Pension plans are first and foremost investors, with the primary function of yielding the best returns for their plan members. But given their size and scope, they can easily make changes that affect the way corporations do business. It’s perhaps for that reason that DB plans have entered the proxy voting arena, and are using their financial prowess to drive social and political agendas they feel strongly about.
The key is how to balance a bottom line objective with a socially conscious mindset. A few recent examples both in Canada and elsewhere bring the point home. Earlier this spring, the Ontario Teachers’ Pension Plan in Toronto withheld votes and would not back the board at Precision Drilling, an oilfield services company in Calgary, for what it called “unacceptable” payments to the company’s founding chairman and chief executive officer.
Last month, the Norwegian government’s pension plan decided to boycott Wal-Mart and to no longer invest in the retail giant for alleged “serious and systematic” abuses of human and employment rights.
What is evident in these cases is that pension plans can use their financial muscles to make a mark within the companies in which they invest. But is that always a good thing?
KNOW YOUR LIMITS
It may be a cliché in financial circles, but scandals like Enron and Worldcom marked a turning point for pension funds that wanted to alter corporate boardrooms.
“One response [to the scandals] is that large investors generally got re-engaged in the issue of asking themselves if the board of directors in the companies they invested in were doing their job appropriately,” says Adrian Mitchell, portfolio manager, North American equities and chartered financial analyst for the Hospitals of Ontario Pension Plan(HOOPP)in Toronto. He adds that the scandals of the early 2000s reminded plan sponsors that governance matters in a “real and tangible way.”
But managing the plan still comes first for many funds. And while most large plan sponsors can and do make changes to the companies they are invested in, many say it is not their primary focus. “It is our desire and goal to work with the directors whom we elect to the boards of companies that we are shareowners in,” stresses Dennis Johnson, senior portfolio manager for corporate governance and chartered financial analyst with the California Public Employees’ Retirement System(CalPers) in Sacramento, Calif. He reminds other plan sponsors that input (as a voting shareholder)is really with one purpose in mind. He says his intention is “not necessarily [to] have greater influence, but certainly [to] have greater input in improving corporate governance practices which should lead to improved performance of the company which in turn should lead to an improvement of the stock price.”
Doug Greaves, the vice-president and chief investment officer for Canada Post’s DB plan in Ottawa, agrees. “We are fiduciaries and we have to vote in the best financial interest of our members,” he notes. But he stresses there is a fine line between what proxy voting can and should be. “Pension plans are not in the business of managing corporations, but their interests are to ensure there is a board of directors in
place that is effective in appointing management that will be effective in generating returns over the long term.”
GETTING THERE
Proxy voting for large plan sponsors doesn’t just happen. There are guidelines adopted by all parties to ensure they are meeting certain standards for their own boards and plan members. In Canada, the Coalition for Good Governance has set up guidelines for proxy voting. These include takeover protection, transparent accounting, independent audits, and shareholder rights among others. And large plan sponsors often follow these guides and set up very similar ones for their own proxy voting strategies.
Peter Chapman, executive director for the Shareholder Association for Research and Education in Vancouver, says that plan sponsors should take their responsibilities seriously when considering a strategy for their proxy guidelines. “Trustees are responsible for approving a proxy voting policy and ensuring that the votes are cast in the best interest of plan members. Therefore, proxies are seen as a valuable asset of the plan and so they have a duty to look after that.”
Chapman also notes that larger plans have grown their internal resources to manage proxy voting. Larger staffs and more time and research have gone into managing proxy voting over the past five to 10 years, he says. “The growth of the resources put into that is certainly an indicator that large pension plans are putting more emphasis on proxy voting.”
According to Johnson, CalPers has three main key proxy voting guidelines. They are: director independence and leadership; executive compensation in which pay is geared towards performance; and finally the notion of one share equals one vote. These parameters guide the US$210 billion fund, ensuring it stays focused.
With large funds having a difficult time selecting which voting direction they want to take, the question becomes: how to pick and choose?
“Issues for CalPers are cyclical in nature,” says Johnson. “Currently we have several issues that are a priority for us… executive compensation being one, disclosure of environmental data and majority votes” are matters the pension plan is looking at. “I would venture to guess, those were not the priorities 10 years ago and so the level of interest of shareholders to have influence and input is cyclical.”
Johnson says priorities can change following an event, such as the Enron and Worldcom scandals. Both triggered greater awareness of executive compensation and management structures. But issues such as anti-takeover measures or the ability to change certain bylaws are ongoing.
For HOOPP, proxy votes are kept confidential, and therefore it would not provide specific examples. However, Mitchell adds that it is sometimes difficult to know if proxy votes are the real reason behind change. “You hope that you contributed to change, but you can’t prove that ‘we’ specifically contributed to that change,” he says. Within the last year, Mitchell adds, HOOPP has raised issues such as governance, labour relations and executive compensation at shareholder meetings although financial considerations take up the bulk of its voting issues.
However, new, more politically motivated causes are creeping their way into voting patterns. In fact, pension plans such as the Ontario Teachers’, the Canada Pension Plan Investment Board and the Caisse de dépôt et placement du Québec signed a U.N. initiative known as the Principles for Responsible Investing in April that stresses the importance of socially responsible investing.
Johnson says that as an investor, CalPers is concerned with issues such as the environment and human rights in connection with how they may negatively affect the revenue of its portfolio. “We have been actively engaging companies and the federal government on the issue of Sudan. We are doing this recognizing this could be a risk to CalPers’ portfolio if we invested in any company that could be deemed to be contributing to genocide and human rights violations there.”
Overall, there has been an evolution in proxy voting from a one-sided, board of director influenced strategy to a more diverse and issue-driven strategy. Chapman says that despite the bottom line being the all-important driver behind proxy voting in the past, there is a tangible measure of change being noticed within boardrooms. Pension plans have the opportunity to signal issues to the market and make their voices heard on a wide range of issues. “As people vote more critically, the opportunity to make a difference increases…it starts to make a difference as to how you cast your vote.”
Joel Kranc is news editor of BENEFITS CANADA. Joel.kranc@bencan-cir.rogers.com.
