Project 5
Legal Barriers to Socially Responsible Investment

Description

Pension trustees have the ultimate responsibility of overseeing the policies and practices of a pension plan to ensure that it meets the long-term interests of the members and beneficiaries (OSFI, 2001; Yaron & Kodar, 2003). Ambiguity about the legal parameters of trustee powers and responsibilities has made trustees reluctant to engage in certain practices, particularly socially responsible investment (Lane, 1986; Phillips, 1997; Yaron, 2001). Academic findings, legal jurisprudence, and comments from pension plan trustees have all raised questions about the extent to which legal barriers exist that prevent socially responsible investment (Butler, 1995; Yaron, 2001). However, recent regulatory reforms and empirical studies (Blank & Daniel, 2002; Dowell et al., 2001; Repetto & Austin, 2000; Verschoor, 2002) require the pension community to revisit this issue. For example, recent changes introducing the prudent person rule into Canadian pension law and amendments to pension regulations in the U.K., Australia and four EU countries have challenged long-standing and contradictory interpretations of the common law regarding fiduciary duties; these changes require disclosure of non-financial investment criteria, thereby implying that use of such criteria by pension plans is acceptable (Mathieu, 2000; Myners, 2001). The research project will undertake a comparative assessment of legal barriers in Canada, the U.S., and the U.K. on fiduciary duties and socially responsible investment. Research will include consideration of existing practical and legal barriers, a comprehensive literature review, interviews with pension trustees, practitioners and policy makers, and a comparative analysis based on the data obtained.

For further information, please contact Gil Yaron: gyaron@share.ca

Outputs

Papers

Yaron, Gil. Acting Like Owners: Proxy Voting, Corporate Engagement and the Fiduciary Role of Pension Trustees.

Yaron, Gil. Fiduciary Duties, Investment Screening and Economically Targeted Investing: A Flexible Approach for Changing Times.

Academic Presentations

Yaron, Gil. (2005, May 18). Fiduciary responsibility and economically targeted investment. Pensions at Work Lecture Series.

Yaron, Gil. (2004, October 17). Acting Like Owners: Proxy Voting, Corporate Engagement and the Fiduciary Role of Pension Trustees. Pensions at Work Conference, Winnipeg, Canada.

Bibliography

Section 153(2) of the CBCA, under Part XIII: Proxies, is titled "Restriction on voting". It states than an intermediary may not vote shares that they do not own and that are registered in their name unless the intermediary receives written voting instructions from the beneficial owner.

Investor Communications Services is a division of Automatic Data Processing, a North American-based global payroll processing company. ICS, as part of ADP's Brokerage Service Group, handles a wide variety of shareholder communications. The "2005 Proxy Season Statistics" is a spreadsheet which details the jobs, shares and share-voting that occurred, in both 2005 and 2004, for all companies that have dealt with ICS (proxies) during that time.

This report, published in September of 2004 by the American Federation of Labor and Congress of Industrial Organisations' Office of Investment, evaluates how the top-ten mutual fund companies in the United States voted on behalf of their shareholders ("proxy votes") with regard to the specific issue of executive pay proposals, looking specifically at twelve S&P 500 companies which the AFL-CIO has deemed to have "clearly excessive CEO pay and poor performance". This report was written as a result of the Unites States Securities and Exchange Commission's ruling, in January 2003, that requires mutual fund companies to disclose their proxy votes, a practice investment firms have done under the Department of Labor and which the AFL-CIO had been petitioning the SEC to adopt since December of 2000. The mutual fund proxy votes were disclosed for the first time on the 31st of August, 2004 (for the year ending 30th of June, 2004). The report details further the history of the regulations change, the AFL-CIO's position regarding this history, as well as their position regarding executive compensation, followed by a four-paragraph summary regarding the report's methodology. The next section of the report details its key findings, which includes: A) a significant variation with respect to the mutual fund companies' voting practices, B) A shortcoming in the new regulation, regarding the lack of information about the mutual fund companies' business relationships with the S&P 500 companies in question, which according to AFL-CIO, constitutes a conflict of interest in terms of proxy votes. The final section of the report offers twelve case studies, one for each of the S&P 500 companies the report investigated. Those companies are (in order of presentation): Allergan Inc., CSX Corp., Delta Air Lines, Inc., Kohl's Corp., Lucent Technologies Inc., Peoplesoft, Inc., Raytheon Co., Sprint Corp., Bear Stearns Co., Broadcom Corp., Delphi Corp. and Union Pacific Corp.

