by Christopher Carosa, CTFA
The Department of Labor just published a proposed rule pertaining to Fiduciary Duties Regarding Proxy Voting and Shareholder Rights. As the DOL’s related Fact Sheet states, “The proposal retains the core principles in the current regulation that sets forth requirements for satisfying the prudence duty under ERISA section 404(a)(1)(B) when deciding on plan investments and investment courses of action.” Aside for the usual declaration that voting proxies must always and only be done in a manner which operates exclusively for the economic interest of the plan participants, the DOL added this important phrase: “...fiduciaries must vote proxies only when the fiduciary prudently determines that the matter being voted upon would have an economic impact on the plan and are prohibited from voting proxies unless the fiduciary prudently determines that the matter being voted upon would have an economic impact.” It is the prohibition that has caught the attention of many. In some ways, this DOL guidance is not in harmony with a similar SEC rule. The DOL allows the fiduciary to sometimes vote and sometimes not vote. With the SEC, it’s all or nothing.
Does the DOL represent a more practical procedure?
First, it’s clear voting proxies does present an advantage. “Voting gives you the ability to voice your opinion on what should happen with a company you are invested in,” says Jared O’Neal, Financial Advisor at Raymond James & Associates in Destin, Florida. Anyone who has ever seen a proxy statement from a publicly-traded company knows this is the one act that gives a shareholder a real sense of ownership in the company. You get to vote on everything from exiting things like poison pill strategies and directors to boring things like approving the annual auditor. “Voting proxies give shareholders a say on a wide array of issues that a company is facing,” says Christopher Anderson, Investment Operations Lead for Team Hewins in Redwood City, California. “Being a shareholder means participating in a company’s future profits and voting proxies impacts a company’s financials, governance, and over the long-term, its stock price.” Many shareholders feel their votes won’t matter. While that may be true in one sense, simply participating in a vote can send useful information to company management.
“Investors should vote proxies, even if the shareholder only has a small position in the company,” says Stephen H Akin, a Registered Investment Adviser with Akin Investment, LLC in Biloxi, Mississippi “Bringing the small holder into the process is good for both parties. It brings the shareholder closer to the company. Shareholders always know more about their holdings after the process is completed. The companies often use the participation rate and data of small holders for insight into who represents their broad base of stockholders.”
Of course, sometimes the value-added of voting a particular proxy isn’t there. “Not all proxies are equally important,” says Anderson. “Votes to elect a new member to the board of directors can have a significant impact on a company’s prospects. On the other hand, some proxies are more administrative in nature and others may cover issues that are not important to the shareholder.”
Furthermore, when it comes to economic impact, proxy voting may be of lower significance than the decision to purchase the company in the first place. After all, more than one Wall Street veteran has said the best way to vote a proxy is with your feet. “Buying and selling stock has a much larger impact to your bottom line than voting a proxy does,” says O’Neal. “The vote will not create an immediate effect like a buy or sell will.” In fact, a shareholder buying a company with the intent of changing that company must necessarily subordinate economic interest.
“Deciding to purchase a stock means becoming a partial owner of an existing company with an existing governance structure,” says Anderson. “Shareholders can enact change through voting proxies; however, this takes time, and an investor should make sure they are reasonably comfortable with the company’s current business practices, rather than expect quick and radical change via voting proxies.” This, then, immediately addresses the concerns offered by the DOL (and possibly ignored by the SEC) when it comes to proxy voting. Specifically, if there’s a cost involved in proxy voting that is not justified by any potential payback, is it in the best interest of retirement plan participants to take those fees from their retirement accounts? More pointedly, what’s a fiduciary to do?
On cannot ignore these costs. They are real both in terms of time expended by the fiduciary as well as potential through out-of-pocket costs incurred when a third-party proxy voting contractor is employed. In either case, the logistics of determining how to vote among a broad range of distinct clients can present a conflict-of-interest difficult to overcome, let alone justify in the first place. Many advisers, perhaps under pressure from the compliance rubric of the SEC, feel they are required to aggregate all their clients’ holdings and vote proxies in a consistent fashion. “Two investors could have different goals that are diametrically opposed and voting in one block could leave one of their voices unheard,” says Anderson. “For the most part, this is not a concern because shareholders generally have the same goal, seeing the company excel and their investment grow. For clients who have more unique interests, such as social or environmental concerns, some firms offer investment programs that cater to those ideals and vote proxies accordingly.” Worse, how does a fiduciary know for certain, particularly in proxy matters that do not rise to have a measurable economic impact, how individual plan participants are thinking? And, if advisers do use a one-size-fits-all approach, does that violate the “treat each client individually” parameter? “While aggregation might be easier, advisers do not necessarily think exactly like each of their clients do,” says O’Neal. “That’s similar to an adviser making a blanket recommendation to all of their clients, which is a no-no.”
If a fiduciary must vote proxies, following the DOL’s guidance may represent the most practical alternative: Vote when the economics support voting; abstain when they don’t. “Shareholders participate in a company’s future profits, so voting in a way that should increase those profits is in the best interest of most shareholders,” says Anderson. “Voting proxies in a way that improves governance practices, including transparency and oversight of the firm’s business operations, generally leads to a stronger, more profitable company over the long-term.” The best way to eliminate fiduciary liability, however, remains to have shareholders vote for themselves. In retirement plans, this isn’t always possible, but if there were a way to construct it such that this is a viable option, that might be the most prudent road to take. “The shareholder should be the one making the voting decisions,” says O’Neal, “but I do understand that many clients do not know much about the inner-workings of the companies they are investing in. A simple solution would be to give the client the option to vote for themselves or have their adviser vote on their behalf.” To vote, or not to vote. That is the proxy question. The DOL may have just made the answer easier.