One cheer for Secretary of Labor Robert Reich.
The interpretive bulletin on proxy voting by corporate pension funds Secretary Reich issued late last month should improve the performance of those funds in this area.
Pension funds and their managers should be encouraged to vote their proxies thoughtfully, but the hint of sanctions for failure to do so in some of the statements surrounding the release of the bulletin is deeply troubling, as is Secretary Reich's use of it as an opportunity to promote another of his favorite causes - "high performance workplaces."
While a few forward-thinking funds, such as General Motors Corp., have issued thoughtful proxy-voting policies to their external managers, and/or established policies for internal management operations, too many have not.
Funds that have not done so have often failed to realize the value that can exist in the proxy vote. Proxies have value. To make that point, Dean LeBaron, chairman of Batterymarch Financial Management, Boston, once half-facetiously proposed pension funds be allowed to realize the value of their proxies by selling them. There is little doubt there would be a market for the proxy votes for many corporations.
But, while Secretary Reich's new interpretive bulletin should stir more pension funds to action, it went too far in virtually mandating proxy voting.
It is ironic that no one in the United States is legally required to vote in federal, state or local government elections. Yet, by this bulletin, pension funds and money managers are virtually legally required to vote their proxies.
Many smaller pension funds will find this another burdensome requirement. Yes, proxies have value, but often the cost of realizing it may be greater than the value. In fact, this may be the case most of the time. If it were not so, if there were great value to pension funds in being activist shareholders, the market would have sent unambiguous signals of the fact.
As it is, funds may well have to bring in their lawyers or consultants to help them develop written proxy-voting policies. That will be a burden for small funds.
They will have to communicate their policies to their external money managers. They also will have to establish monitoring processes. These will involve new costs.
Many small funds find it difficult enough to monitor their external managers' investment performance without monitoring their corporate governance performance, too.
It may well be another reason for a small company with a defined benefit plan to switch to a defined contribution plan, or for a small company with no plan to not even consider a defined benefit plan and to offer instead a defined contribution plan. By choosing a defined contribution plan, the employer can avoid the problem of voting proxies or monitoring managers' activities in voting proxies.
Likewise, many small investment management firms will find this an additional burden for which they are not staffed.
Secretary Reich's use of the bulletin to tout "high performance workplaces" implies funds should use their proxies to pressure other companies to change their workplace practices. Such micro-management is not an appropriate use of the proxy vote. The proxy should be voted on the overall policies, direction and performance of the board and top management, not everyday business practices.
