Martin Lipton is a founding partner specializing in mergers and acquisitions and matters affecting corporate policy and strategy, and Steven A. Rosenblum and William Savitt are partners Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Mr. Rosenblum, Mr. Savitt, Karessa L. Cain, Hannah Clark, and Bita Assad. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr. (discussed on the Forum here).
As we approach the first anniversary of the Business Roundtable’s abandonment of shareholder primacy and embrace of stakeholder governance, and the fourth anniversary of our development for the World Economic Forum of The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, we thought it useful to consider in broader context the key issues of corporate governance and investor stewardship today. While there is no universal consensus, the question underlying these issues can be expressed as: What is the corporation trying to achieve? What is its objective?
Comment Letter to DOL
More from: Gary Retelny, Subodh Mishra, Institutional Shareholder Services Inc.
Subodh Mishra is Managing Director at Institutional Shareholder Services, Inc. This post is based on a recent comment letter from ISS President & CEO Gary Retelny to the U.S. Department of Labor in response to potential amendments to the Employee Retirement Income Security Act of 1974 (ERISA). Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here).
Institutional Shareholder Services Inc. (ISS) is pleased to submit these comments regarding the above-referenced proposal to amend the “Investment duties” rule under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) [29 CFR §2550.404a-1]. Given the increasing importance of integrating environmental, social and corporate governance (“ESG”) factors into a prudent investment management strategy, ISS applauds the Department’s intent to clarify the sub-regulatory guidance in this area. Unfortunately, the proposed rule amendment adds more confusion than clarity, and would, we fear, work to the detriment of ERISA plan participants and their beneficiaries.
While the Department seems to recognize the economic relevance of ESG factors in theory, the Proposing Release nonetheless perpetuates outdated assumptions about ESG investing. As a result, the proposed amendment of Rule 404a-1 imposes unnecessary burdens on the selection of ESG investments, even where the fiduciary has found such investments to be prudent after evaluating them solely on pecuniary grounds. The permissible consideration of non-pecuniary factors under the proposed amendment is confusing as well. The Department characterizes this rulemaking as a confirmation of existing sub-regulatory guidance, but that is not the case. Whereas existing guidance employs an economic equivalence test for assessing alternative investments, the proposed rule requires that such alternatives be economically “indistinguishable.” In so doing, the proposal creates a new—and, ISS fears, unworkable—standard for ERISA fiduciaries.
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