The CFA Institute hosts web-pages for The Association of Investment Management and Research (AIMR) Pulbications. Featured on the "AIMR Standards" sub-page are references to four texts, all of which feature an abstract preceded by the appropriate title headings in bold. Under each abtract is the order number, number of pages, member and non-member pricing and publication date for each text. The four citations are bookended by links to "Ordering Information" and "Online Ordering". The Standards of Practice Handbook: The Code of Ethics and the Standards of Professional Conduct (8th ed.) appears as the fourth citation on this page as of 26 April, 2006.

This article examines the impact of the California Public Employees' Retirement System (CalPERS)'s Corporate Governance (a term used interchangeably with "shareholder activism" here) Program, which annually identifies ten public companies that the organization believes to demonstrate the poorest performance with regards to financial and corporate governance practices, in what CalPERS names its "Focus List". This is done within the larger context of, according to the authors, the separation of the ownership and control of corporations, in which the shareholders (as owners)' interests/objectives are not always maintained by the management that controls a given company. After the introductory section, the article reviews how corporate governance can break-down in a public company. Followed is an examination of prior research into the effectiveness of shareholder activism. The fourth section investigates the impact of the CalPERS' Focus List. An examination of shareholder activism by passive index funds precedes the paper's conclusions, which details various ways in which the CalPERS' Focus List has contributed to wealth-generation on behalf of shareholders. All of the paper's authors were, at the time of writing, employed by CalPERS.

Baue's online news article, dated 29 March, 2002, reports on the U.S. Securities and Exchange Commission Chair Harvey Pitt's 12 February 2002 response to a 1988 letter written by Ram Trust Services, itself inspired by guidelines created by the U.S. Department of Labor at that time, which directed the Employee Retirement Income Security Act fund managers to vote proxies with due diligence. Baue implies that the public controversy surrounding Enron was a determining factor that explains the fourteen-year response-time on the part of SEC. Several of the people quoted in the article also suggest that public disclosure of proxy votes would encourage accountability and transparency. As of 27 April, 2006, a link to an related article follows this one, on the same web-page.

This web-page, part of Social Science Researc Network's abstract database, is a reference to an unpublished conference paper submitted by Baums during the Conference on Comparative Corporate Governance, which took place in Hamburg from 15-17 May, 1997. The author's e-mail, phone, facsimile and mailing information is provided. Finally, the provided abstract is as follows: " The paper describes the regulation of shareholder voting in the countries forming the European Union. The focus is on four points: How easy or how difficult is informed voting made in the various systems? Is voting by proxies permitted, and if so, in what forms and under what restrictions? What duties do institutional investors have with respect to voting the shares they hold in their portfolios?"

As of 27 April, 2006, the Social Science Research Network abstract database web-page/link to this article provides full contact information for both authors, a Suggested Citation for the paper, four location-specific links to download the paper as well as options to email either the abstract or full paper and/or to "Add to My Briefcase". The paper itself focuses on ways in which shareholder voting can be "disclocated" or "influenced," including the "broker vote" phenomenon, as well as environmental factors. Bethel and Gillan use "a broad set" of the S&P Super-Composite 1500 companies to analyze the impacts of those features. The first three sections of the paper describes aspects of shareholder voting. The last three discusses the sample, analyses and offers conclusions, in that order. Bethel and Gillan find that the balance of power between managers and shareholders in the proxy vote process are exacerbated by state and federal security laws, as well as the regulations of securities exchanges and firm ownership structure. They argue, furthermore, that in these cases, the power-shift favours the managers. The authors' final point is that some envrionmental and regulatory aspects, in fact, favour the shareholder.

The authors of this article propose to discuss the concept of shareholder voting within the context of two widely-held hypotheses, which they believe are polarized. The management-interest hypothesis claims that management effectively controls the proxy vote mechanism, making the shareholder vote redundant. The shareholder-interest hypothesis, meanwhile, contends that shareholders, as financial risk-bearers, have incentive enough to strongly influence corporate-governance. The paper tests these two hypotheses within the context of management-controlled anti-takeover amendments, delving into blockholders, voting rules, agenda control, public information and exchange rules. The data sample follows: 414 firms that proposed 670 anti-takeover amendments during the 1984-1986 proxy season. The six sub-issues above are tested empirically against the data, drawing out implications for the two hypotheses. The authors concluded that “the strong versions” of neither hypothesis are supported by their data. Finally, they predict that shareholder activism will increase in the future.

