In September, the Department of Labor proposed a rule that seeks to reaffirm the principle that pension plans’ main focus should be the financial well-being of their beneficiaries, and asked for comments from interested parties. This rule aims to undo an Obama-era rule that was widely interpreted as compelling fiduciaries to vote proxies (see DOL quote below). The new rule would change that by focusing fiduciaries only on proxies that are materially relevant to the investment outcomes for those invested in the plans.
Here, in lightly edited form, is the comment letter I submitted to Secretary Scalia last week:
Monday, October 5, 2020
The Honorable Eugene Scalia
U.S. Department of Labor
200 Constitution Ave.,
N.W. Washington, DC 20210
Dear Secretary Scalia:
Please accept this letter for the docket regarding RIN 1210-AB91, “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights.” I write as President of Bowyer Research, a financial economics consulting firm which, among other things, produces in-depth quantitative analysis of the effects of various ESG factors for investment institutions.
Having extensively analyzed both the effects of ESG factors and the details of proxy-voting processes for two major proxy advisory services (in one case as a consultant to a client of one firm and in the other case as a consultant to another in vetting the service), I conclude the following:
- ESG factors are not generally additive. Some factors add returns, but only some do. There are clearly materiality issues with such factors. That is to say: factors which are proximate to, and directly relevant to, the firm in question are more likely to be helpful. Those which are not proximate and material are much less likely to offer any benefit to shareholders and frequently erode returns when used as screens.
- ESG activism is grounded historically in ideological politics, not in financial analysis. Studies purporting to find additive value often are after-the-fact justifications for an agenda which was not designed to help shareholder returns, but rather to effect social and political change that traditional electoral politics had not delivered.
- The proxy service processes that I’ve observed are opaque and politically unbalanced. The proxy service which I have been in dialogue with has been able to show no evidence whatsoever that they have made any effort to include a variety of political views in their process. In fact, the processes have baked-in features which hard-code group-think into the recommendations.
- The comments in the DOL statement, if they miss the mark at all, perhaps underestimate the cost of the current system in that, not only are fees paid to proxy services and for internal human resources to interface with proxy services, but further, because these questions often involve highly polarized political issues, top-level management is often drawn into the process. A CEO, COO or CFO’s most scarce commodity is attention. Polarized issues by nature get passed up to top managers and take up valuable attention-space which rightly belongs to the shareholders’ goal of a decent and dignified retirement.
- The Interpretive Bulletin 2016-01 at the time of issuance was widely interpreted as an unfunded mandate to vote proxies. This placed an undue burden on trustees and money managers to chase social goals which are orthogonal to the single focus of providing financial value to retirees.
- That bulletin also functioned as a heavy de facto subsidy to proxy-advisory services, an industry riddled with conflicts of interest with its clients and with problems of opacity, extreme market-share concentration and rampant political imbalance.