WASHINGTON - Corporate pension fund executives must, under ERISA, provide outside money managers with proxy voting guidelines on issues that could affect the value of their portfolios, warned Assistant Secretary of Labor E. Olena Berg.
The Labor Department's pension office will issue formal guidelines on proxy voting and corporate governance within the next few months.
It is not known how many pension funds have such policies now; studies that have been done show widely diverse results.
In a speech to institutional investors at a conference in Washington, Ms. Berg, the head of the Pension and Welfare Benefits Administration, also said corporate pension plan fiduciaries are responsible under the Employee Retirement Income Security Act of 1974 to vote shares of foreign companies and in commingled pools.
"Today, no plan fiduciary responsible for appointing investment managers would dream of not having an investment policy which he or she communicates to investment managers. .*.*. It is just as important to develop and communicate voting guidelines to investment managers, as voting guidelines are, in effect, the 'investment policy' for such votes," she said.
ERISA also encourages corporate pension plan fiduciaries to engage in shareholder activism, especially if such activities can help boost returns in underperforming companies, said Ms. Berg, who previously, as chief deputy treasurer for California, sat on the board of the California Public Employees' Retirement System, a leader in shareholder activism.
But executives at some of the nation's largest corporate pension funds believe it is up to money managers, not them, to develop proxy voting guidelines.
"When we hire a manager for his investment style, we don't tell him how to invest the money, and we think the proxy voting decision is as important as the buy or sell decision," said Fred G. Weiss, vice president of planning, investment and development at the $1.2 billion pension plan of Warner-Lambert Co., Morris Plains, N.J.
"If we don't instruct him on how to do one because we have confidence in his ability, why should we not trust his decision to make sensible decisions on proxies?" Mr. Weiss asked.
Mr. Weiss - who also chairs the Financial Executives Institute's Committee on Investment of Employee Benefit Assets - declined to comment on Ms. Berg's call for corporate plan fiduciaries to actively monitor the performance of companies in which they are invested.
All but $100 million of Warner-Lambert's domestic stock portfolio is managed by outside money managers, and 15% of the fund is invested in foreign stocks, managed by outside firms, Mr. Weiss said.
Automobile giant General Motors Corp. also holds its outside money managers solely responsible for voting shares of companies in its investment portfolio in the best interests of its pension plan participants. GM's $46.9 billion pension fund requires its outside money managers to vote shares on every issue that could have a significant impact on the value of those investments, and to keep records of those votes.
"The responsibility requires that each proxy proposal be reviewed carefully and thoughtfully on its individual merits in order that the manager vote on the basis of informed judgment," said Mark Tanner, a GM spokesman. GM has a similar guideline for money managers to vote shares of foreign companies, making adjustments for local laws, Mr. Tanner said.
The automobile manufacturer's pension fund made waves last year when it became the first large corporate fund to join the Washington-based Council of Institutional Investors, a group active in corporate governance circles.
Meanwhile, Campbell Soup Co., Camden, N.J., in July developed guidelines for its money managers to follow in voting shares of other companies' stock held by its approximately $1 billion pension fund.
"We instruct our money managers to vote proxies according to our definition of corporate governance," said Jim Moran, a company spokesman. The company's proxy voting guidelines focus on performance, not social issues, he said.
The guidelines encourage money managers to vote in favor of policies that link executive pay to shareholder returns, against lowering the exercise price of worthless stock options, and against the election of more than three inside directors on a company's board. General Mills Inc., Minneapolis, has an in-house committee that votes shares of companies its pension fund holds in line with what it considers to be good governance practices, said Clifford L. Whitehill, senior vice president and corporate secretary. For example, General Mills generally prefers companies have a majority of independent directors and keep shareholders' votes confidential.
But Mr. Whitehill suggested his company's approximately $950 million pension fund might not see the need to attempt to improve the performance of laggard companies through activism. "We have to look at it from the standpoint of can we allocate the necessary time to underperformers or is it better to dispose of investments in that company," he said.
At least one large money manager already has begun examining how to change its procedures in keeping with the Labor Department's interpretation of ERISA.
"What she (Ms. Berg) said would involve significant cost in terms of foreign proxy voting," said the money manager, who did not wish to be identified.
Meanwhile, preliminary findings of a CIEBA survey of proxy voting practices among its 150 members suggest more than 95% have written guidelines for their money managers to follow, said Jim Kaitz, a lobbyist for the Washington-based group. The group's members represent many of the country's largest pension funds. Yet, two of the most prominent of CIEBA's members, Warner Lambert and GM, do not have such policies.
But a 1993 Greenwich Associates survey of 384 pension plan sponsors found only 14% had given money managers general voting guidelines to follow on corporate governance issues, while 16% expected to give such guidelines to money managers in the coming year. Part of the discrepancy, however, comes from the differing universes: Greenwich's survey included public funds and endowments and foundations.
The Labor Department's guidance, to be issued in the spring, should help clarify its position on proxy voting previously outlined in February 1988 to Avon Inc. and in January 1990 to Robert A.G. Monks, then president of Institutional Shareholder Services Inc.
Ms. Berg said some pension funds and money managers apparently had interpreted those letters to mean plan sponsors could not develop voting guidelines for their money managers.
The Labor Department's interpretative bulletin also will explain that money managers of pooled accounts must comply with different guidelines provided by plan sponsors to proportionately vote shares held in the pool. Alternatively, managers may develop a single proxy voting guideline and require all participating investors in the pool to agree to the policy, Ms. Berg said.
Finally, the bulletin will ask plan fiduciaries to perform a cost-benefit analysis in deciding whether to vote shares in foreign companies.