From the context that institutional ownership of common stocks have, according to Brickely, Lease and Smith Jr., “increased dramatically since the 70s,” this journal article begins by proposing two views regarding share-ownership. One position states that owners of large amounts of shares (institutions or other “blockholders”) are susceptible to management influence in terms of voting. In contrast, the authors state that it has also been argued that in comparison to individual or small shareholders, larger ones are able to affect the outcome of voting in a more substantial manner, and take an appropriately active interest in doing so. This last point is one of two testable hypotheses that the authors propose. The other posits that larger shareholders vote for “value-increasing proposals”, while small ones vote for value-decreasing ones. The paper examines 201 firms that voted on anti-takeover charter amendments as proposed by management, in 1984. Specifically, the authors obtained data on both managerial and institutional share ownership, from which they derive further hypotheses based on the distinction between inside and outside shareholders. The second section of the article presents the sample design and data description. Section Three reports the empirical results. The paper concludes that institutional and/or other outside blockholders do in fact vote more actively. The data also indicates that institutional shareholders do not vote pro-management to the extent that some argue is the case. Amongst the types of institutions that vote against management are mutual and public pension funds, whereas banks, trusts and insurance companies do the opposite. These and other studies undertaken in this paper, state the authors, “indirectly” support the position that emphasizes the importance of ownership structure, and specifically of block holdings within that context.

This news item reports on ING Group's recent global voting policy change with respect to its client voting rights. The company claims its voting rights would serve its clients' interests exclusively, irregardless of ING's relationship with any given company. ING does state that while the group may, theoretically, vote one way in terms of its client assets but another in terms of its proprietary ones, the goal is to mitigate conflicts of interest between its asset management clients such as pension funds versus banking clients. ING will report on its voting behaviour at the start of 2005, according to the Dutch corporate governance code.

Section 65 of the CBCR, 2001 (annexed to the CBCA, 1985) is found in Part 7: Proxies and Proxy Solicitation, sub-heading Date of Proxy Circular and Information. It requires that a proxy circular be dated no later than 30 days before it is first sent to shareholders and that it contain all information required as of that date.

The Canadian Coalition for Good Governance’s mission statement proposes that the organization promotes “best corporate governance practices,” with an emphasis on protecting shareholder interests. As such, the CCGG’s 2004 Annual Report begins with a bar-graph entitled “100 Companies Must Improve Their Governance Practices In 2004". The graph rates all 212 companies in the S&P/TSX Composite Index on a scale of zero to one-hundred, with respect to good governance practices. CCGG Chairman Michael Wilson’s message follows. Described - in the following order - are the organization’s strategies, positive developments in the past year, a restating of the purpose of good governance and a concluding paragraph. The Managing Director’s Report delves into CCGG’s strategy in 2003 in a step-by-step manner, the most general outcome being that, according to CCGG itself, the organization managed to improve the corporate governance of 16 of the 33 companies it analysed. The final part of the Managing Director’s Report describes CCGG’s strategy for 2004. An unaudited Financial Statement, CCGG’s Mission Statement and Objectives and a list of their Board and Full Membership concludes this Annual Report.

CANSIM is Statistics Canada’s socioeconomic database. Table 280-0003's sub-title is “Trusteed pension funds, market and book value of assets, by foreign and domestic holdings, quarterly (Dollars)”. The options for table-generation are as follows: In terms of Asset Value, one can select either Market value of assets or Book value of assets. In the Asset category, foreign and domestic, the options are Total assets, or Bonds, Stocks, Short-term or Other assets. In Nationality holdings, one can select either Canadian assets, Foreign investments or both. Finally, one must specify the Reference period, defaulted as Quarterly data. The data can be presented as a Table or as individual Tim series. To display any type of requested data, one is charged three dollars Canadian as of 24 May, 2006.

The authors of this letter represent a pan-European organization with a mandate to promote good corporate governance and fair treatment of shareholders, by the name of the International Corporate Governance Network. The letter is addressed to the European Union’s Minister of Justice, in response to the Consultative Document of the Expert Group on Cross-Border Voting. The letter praises the findings of the Document, created by what the authors refer to as “the Winter Committee,” and offer additional comments. Their first is to legalize proxy-voting rights, as well as disclosure rights. In terms of what constitutes a beneficial voter, the authors address the difficulties in creating legal or official definitions of such, due to the complicated nature of shareholding within the European context, recommending that the last members of the chain of ownership be considered as beneficial voters. To improve temporal, cost and communication problems related to voting communication, the authors suggest a direct communication between issuers and shareholders. In terms of voter privacy, the authors prefer a voting opt-out system, as opposed to an opt-in system. In terms of the voting requirements, the authors weigh the pros and cons of either blocking share-trading (as per the European system) or declaring a recorded date (as per American and Japanese systems). They conclude that the “British compromise,” which declares a recorded date as close to the Shareholder’s Meeting as possible is viable as communication technology improves. The letter also addresses the problems of different settlement periods in different countries, the difference between bearer and registered shares and share-lending. The letter concludes with a call for changes in terms of cross-border shareholder voting with respect to national laws.

