Response to the Chamber of Commerce’s Outrageous Comment to DOL

Nell Minow is Vice Chair of ValueEdge Advisors. This post is based on her recent comment letter to the Department of Labor.

VEA Vice Chair Nell Minow has submitted a comment to the Department of Labor on proxy advisory firms and proxy voting by pension fiduciaries. This is a follow-up to two previous letters on the issue and in response to a letter from the Chamber of Commerce calling for the same kinds of restrictions on proxy voting and proxy advisors they are pushing for at the SEC.

October 19, 2019

Assistant Secretary Preston Rutledge
Department of Labor
200 Constitution Ave, NW, Ste S-2524
Washington DC 20210

Re: Executive Order on Energy Infrastructure/Rulemaking

Dear Assistant Secretary Rutledge,

Of course it is no surprise that the CEOs behind the national Chamber of Commerce would do everything they can to prevent their shareholders from having access to the sole source of independent research and analysis on proxy issues, but it is nevertheless disappointing that their letter to you of September 20, 2019 is so slanted, sloppy, self-serving, and superfluous. It would be a terrible mistake for EBSA to ignore the interests you are charged with protecting, the pension plan participants who are the beneficial holders of securities, to further promote the insulation from oversight of corporate insiders. The best guarantee of pension security over the long term is to make sure that shareholders, especially those who act as fiduciaries and thus have the expertise and the obligation—and the ability—to protect shareholder value. The fact that the CEOs behind this comment are willing to spend so much time, effort, and (shareholder) money to stop shareholders from a tiny fraction of non-binding, advisory-only proxy votes contrary to managements’ recommendations makes it clear that their goal here is extinguishing even the mildest of shareholder response.

The Chamber tries hard to spin the SEC’s recent initiative on proxy advisory firms as a significant recognition that there is a problem and a significant action in response. Both are serious mischaracterizations. Indeed, it is far more accurate to say that the SEC took no significant action even after a multi-million-dollar lobbying effort including creation of a CEO-funded fake dark money front group cheekily named the Main Street Investors Coalition, despite having no connection to Main Street or investors and not being a coalition. The fact that its initial director was a former energy industry lobbyist with no previous connection to or expertise in corporate governance makes it clear what it was intended to do—get rid of non-binding shareholder resolutions and initiatives on the subject of climate change at a fraction of a percent of listed companies. (We note that he also served as an officer of another fake front group created by the same funders, also dedicated to eradicating pension fund oversight on corporate governance and related matters.)

This exponentially disproportionate reaction shows that the CEOs behind it know that they cannot make a case against these initiatives on the merits and were terrified of even this modest market response. We note that they make vague claims about “political” votes but are unable, even after repeated requests, to give a single example of a proxy vote cast “incorrectly,” inconsistent with “exclusive benefit” or fiduciary standards, where any trade-off was made between feel-good policies and shareholder value or where any vote was “wrongly” or improperly or even disproportionately influenced by a proxy advisor. Any self-reported, unaudited claims of expense from shareholder resolutions are vague and unsubstantiated and highly suspect. As shareholder resolutions are non-binding, even a 100 percent vote in favor does not require companies to take any action whatsoever.

Proxy advisory firms are the essence of and vital to the free market. They produce research no one has to buy and recommendations no one has to follow. Their clients are sophisticated financial professionals subject to the strictest fiduciary standards, and those clients have a choice of providers. It is the very definition of prudence for these experts to avail themselves of independent research relating to buying/selling or voting securities. The data show that (1) proxy advisor policies are more influenced by their clients than the clients are influenced by the proxy advisory firms (this is another example of a robust free market) and (2) proxy advisor clients are more likely to follow the recommendations on routine matters like re-election of unopposed directors and approval of auditors than they are on more complex issues like CEO pay (another advisory-only vote), business combinations, and shareholder proposals.

That is a textbook example of free market efficiency and the exact opposite of a justification for government intervention.

