Since the inception of the Obama Administration, free market
groups have done an effective job of exposing the perfidy the
National Labor Relations Board (NLRB), the National Mediation Board
(NMB) and other government agencies that lefties use to compensate
for legislative defeats. But there is another outfit known as
Institutional Shareholder Services (ISS) that deserves scrutiny
from the business community.
Without additional transparency and tighter enforcement of
proxy-voting requirements, publicly-held companies could be
pressured into accommodating political agendas that are detached
from the economic interests of retirement funds, according to a
U.S. Department of Labor Inspector General
audit released in March.
Since average Americans are reliant upon retirement plans that
invest in corporate stock, they are entitled to know whether or not
shareholder recommendations are made with an eye toward potential
financial gain, or if public policy motives have worked their way
into the process.
Proxy advisory firms, which make shareholder recommendations to
investors and research proxy issues, are an integral part of this
equation and deserve more scrutiny. Institutional Shareholder
Services (ISS), formerly RiskMetrics, is widely viewed as the most
influential of the advisory firms. It also appears to be joining
forces with organized labor. That’s bad news for investors and bad
news for the economy.
Bradford Campbell, who oversaw EBSA as the Assistant Secretary
of Labor during the Bush Administration warns that, “The law
protects workers by prohibiting pension plan officials and others
in charge of the plan’s assets from using their positions to
benefit themselves or to pursue a political agenda. Proxy voting is
a fiduciary duty, and the economic interests of the plan cannot be
subordinated to the personal, union or corporate interests of the
person casting the vote on the plan’s behalf.”
Most companies are understandably reticent to speak out about
ISS since the firm does have the ability to lower their ratings.
Union officials and green activists who have lost out in the
political arena have very shrewdly seized upon shareholder activism
as a way to advance their agenda.
The Office of Inspector General (OIG) report on the Employee
Benefits Administration (EBSA) concluded that the agency, which
is part of the U.S. Labor Department, “does not have adequate
assurances that fiduciaries or third parties voted proxies solely
for the economic benefit of plans.” This means organizations like
AFSCME and the Sierra Club are strongly positioned to use ISS as a
conduit to cajole corporate America into accepting their
agenda.
Americans for Limited
Government President Bill Wilson charges, “These union and
environmental groups are putting working American worker’s pensions
at risk in order to pursue their radical policies over the
financial interests of the company and the pensions they run.
This is nothing more than a direct attack on the American
worker.”
Some of the key findings from the Office of Inspector General
report confirm the concerns voiced by Campbell and Wilson as they
state: “Without additional transparency and enhanced enforcement
activities, concerns about the fiduciary use of plan assets to
support or pursue proxy proposals for personal, social,
legislative, regulatory, or public policy agendas, which have no
clear connection to increasing the value of investments used for
payment of benefits or plan administrative expenses, may not
be properly addressed.”
The report also identified some the key factors responsible for
the problems with enforcing proxy-voting rules.
(1) Lack of a Documentation Requirement: EBSA’s
proxy-voting requirements do not specifically require fiduciaries
or investment managers to document (1) the monitoring of
proxy-voting activities or (2) the economic rationale for
proxy-voting decisions. OIG found that economic benefits were
not documented for 77 percent of proxy voting decisions studied
during 2008-09.
(2) Statutory Monetary Losses Requirement: ERISA ties
enforcement actions to monetary losses and it is difficult, if not
impossible, to attribute monetary losses to proxy-voting decisions.
(The report notes that the SEC is not subject to the monetary
damages requirement, which makes enforcement of proxy voting rules
by the SEC more likely.)
The OIG made three recommendations to the EBSA, none of which
the EBSA accepted. They are:
(1) propose amending ERISA to give the Secretary of Labor
the authority to assess monetary penalties against fiduciaries for
failure to comply with proxy-voting requirements,
(2) revise proxy-voting requirements in 29 CFR 2509.08-2
to require documented support for fiduciary monitoring and the
economic benefit for proxy-voting decisions, and
(3) include fiduciary proxy-vote monitoring in enforcement
investigations to ensure that the economic benefit for proxy-voting
decisions are appropriately documented.
Fortunately, some commentators are beginning to take notice of
ISS and the disproportionate influence it is now exerting. ISS has
ability to sway 30 percent of the vote in any proxy battle and is
very adept and skilled at getting “whatever it wants,” according to
some financial blogs.
Going forward, here is what investors, shareholders and
corporate officers should take away from the OIG report and the
EBSA’s reaction.
- EBSA does not currently appear interested in expanding
enforcement of proxy voting rules.
- The SEC may be a more appropriate venue for attempting to
tighten proxy voting requirements, given the lower threshold for
enforcement actions.
Enhanced enforcement by EBSA of proxy rules may have
implications for ISS’s Taft-Hartley voting policy, an off-the-shelf
policy tailored to pension funds and generally considered more
activist or socially-oriented than the better known ISS benchmark
policy.
Wilson responded to the Labor Department’s failure to act upon
the independent Inspector General recommendations saying,
“Unfortunately, the Labor Department’s failure to accept basic
recommendations from the independent Office of Inspector General on
how to protect workers’ pensions shows that the Obama
Administration is more interested in shilling for their political
bosses at the AFL-CIO than protecting workers.”
In the absence of improved oversight, the onus will continue to
fall upon free market activists to expose and resist politically
motivated shareholder recommendations.
