Proposed Revisions to the DOL Shareholder Proposal

Abstract

On Sept. 4 the Department of Labor (DOL) issued proposed regulations governing ERISA plan fiduciary proxy votes. Public comments were due on or before October 5, 2020. This proposal would revoke and replace an existing regulation. An ERISA plan fiduciary would be generally required and permitted to vote in favor of a portfolio company resolution, including one pertaining to environmental, social and governance (ESG) issues, such as a say-on-pay resolution, only if the fiduciary finds the vote would increase the plan portfolio’s expected economic performance. The effect on the expected economic performance is determined without regard to the vote’s long-term effects on that portfolio, the fiduciary policies with respect to similar resolutions of other portfolio companies, or the actions of other shareholders of the company. The proposal, also, allows ERISA plan fiduciaries to not vote for any resolutions of companies that constitute such a small part of the plan’s investment portfolio that they would not have a material impact on the portfolio’s expected economic performance. This may include resolutions for portfolio companies, such as a portfolio company in an S&P 500® Index portfolio constructed by the plan.

The proposal would discourage ERISA fiduciaries and non-ERISA plan fiduciaries from being ESG investor activists. Investor activists engage the management of a portfolio company both individually and in concert with other investors. Such activism includes direct interactions with a company’s managers and directors, as well as casting proxy votes.

The article argues that it is advisable for the DOL to revise the proposal to be consistent with ERISA, and the DOL historical and current policy of permitting ERISA fiduciaries to engage in investor activism, if such activism does not reduce the plan’s expected economic performance. The effect on the expected economic performance is determined for the appropriate investment horizon. The effect takes into account the actions of the fiduciary with respect to other portfolio companies of the plan, and the actions of other shareholders in the portfolio company.

Keywords: ERISA, DOL, ESG, Fiduciary, Sustainable Investing, Responsible Investing, Public Retirement Plans, Retirement Plans, Investments Advisors

JEL Classification: G11,G12, G34, J32, K19, K22, K31