The data show that (a) overwhelmingly—well over 90 percent of the time—the proxy advisory services recommend votes consistent with the recommendations of the issuer boards and executives, and (b) when they do not, the financial professionals who purchase the reports make up their own minds about how to vote. If the proxy advisory firms were as influential as their critics claim, the critics should be overjoyed at the strong level of support they have for management-recommended votes. As noted above, the more complex and controversial the proxy issue (with business combinations at the top of both lists), the more the votes vary, showing that critics of the proxy advisory services have it exactly wrong; proxy advisory services are guided by their clients more than the clients are guided by the proxy advisory services.

Ning Chiu of Davis Polk reports, “On shareholder proposals, ISS recommended for social and environmental proposals 55.4 percent of the time, but funds only supported those proposals 25.2 percent of the time. Overall, ISS was in favor of shareholder proposals 64.7 percent of the time, yet funds voted for them only 34.6 percent of the time. But average support for shareholder proposals during the 2017 season was 39 percent,” indicating that of that 39 percent, a substantial group, may not be ISS clients at all or are clients who read the analysis and vote contrary to the recommendation.

The best determiners of the value of proxy proposals are shareholders and the best determiners of the value of proxy advisory services are the financial professionals who are freely able to decide whether to buy the reports, who to buy them from, and whether to follow their recommendations. Proxy advisory firms are the only independent source for evaluation of proxy issues. To reiterate, shareholder proposals and say-on-pay votes are non-binding, so even if proxy advisors are as powerful as critics say (but are unable to prove as the data is all to the contrary), and even if there is a 100 percent vote against the wishes of management, the corporation does not have to do anything about it. Worst case scenario is that if all of the wild (and unsupported) allegations of proxy advisory firm critics are true, there is no risk of harm other than the hurt feelings of corporate insiders; and that is literally the reason we pay them the big bucks – to be able to respond to challenges with courage and integrity and, when their shareholders do not support them, to either do a better job of communicating or change their direction.

The very last people we should ask to evaluate the worth of proxy advisory services are the people they evaluate: corporate executives and board members. We don’t let students grade their own papers, and we don’t let manufacturers decide what toxins to pour into the air and water. We cannot let the squeamishness of corporate insiders about assessments they do not control (plus the millions of corporate dollars they divert from creating shareholder value to spend on lobbyists and fake front groups) lead to any impediment to that independent assessment. The real question the Department, as vigilant protectors of pension value, should investigate here is why executives and directors do not want to hear from their shareholders in the most low-key, low-risk, low-cost manner possible.

We strongly endorse the Department’s guidance dating back to 1988 that proxy voting and other elements of stock ownership are plan assets and, like the buy/sell/hold decision (as well as decisions about filing or participating in shareholder lawsuits, submitting shareholder resolutions, or engagement with board members or executives) must be made for the exclusive benefit of plan participants. Indeed, we would welcome enforcement actions based on this critical fiduciary obligation. Any other characterization of proxy voting would have to be thoroughly documented, and that is not possible, given that the items put to a shareholder vote have only become more significant and value-impacting since those letters were issued.

Indeed, shareholder votes are unique because unlike other decisions fiduciaries make concerning shares of stock, proxy votes are subject to the problem of collective choice, sometimes known as “the prisoner’s dilemma” or “the tragedy of the Commons,” and the subject of a robust literature including Nobel Prize-winning work in economics. Any individual proxy vote, whether cast by a person who owns a dozen shares or a fiduciary acting on behalf of thousands of beneficial holders, is of little value unless the vote reaches critical mass. It does not have to be a majority to send a meaningful message, but it does have to be significant. In the past, the Investor Responsibility Research Center and others documented the problems with institutional investors voting proxies to placate or market to executives of portfolio companies instead of voting for the exclusive benefit of plan participants. This was one of the most important factors leading to the 1988 Avon letter, sent after CEOs at Avon and other companies lobbied investors to vote against shareholder resolutions asking for a shareholder vote on poison pills, a then-popular antitakeover device, created by Martin Lipton in the midst of the era of hostile takeovers and LBOs and greenmail, when both activists and insiders were diverting corporate assets from shareholders to themselves. The implied pressure—vote with management or lose our business—was what led the Department to remind fiduciaries that their duty is to beneficiaries, not corporate customers. As you well know, that is a reminder that must be constantly and consistently communicated.

