Last Best Weapon, described it as an “extreme move by the DOL”, saying it “shifts the burden so that fiduciaries must first determine economic impact before voting proxies. Pure economic voter suppression here.”

Vice-Chair of ValueEdge Advisors, Nell Minow, said the DOL proposal fails both legally and economically. “The DOL has followed up its outrageously unsupportable proposed rule on ESG investing with an even more outrageously unsupportable proposed rule rolling back more than 30 years of settled law.”