4 pension plans not following herd with proxy votes

Four major pension funds voted in opposition of more directors and other issues than shareholders in aggregate during the most recent proxy season.

The California State Teachers' Retirement System, West Sacramento, voted to oppose 36% of the 17,764 nominees for director to corporate boards in the fiscal year ended June 30, more than other major pension funds sampled and other institutional investors on average, according to the latest proxy-voting reports of four major pension funds and other reports.

The State of Wisconsin Investment Board, Madison, voted against 24.6% of the 7,583 nominees in the same period; the Florida State Board of Administration, Tallahassee, voted to oppose 16.8% of the 15,968 nominees for the year ended Dec. 31, 2012; and the Ohio Public Employees Retirement System, Columbus, voted to oppose the election of 21.7% of nominees for the year ended Dec. 31, 2011.

“I think what is evident is institutional investors are paying more attention to directors than they ever have before,” said Patrick McGurn, special counsel, Institutional Shareholder Services Inc., Rockville, Md., a corporate governance and proxy-voting advisory firm.

A decade or so ago, “the numbers in opposition would have been a small fraction of what they are today,” he said.

By contrast, all institutional investors, including pension funds, voted on average to oppose only 4% of nominees for directors for the year ended June 30, 2011, according to the most recent report of Broadridge Financial Solutions Inc., Lake Success, N.Y., whose services include proxy-voting processing.

All shareholders, including individual investors, also voted on average against 4% of nominees, the Broadridge data show.

“I think they have substantial influence” in proxy voting, said Kent S. Hughes, managing director, Egan-Jones Ratings Co.'s proxy advisory services, speaking of public pension funds.

The Broadridge figures are based on 83.4% of all shares that were voted, including institutional and individual shares held by custodians and brokerage firms.

But “it is difficult to generalize about” the proxy voting practices of public pension plans, Mr. Hughes said.

The voting tendency against directors is much higher than voting recommendations by ISS, Mr. McGurn pointed out. In 2012, ISS recommended opposing 8.7% of the directors nominated at companies in the Russell 3000 stock index, while recommending support for the other 91.3%.

“It's clear they (pension funds) aren't voting in lock step with proxy advisers,” Mr. McGurn said.

“Some numbers are literally three times what we recommend,” Mr. McGurn said. “They (pension funds) have their own criteria” for voting and their own concerns about portfolio returns they address by their voting. “I think (corporate board) directors take a much closer look at voting results ... than they ever have before.”

High levels of negative votes often now result in an outreach to institutional investors to identify areas of concern and address them, Mr. McGurn added.

The average support for nominees for directors was 95% at the Russell 3000 companies, according to ISS data for 2012. Only 61 nominees at 40 companies in the Russell 3000 drew more opposition than support in voting, Mr. McGurn noted.

Of 26,690 proposals on all issues at 3,041 U.S. companies, CalSTRS voted 71% in favor. Florida SBA voted 80.7% in favor of all 23,668 proposals at 2,837 companies; SWIB voted 74% in favor of all 11,084 proposals at 1,111 companies; and Ohio PERS voted 75.1% in favor.

For CalSTRS, that level of support for all proposals is up from 63% in the previous fiscal year and is its highest since the fiscal year ended June 30, 2007, when it was also 71%.

CalSTRS attributes the increase from the previous year to “refocusing staff's efforts on improving outlier executive compensation programs and increasing engagement with companies where we had previously not supported proposals,” according to a CalSTRS report.

Commenting on the voting tendency of pension funds compared to other shareholders, Mr. Hughes said, “I would assume a good number of pension funds are activist shareholders,” leading them to vote negative on some issues trying to bring about a change at companies.

Overall, FSBA votes 81.2% in favor of management on all proposals; SWIB, 73.5% in favor of management; and OPER, 78% with management. CalSTRS did not provide a breakout.

Mr. McGurn said it is hard to tell if pension funds influence other institutional investors on proxy voting.

“I think every (pension plan) is focused on its own voting policies” and the affect its votes will have on its investment objectives, Mr. McGurn said.

All classes of shareholders have in general reduced their votes against directors as they have increasingly participated in advisory say-on-pay votes.

On say on pay, or the shareholder advisory vote on executive compensation, the large public pension funds tend to cast more of their shares against executive compensation programs than most other shareholders, whether institutional or individual.

CalSTRS voted 83% in favor and 17% against ratification of executive compensation in say-on-pay proxy voting at 2,466 companies.

Other funds cast stronger opposition on the advisory executive pay voting. FSBA voted against say-on-pay ratification 21.7% of the time at 2,220 companies; SWIB voted to reject say-on-pay ratification at 24% of 984 companies; and OPERS voted 23.5% against ratifying executive compensation at 3,523 companies.

By contrast, ISS' recommendations were more favorable to companies in say-on-pay voting than the votes cast by the pension funds. ISS recommended shareholders vote to reject the say on pay at 13.26% of companies in the Russell 3000, supporting the pay at the other 86.74% of the companies.

All institutional investors, including pension funds, voted 86% in favor and 14% against the advisory vote on executive compensation, the same percentage split as all shareholders, according to Broadridge.

“Withholding (votes on or voting against) directors has to some extent been diminished as a device (used by shareholders) for going after companies on their executive compensation,” Mr. Hughes said.

Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandating all U.S. publicly traded companies hold an advisory vote on executive compensation, “say on pay has been getting more emphasis,” Mr. Hughes said. “In the view of some activist shareholders, it has been a more useful tool” to focus any need for change on compensation.

Before the advent of say on pay, Mr. Hughes said shareholders tended to direct opposition to executive pay programs through voting against directors who were members of the corporation's compensation committee.

“Before you didn't have a choice,” Mr. Hughes said.

Now there are fewer withhold votes (or opposition votes) on compensation committee members, he added.

Mr. McGurn confirms, “We've seen a drop in the average vote against directors in the era of say on pay.”