Pushing the Limits of Pension Fund Activism

The Department of Labor has tried yet again to referee the perennial battle between activist pension funds and corporations over how far each side can push for or against shareholder resolutions.

Robert Doyle, director of regulations and interpretations at the Labor Department, issued a letter last month to the U.S. Chamber of Commerce intended to clarify how much activism is permissible from pension-related funds and what kinds of shareholder resolutions they are permitted to sponsor. Doyle confirmed a department decision from 1994 that pension funds regulated by the Employee Retirement Income Security Act (ERISA) cannot use the proxy process to further causes that have no clear economic benefit to the pension plan. The Chamber promptly heralded the news as “a clear message that union pension trustees need to put workers’ retirement security first, instead of any political agenda.”

Others don’t see it that way. They say Doyle’s letter merely restates what most people already knew and doesn’t portend any new limits on pension fund activism.

“I don’t see anything new in this opinion,” says ERISA expert David Abbey, associate counsel for T. Rowe Price, a large manager of pension funds.

The issue resurfaced last year when the Chamber asked the Labor Department whether a shareholder activism campaign launched by the AFL-CIO squared with ERISA. (The campaign seeks to pressure companies to support the AFL-CIO's health care agenda.) The Chamber also claimed that the labor group wants companies to reveal the personal political contributions of corporate board members and officers to candidates who oppose that agenda.

REJECTING ERISA

The following excerpt is from a letter sent by The Department of Labor’s Robert Doyle to Thomas Donahue of the U.S. Chamber of Commerce.

… The Department rejects a construction of ERISA that would render the Act’s tight limits on the use of plan assets illusory, and that would permit plan fiduciaries to expend ERISA trust assets to promote myriad public policy preferences, and believes that these principles apply with equal force to a plan fiduciary’s support or pursuit of a proxy proposal.

Under section 404(a)(1)(A) and (B) of ERISA, plan fiduciaries must act solely in the interest of participants and beneficiaries and for the exclusive purpose of paying benefits and defraying reasonable administrative expenses. In our view, plan fiduciaries risk violating the exclusive purpose rule when they exercise their fiduciary authority in an attempt to further legislative, regulatory or public policy issues through the proxy process when there is no clear economic benefit to the plan. In such cases, the Department would expect fiduciaries to be able to demonstrate in enforcement actions their compliance with the requirements of section 404(a)(1)(A) and (B).

The mere fact that plans are shareholders in the corporations in which they invest does not itself provide a rationale for a fiduciary spending plan assets to pursue, support, or oppose a proxy proposal unless the fiduciary has a reasonable expectation that doing so will enhance the value of the plan’s investment. To the contrary, Interpretive Bulletin 94-2 makes it clear that plan fiduciaries, when considering whether to support or oppose a proxy proposal or to engage in activities intended to monitor or influence the management of corporations, must first take into account the cost of such action and the role of the investment in the plan’s portfolio, and cannot act unless they conclude that the action is reasonably likely to enhance the value of the plan’s investment and will not subordinate the interests of plan participants and beneficiaries to unrelated objectives. As the Department has indicated in other contexts, plan fiduciaries may not increase expenses, sacrifice investment returns, or reduce the security of plan benefits to support or promote goals not directly related to the plan.

Consistent with these various pronouncements, the use of pension plan assets by plan fiduciaries to further policy or political issues through proxy resolutions that have no connection to enhancing the value of the plan’s investment in a corporation would, in the view of the Department, violate the prudence and exclusive purpose requirements of section 404(a)(1)(A) and (B). For example, the likelihood that the adoption of a proxy resolution or proposal requiring corporate directors and officers to disclose their personal political contributions would enhance the value of a plan’s investment in the corporation appears sufficiently remote that the expenditure of plan assets to further such a resolution or proposal clearly raises compliance issues under section 404(a)(1)(A) and (B).

Source

Robert Doyle Letter to Thomas Donahue (Dec. 21, 2007).

In the Labor Department’s response, described as an advisory opinion that further clarifies the application of Interpretive Bulletin 94-2, Doyle stressed that ERISA requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries, and for the exclusive purpose of paying benefits and defraying reasonable administrative expenses.

Doyle then used the AFL-CIO’s resolution about disclosure of political donations as an example. A proposal requiring corporate directors and officers to disclose their personal political contributions seems sufficiently distant from affecting a pension plan’s investment in the company, he wrote, that using pension assets to pursue the resolution “clearly raises compliance issues.”

The Chamber seized on that statement to proclaim that the Labor Department’s letter prohibits pension funds from engaging in politically motivated proxy activity. A Chamber spokesman says that the letter lays out what pension funds can’t do: submit resolutions “seeking disclosure of personal political contributions,” which the AFL-CIO discussed in a published article last July.

Not So Fast

Pedrotty

Daniel Pedrotty, director of the AFL-CIO Office of Investment, says the Chamber has distorted what the union wants to do. The resolutions only seek disclosure of political contributions made by companies themselves, rather than individual officers and directors, he says.

“The Chamber is being intentionally misleading,” he says. “They are intentionally propping up this mistake because they can’t get the DOL to say [proposals calling on companies to disclose political contributions] is a bad use of assets.”

For example, the AFL-CIO submitted proposals to Bristol-Myers Squibb, Eli Lilly, Johnson & Johnson, JP Morgan and others asking for twice-yearly reports disclosing company policies and procedures for political contributions and expenditures made with corporate funds. The proposals also called for identifying the person or persons in the company who participated in the decision to make the contribution.

Pedrotty says more than 50 similar measures are being submitted by a variety of sponsors for this year’s proxy season.

Pedrotty says Doyle’s letter is also significant because he took no view on the union’s desired health care reforms. The AFL-CIO has submitted proposals to Boeing, IBM, and United Technologies asking the boards to adopt principles for health care reform based upon those supported by the Institute of Medicine—including health care coverage provided to all at prices affordable to individuals and families.

In a telephone interview, a Chamber spokesman conceded that the Labor Department letter “is not ground breaking.” Rather, he said, “it puts boundaries around the activities that unions can engage in.”

Others say the Doyle letter will have little effect on unions’ lobbying for stronger, more shareholder-friendly corporate governance policies such as proxy access, majority voting to elect directors, and shareholder votes on executive pay.

Richman

“I don’t think it will affect these very much,” says Ronald Richman of the law firm Schulte Roth & Zabel. “Corporate governance will not be as affected by this. Plans can make a rational decision that majority rule is an appropriate way to spend plan assets. A company can run better, which makes them worth more.”

Indeed, the Chamber admits it has not looked at issues like proxy access from an ERISA standpoint. “We have not gone down the list point by point,” the spokesman says. “We will make sure resolutions introduced make a clear economic benefit to the plan.”