This International Shareholder Services, Governance Weekly item comments on an interim report of the International Corporate Governance Network’s Securities Lending Committee, which equates share lending with “selling [...] voting rights”. A survey of a portion ICGN’s membership finds that eighty-percent of those members lent their shares. Furthermore, those lent shares are often not recalled for voting purposes, nor do the lenders know when and how many shares they have lent. While ICGN-SLC does not oppose share-lending “per se,” the committee offers the following observations: A) that corporate governance policy implications with respect to share-lending ought to be “closely examined”; B) good corporate governance is, unwittingly or not, often nullified or diminished by share lending, and C) with respect to voting disclosure, institutions ought to disclose the percent of shares not voted upon due to lending, because, the report claims, this would lead to better policy. The ICGN-SLC also suggests that a record-date system is preferable to share-blocking with respect to share-voting policy. Finally, the Committee suggests “weighing the imputed value of voting against the returns earned on lending”. The item concludes that the committee hopes to receive responses from ICGN members at their annual 2005 meeting in Rio De Janeiro.

Section III. F. of Conard’s article, entitled “The Fiduciary Duty of Fund Managers,” begins by listing the various liabilities and prohibitions directed at fund and portfolio managers by a couple Acts (ERISA and ICA) with respect to fiduciary duties. The author, however, claims that voting of shares is not an issue mentioned by either Act, even thought Conard argues that voting shares against the interest of beneficiaries in favour of portfolio managers is an “obvious” violation of fiduciary duties. Conard claims, furthermore, that beneficiaries are not in a position to know that this is happening, and that fund managers have several ways (explained in detail) to convince a judge against liability on their part.

The Council of Institutional Investors is a US-based, non-profit organization founded in 1985 representing 140 members representing public, labour and private funds, in response to the hostile takeovers of that era, that the organization claims threatened pension fund beneficiaries. The CII encourages its members to actively protect plan assets as well as to encourage them to increase returns with respect to fiduciary obligations. Outlined in the website is CII’s three-tier membership requirements (any link with the capitalized letter “M” preceding it indicates a web-page only members have access to), names of the Board and the Council’s policies regarding both corporate governance and pension funds issues. The Council offers a Focus List, publications, correspondences and a resource centre. A list of upcoming meetings are supplemented by an archive of past ones. Finally, the site features a contact web-form and a site map.

Famous case

The California Public Employees' Retirement System is the focus of this article. In specific, the authors maintain that CalPERS was an early leader in terms of adopting shareholder activism practices, although they maintain that the organization has more recently been less effective at engendering successful change. The article also purports to reveal what the long-term returns are for an investor with public information with respect to buying a portfolio targeted by CalPERS. Through a detailed historical background of the organization, the authors argue that CalPERS’ activism was more vocal during the years (1987-1994) that its first CEO, Dale Hanson was involved with the organization, using empirical evidence as detailed by previous research, from which they draw the conclusion that external monitoring from CalPERS increased shareholder returns prior to 1994. The sample for this article were all of CalPERS publicly-announced targets between 1992-1997. A detailed methodology follows. The results, in summary, indicate that from 1995 on, the increased-return-rate for companies targeted by CalPERS’ were much more short-term than they had been before. In sum, the paper concludes that investors will benefit from shareholder activism if management is pressured to make substantial changes.

Global Proxy Watch - the newsletter of International Corporate Governance and Shareowner Value - reports in its “Votes Rules” briefing item of 27 June 2003, that the upcoming mandatory proxy voting law in France has received an amendment by the Senate Financial Commission’s raporteur général that obliges fund managers “to vote all shares they hold they hold, or explain why they don’t”. The news item offers analogies to other laws in the UK and the United States. It claims that the French legislation is expected to clear by mid-July. Subsequent to that, it is claimed that further rules will be enacted by the new market regular. The French fund management association, AFG-ASFFI, is claimed to be neutral on the bill. The item ends with the observations that the proposed article L. 533-7-1 will “spur” French investors to scrutinize companies and encourage similar rules in other countries.

InstitutionalShareowner.com is a website created by the Socially Responsible Investing (SRI) World Group, Inc., a United States-based organization created in 1998, concerned with social, economical and ethical issues in the investment and corporate spheres in America. The Shareowner Action Center web-page has links to corporate social responsibility shareowner resolutions for the 2002 proxy season in the following categories: Corporate Governance, Energy & Environments, Equality, Global Corporate Accountability, Global Finance, International Health and Tobacco and Militarism & Violence. Alternative search options are a "Resolution Search by Company" option as well as a link to the Investor Responsibility Research Center's 2002 Proxy Voting Checklist. As of 26 April, 2006, all links on this page are "dead".

Under Title 17 - Commodity and Securities Exchanges of the United States Code of Federal Regulations, parts 239 and 249 deal with, amongst others, the disclosure issue, whereas Sections of Parts 274 and 275 deal with the issues of proxies and proxy votes.

[to top of page]