This is why proxy advisors provide an essential service in making independent research available to a wide range of institutional investors, thus substantially reducing the costs to reduce the risk and increase the benefit of voting proxies to increase shareholder value.

Any complaints the Chamber makes about the quality of proxy advisory service products is highly suspect, including the “studies” that they fund and the allegation of conflicts of interest. We would challenge the members of the Chamber to show that they can meet the same standards for conflicts, error rates, and renewal rates that the proxy advisory services do. Their letter provides zero evidence of any kind of harm to the plan participants, the employees that Chamber members’ always claim to be the companies’ most significant asset. In any event, the assessment of the quality and value of proxy advisory firm products is best made by market forces, meaning the customers, not the subjects of the data and analysis.

We also ask the Department to keep in mind that the proxy advisory services are publishers of independently produced data, analysis, and recommendations and any effort to limit the content of their reports would have to be reviewed and approved by DOJ’s Office of Legal Counsel for its supportability as a limit on the First Amendment rights of free speech and free press.

We are fully in agreement with the opening statement of the Chamber’s letter: ” A fundamental component of our strong capital markets is the existence of responsible corporate governance laws and regulations that encourage companies to stay public and promote long-term shareholder value.” If only the rest of their letter supported instead of undermining that goal. The Department should not engage in any rulemaking on this issue without extensive consultation with fiduciary investors and we strongly recommend a public hearing so they can be heard. Tellingly, the Chamber asks for sub-regulatory action because its members know that their arguments would collapse under the transparency and rigor of a notice and comment proceeding, particularly with regard to their unsubstantiated and unreasonable speculation about cost-benefit analysis of proxy voting, without a single supporting document they have not underwritten themselves.

In summary: the Department should not be swayed by the complaints of corporate insiders about the sole source of independent research on proxy issues, given that:

• well over 90 percent of proxy advisor recommendations are to vote with management,
• even a 100 percent vote against on shareholder proposals or CEO pay is not binding,
• proxy advisors produce reports no one has to buy with recommendations no one has to follow, purchased by the most sophisticated financial professionals in the world,
• data show that fiduciaries review the recommendations of proxy advisors but make their own decisions, and
• neither the Chamber nor any other lobbying group has provided a single example of a proxy issue “wrongly” voted contrary to fiduciary obligation, while before the 1988 Avon letter there was extensive documentation of votes that benefited the fiduciary’s commercial interest instead of being cast for the exclusive benefit of plan participants.

Just to reiterate the basis for my views for the record, I have worked in and studied and taught in the field of corporate governance since 1986, including four years at ISS. But I have not worked at ISS or any proxy advisory firm in over 30 years. I have worked on behalf of shareholders since leaving government in 1986, but currently get no revenue from institutional investors or proxy advisors and do not expect any in the future. Before joining ISS as its fourth employee in 1986, I worked at OMB under David Stockman, President Ronald Reagan, and then Vice President George H.W. Bush, who chaired the President’s Regulatory Relief Commission. It was one of the greatest disappointments of my professional life that the endless stream of corporate executives who came to tell us what they wanted did not, in fact, want regulatory relief. What they wanted was regulatory burdens—imposed on others, especially regulations to limit their liability and impose barriers to entry. Fortunately, Vice President Bush understood that we were there to let the market do what it does best and intercede when there were issues—like the collective choice problem and imposition of externalities—that require it. I trust the Department will do the same.

Should there be a rulemaking, I expect that my firm, ValueEdge Advisors, will file a formal comment. Until then, I am happy to answer any questions about my affiliations, experience, and views on these issues. As I have not yet received a reply to my most recent letter, I attach a copy for your reference and look forward to your answering my questions.


Nell Minow

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