Public pension funds are conflicted in proxy voting
Prior blogs have focused on index funds growing power to influence companies through proxy voting. While the index providers have significant clout, one cannot overlook public pension funds and the potential proxy voting conflict in this analysis. For several years, public pension funds have increasingly pursued more activist positions. Arguably, public pension funds in combination with the index providers tipped the Exxon Mobile / Engine No 1 vote. We have argued that the index providers have a principal-agent conflict in voting proxies and that the underlying investors should be able to express their interests in how proxies are voted.
Public pension funds present a similar dilemma. The largest ten funds manage nearly $2 trillion in assets of which about 46% are in equities. As evidenced in the Exxon Mobile vote, public pension plans hold power of the proxy and can influence corporate strategy, risk and return. Public employee retirement systems represent millions of state workers, who might have divergent views, yet public funds have a long history of taking political stances and promoting specific causes. For example, many public pension funds divested their South African assets in the 1980s or tobacco stocks in the 1990s. Many public pension funds have realized that divestment is not the only option and may be a sub-optimal approach. Proxy voting has emerged as a low-cost activism strategy.
The critical question is whether public pension funds should be taking policy stances on behalf of their beneficiaries or whether they should at least attempt to understand how their beneficiaries think about the key issues. In a Harvard Law Journal article, Eric Finesth argues that because employee contributions to a public pension fund are compulsory and the fund has a stated policy to vote proxies to advance political or ideological goals not related to the pension fund’s purpose of providing retirement benefits, employees have a First Amendment right to opt out of having their pro rata portion of their shares voted in a manner with which they disagree. {Finseth, Eric John. In 2018, the Institute for Pension Fund Integrity argued that the proxy voting process needs to be reformed to ensure “…the overall transparency, and ensure that the individual investor’s voice is not overshadowed by the potentially-misguided political motivations of fund managers and other institutional forces…”
How to manage public pension funds proxy responsibilities
As noted in prior blogs this issue is raised equally on the right and the left of the political spectrum. The problem can be fixed with additional insight into what the underlying investors value and some inquiry into how they would like their proportional shares voted. To avoid problems with the underlying investors are non-responsive, the pension plan could present its voting policy as the default option and allow the plan participants and retirees to opt-out. The critical question is whether any one is motivated enough to bring about change.
