Seth Magaziner was elected General Treasurer of the state of Rhode Island, in charge of, among other things, its $7.5bn public pension fund in January 2015.
Magaziner began his career as a public elementary school teacher in rural Louisiana in the aftermath of hurricane Katrina. Then, after attending business school, he joined Trillium Asset Management where he rose to vice president and was a member of its Investment Management Committee.
I spoke to Magaziner at length last week, and first asked him why he had come out strongly in support of the December Department of Labor bulletin that updated its guidance on proxy voting for employee benefit plans. He replied: “It’s just common sense. We as public pension fund managers in Rhode Island must take the long-term view. We must be long-term investors.
“We have employees in their 20s who will be in the pension system for the next 60 years, and we need to invest for them. We sent out a release supporting the bulletin in 2016, because it is absolutely right thing to do. Unfortunately, I am concerned that the current administration will be siding with short-term speculators over long-term shareholders.”
With the fund’s newfound activism, I asked him whether he thought there was now a threat to those activities from the new Trump administration.
“There seems to be a clear agenda at play,” he replied, “an agenda hostile to shareholders and in favour of managers. An agenda that seeks to give shareholders less of a voice. The argument for upholding shareholder rights is not as simple as ‘pro-business, anti-business’, it is about who management is supposed to serve. It should not be about the tail wagging the dog.
“And executives should not be able to ignore the will of shareholders when they ask them to take long-term sustainability into account in their business strategies; they should not have the right to silence shareholders who have invested money in the company they are managing.”
I asked him what it was like moving from Trillium to become Treasurer for Rhode Island. He said: “Trillium is one of the oldest and most well-respected SRI firms in the country. I learned a great deal about the importance of taking the long-term view, of the importance of being an active shareholder. But the main reason I ran for Treasurer in Rhode Island was that I saw the need for public pension funds in the US to advance sustainable business practices in the way that SRI firms do.”What are the main barriers to this?
“I knew there were going to be challenges in implementing an active investor approach in the public arena,” he replied. “The first thing we did was revamp the proxy voting policies to place an emphasis on sustainability.
“I think we now have one of the most progressive and far-sighted proxy voting policies among public pension funds. For example, we have become more thoughtful in our voting on director candidates; we voted against a substantial number either because they didn’t bring sufficient independence to the board or because they did not add or increase diversity on the board.”
In 2016, according to figures from the Treasurer’s office, Rhode Island Treasury voted ‘no’ on board slates at 257 companies due to lack of gender/ethnic diversity. It voted ‘no’ on board slates at an additional 19 companies for a variety of issues other than diversity. In addition, the fund voted against more than 80 Say on Pay resolutions such as at Google, eBay and Facebook.
“The State of Massachusetts has a similar threshold for voting against directors as we do,” continued Magaziner. “We will vote against a director if, on joining the board, it has less than 30% diversity. We are also working with the 30% Coalition to promote board diversity.
“There is so much research out there saying that, with diversity at the board and executive level, there is stronger stock performance, higher profitability and less debt. There is a clear shareholder rationale to support or oppose candidates on this basis. Of course, we also take into account independence and expertise.”
Having never done so before, the state’s fund is now active in filing shareholder resolutions, both as a lead filer and co-filer with other funds. “This year, for the first time ever, Rhode Island has filed and co-filed shareholder proposals,” said Magaziner.
“We are the lead filer on a political and lobbying spending disclosure proposal at Devon Energy. We are also co-filers on similar proposals at Exxon, Chevron and Conoco Phillips. We’re also a co-filer at Wells Fargo on a proposal that encourages the company to develop stronger business standards. Our other lead filer proposal was at Navient, on the issue of student loans.
“While the SEC allowed the company to exclude this proposal because of the ‘ordinary business’ rule, we are pleased that we have already had some communications with Navient and that they seem willing to engage in the future.”
I asked whether there were more proposals to come, but he responded: “We want to stay focused in the first year, we are the lead filer on two proposals on the co-file on four others. But we have already begun to vote “yes” on a lot of proposals that simply wouldn’t have been voted on before.”
How were proxies voted before his election, I asked? “Prior to my becoming Treasurer,” he replied, “we relied on State Street, which was our indexed fund manager, to vote our shares according to their standard voting policies. They are still our indexed fund manager, but we now vote our own proxies according to our own set of proxy voting guidelines.”
I asked Magaziner, of the 80 or so Say-on-Pay proposals the fund voted against, which ones were the most egregious. “How much time do you have?” he quipped.
“I can tell you that most of the votes that went against companies were in the energy and tech industries. We have also made it a policy to send letters over the past few months to each of the companies we have voted against, either on
Say-on-Pay or on director elections, seeking to engage with them. And we have already had productive conversations with more than a dozen companies on both Say-on-Pay and board diversity.”
“Oh, and another first,” he added, “this is the first time we’ve engaged with companies as well. Just last month I was part of a group of shareholders that met with Tim Sloan, the CEO of Wells Fargo, to discuss our proposal there.”
And the fund has not only stepped up engagement in public equity, but also in the private sphere. “We also have made a new commitment to engage and conduct advocacy not just on the public investment side, but also with private companies where we are invested,” said Magaziner.
“For example, we are working with [trade union] UNITE to engage with companies on unionising their employees, for example, with REITs and with retail companies.“We’ve already been able to facilitate meetings between management and unions where the union was being blocked.”
I also asked Magaziner, with such a progressive agenda, why he thought he had been elected Treasurer. “There were two reasons. First, I was really clear on the campaign that as a manager of the pension system I would put the best interests of beneficiaries and taxpayers at the top of my agenda.
“Every vote on every proxy would be part of a long-term decision-making process. Every voting decision would benefit the system members and the citizens who fund the system. Second, I also ran on a platform of economic development in the state.
“For example, we have committed to invest $30m of the state’s cash in local credit unions and banks. We’ve already invested $4.7m in just the last few months. These investments are being to support the banks and credit unions that are making loans to small businesses in the state.”
The fund has been doing very well, having outperformed its own benchmark and an indexed benchmark mix of investment and debt.
I asked him what he attributed this outperformance to. “Two things,” he said. “We outperformed our own internal benchmark through good manager selection, we just have high-quality managers. It is also evidence that our asset allocation is working; we have diversified our investments, though, of course, we ensure the exercise of due diligence before any new investments are made. We are continuing to make tweaks, and overall we are getting healthier.”
Rhode Island is, as well as not being an island, the smallest state in the union, but its voice is getting louder as it flexes its progressive muscles.
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