Now Is the Time to Designate Proxy Advisors as Fiduciaries Under ERISA
Bottom Line: It's time to designate proxy advisors as investment advice fiduciaries not only due to longstanding conflict of interest concerns, but also to overcome their increased emphasis on Environmental, Social, and Governance priorities that threaten shareholder wealth maximization (SWM). Such a fiduciary designation would require proxy advisors to act solely in the interest of their clients with shareholder wealth maximization as their overriding focus.
The Labor Department must designate proxy advisors as investment advice fiduciaries under the 1974 Employee Retirement Income Security Act. Given all the old and new concerns, including a lack of focus on SWM, this is the only way to make sure that a proxy advisor’s approach to the creation of voting recommendations for ERISA plans is consistent with the fiduciary duties of an ERISA plan manager.
These fiduciary duties require a plan manager to not only be constantly guided by the fiduciary principles of sole interest, exclusive purpose and the prudent man standard, but also must have, without exception, SWM as her fiduciary objective. These fiduciary duties need to be shared by proxy advisors.
Given that shareholder voting carries with it fiduciary duties, it is somewhat surprising to find that proxy advisors, the primary providers of shareholder voting recommendations, aren't already required to be designated investment advice fiduciaries under ERISA.
Designating proxy advisors as fiduciaries would ensure they focus on shareholder wealth maximization. This means that traditional concerns such as a lack of precision in the voting recommendations of proxy advisors due to a lack of resources and newer concerns such as the rise in the use of Environmental, Social, and Governance (ESG) “objectives” cannot creep into the voting recommendations.
This ESG concern is of growing importance. It has been reported that their use by institutional investors has increased dramatically over the last ten years, with institutional investors managing approximately $83 trillion of assets under the United Nation’s Principles for Responsible Investment, an initiative that backs the use of ESG in asset allocation. At the end of 2018, it was reported that $1.2 trillion had been invested in funds that followed “non-economic" guidelines.
In addition to this fiduciary duty, there are several supplemental recommendations that are necessary to support this primary recommendation for proxy advisors:
- Proxy advisors like ISS whose Taft-Hartley specialty report is notable for its policy of being in compliance with AFL-CIO guidelines would need to be withdrawn and replaced with an SWM specialty report.
- Stewardship teams of large mutual fund families would also need to be designated investment advice fiduciaries because like proxy advisors, stewardship teams provide shareholder voting recommendations.
- Proxy advisors must abstain from providing ERISA plans with voting recommendations on environmental and social shareholder proposals unless they have a compelling reason to believe the board is uninformed.
- To help the DOL monitor proxy advisors' compliance with their fiduciary duties, proxy advisors should periodically provide a series of additional verification information to the DOL.
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