The U.S. currently allows managers of ERISA retirement plans to participate in shareholder votes without considering the interests of the employees and retirees they represent. That is the issue that the Department of Labor is trying to address now. A new regulation proposed by the agency will protect workers’ interests, and it is crucial that this proposal succeed in an era in which a culture of social and environmental activism has overtaken boardrooms and investment decisions.
This proposed rule would impact about $2.1 trillion worth of retirement funds in 29,000 defined contribution plans and 5,500 defined benefit plans. Currently, the managers of these plans are able to vote in shareholder elections without consideration for the financial well-being of the plans they manage and the workers whose money they manage. ERISA plan managers can robo-vote, or vote blindly in alignment with the recommendations of third-party proxy advisers. In other words, they are permitted to take the easy way out, but when they robo-vote, they are assigning their power and neglecting their duty. America’s workers and retirees deserve better.
This regulation is particularly important in today’s age of heightened political and social pressure to believe and act one way or another. Political and even moral concerns do not protect the retirements of America’s workers. There is a movement in investing that values amorphous environmental and social goals — often at the exclusion of the goal of financial gain. It’s fine for an ERISA plan manager to prioritize environmental or social goals with his or her own investment, but it’s not fine if the manager does that with others’ retirement money.
Take, for example, the trend for environmental activism in business and investment decisions. European energy giants such as Shell and BP are shifting strategy to focus on renewables and move away from the legacy money-maker, oil. To do this, they argue that the change is best for the company’s profitability. But is it? Exxon, Chevron and oil companies the world over disagree. When it comes to the opportunity for shareholders to participate in corporate strategy and governance through shareholder votes, it would be irresponsible for ERISA plan managers to simply robo-vote in line with a move away from oil. It would be irresponsible to choose alternative energies over oil because that is the trendy decision, or the manager believes it is the moral decision.
In this new investing environment, safeguards must be put in place to ensure that those managing the retirement funds of Americans are prioritizing the protection and growth of those funds.
Too many recommendations by proxy advisers are not in the best interest of the ERISA plan beneficiaries, the workers and retirees. That is why the managers should not be allowed to blindly rubber stamp the proxy adviser recommendation with a robo-vote. The regulation under consideration by the Labor Department would ensure that managers investigate votes, determine what they believe is in the best financial interest of the beneficiaries and maintain records showing their determination process. This protects beneficiaries’ interests from managers who might otherwise prioritize something other than the pecuniary health of the funds.
Moreover, the proposed regulation would finally clarify that a manager may decide to abstain from voting if, for example, the plan owns only a small percentage of shares in a firm or if investigating the vote is more costly than the financial benefit of a decision. For several years, ERISA plan managers have believed they might be required to participate in every shareholder vote. Because it takes time and expense to investigate each vote, some managers have simply robo-voted in accordance with the recommendations of proxy advisors. This can lead to voting against the financial interests of the plan beneficiaries. For example, robo-voting could lead to votes in favor of environmental or social or other priorities that the manager would not deem independently beneficial to financial outcome.
If your retirement money is at stake, you probably want to be sure those managing it are doing everything they can to protect it and help it grow. That includes how managers handle shareholder proxy votes. You want to make sure they are voting for the right board members who will pursue the best vision for the investment, and the right strategies that will maximize the investment. At least, you want to be assured that those managing your money are reasonably making decisions on those matters based on financial considerations. You do not want them robo-voting. You do not want them basing decisions on non-pecuniary considerations such as their personal morals, which may differ from yours.
If you worked hard for that retirement money, you want it to be protected. That is what this proposed regulation would do.
Ellen R. Wald, Ph.D., is a senior fellow at the Atlantic Council’s Global Energy Center and the president of Transversal Consulting, a global energy and geopolitics consultancy. She is the author of “Saudi, Inc.,” a history of Aramco and how the Saudi royal family controls this multitrillion-dollar enterprise. Follow her on Twitter @EnergzdEconomy.