Reining In The Proxies: A Letter To Secretary Of Labor Eugene Scalia
In September, the Department of Labor proposed a rule that seeks to reaffirm the principle that pension plans’ main focus should be the financial well-being of their beneficiaries, and asked for comments from interested parties. This rule aims to undo an Obama-era rule that was widely interpreted as compelling fiduciaries to vote proxies (see DOL quote below). The new rule would change that by focusing fiduciaries only on proxies that are materially relevant to the investment outcomes for those invested in the plans.
Here, in lightly edited form, is the comment letter I submitted to Secretary Scalia last week:
Monday, October 5, 2020
The Honorable Eugene Scalia
U.S. Department of Labor
200 Constitution Ave.,
N.W. Washington, DC 20210
Dear Secretary Scalia:
Please accept this letter for the docket regarding RIN 1210-AB91, “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights.” I write as President of Bowyer Research, a financial economics consulting firm which, among other things, produces in-depth quantitative analysis of the effects of various ESG factors for investment institutions.
Having extensively analyzed both the effects of ESG factors and the details of proxy-voting processes for two major proxy advisory services (in one case as a consultant to a client of one firm and in the other case as a consultant to another in vetting the service), I conclude the following:
- ESG factors are not generally additive. Some factors add returns, but only some do. There are clearly materiality issues with such factors. That is to say: factors which are proximate to, and directly relevant to, the firm in question are more likely to be helpful. Those which are not proximate and material are much less likely to offer any benefit to shareholders and frequently erode returns when used as screens.
- ESG activism is grounded historically in ideological politics, not in financial analysis. Studies purporting to find additive value often are after-the-fact justifications for an agenda which was not designed to help shareholder returns, but rather to effect social and political change that traditional electoral politics had not delivered.
- The proxy service processes that I’ve observed are opaque and politically unbalanced. The proxy service which I have been in dialogue with has been able to show no evidence whatsoever that they have made any effort to include a variety of political views in their process. In fact, the processes have baked-in features which hard-code group-think into the recommendations.
- The comments in the DOL statement, if they miss the mark at all, perhaps underestimate the cost of the current system in that, not only are fees paid to proxy services and for internal human resources to interface with proxy services, but further, because these questions often involve highly polarized political issues, top-level management is often drawn into the process. A CEO, COO or CFO’s most scarce commodity is attention. Polarized issues by nature get passed up to top managers and take up valuable attention-space which rightly belongs to the shareholders’ goal of a decent and dignified retirement.
- The Interpretive Bulletin 2016-01 at the time of issuance was widely interpreted as an unfunded mandate to vote proxies. This placed an undue burden on trustees and money managers to chase social goals which are orthogonal to the single focus of providing financial value to retirees.
- That bulletin also functioned as a heavy de facto subsidy to proxy-advisory services, an industry riddled with conflicts of interest with its clients and with problems of opacity, extreme market-share concentration and rampant political imbalance.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.
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