Pension Plans
Additional Transparency and Other Actions Needed in Connection with Proxy Voting Gao ID: GAO-04-749 August 10, 2004In 1998, about 100 million Americans were covered in private pension plans with assets totaling about $4 trillion. The retirement security of plan participants can be affected by how certain issues are voted on during company stockholders meetings. Fiduciaries, having responsibility for voting on such issues on behalf of some plan participants (proxy voting), are to act solely in the interest of participants. Recent corporate scandals reveal that fiduciaries can be faced with conflicts of interest that could lead them to breach this duty. Because of the potential adverse effects such a breach may have on retirement plan assets, we were asked to describe (1) conflicts of interest in the proxy voting system, (2) actions taken to manage them, and (3) DOL's enforcement of proxy voting requirements.
Conflicts of interest in proxy voting can occur because various business relationships exist, which can influence a fiduciary's vote. When a portion of a company's pension plan assets are invested in its own company stock, the internal proxy voter may be particularly vulnerable to conflicts of interest because management has an enhanced ability to directly influence their voting decisions. Although situations representing conflicts will occur, limited disclosure of proxy voting guidelines and votes may make proxy voting more vulnerable to such conflicts. Because of limited transparency, concerned parties do not have the information needed to raise questions regarding whether proxy votes were cast solely in the interest of plan participants and beneficiaries. Some plan fiduciaries and the Securities and Exchange Commission (SEC) have taken steps to help manage conflicts of interest in proxy voting. Specifically, some plans voluntarily maintain detailed proxy voting guidelines that give proxy voters clear direction on how to vote on certain issues. The SEC has imposed new proxy voting regulations on mutual funds and investment advisers, requiring that specific language be included in the fund's guidelines on how fiduciaries will handle conflicts of interest. Some plan fiduciaries voluntarily make their guidelines available to participants and the public. In addition, some plans voluntarily disclose some or all of their proxy votes to participants and the public. Some plans also voluntarily put additional procedures in place to protect proxy voters from conflicts of interest in order to avoid breaches of fiduciary duty. For example, some plan sponsors hire independent fiduciaries to manage employer stock in their pension plans and vote the proxies associated with those stock. Plans may also hire proxy-voting firms to cast proxies to ensure that they are made solely in the interest of participants and beneficiaries. DOL's enforcement of proxy voting requirements has been limited for several reasons. First, participant complaints about voting conflicts are infrequent, at least in part, because votes cast by a plan fiduciary or proxy voter generally are not disclosed; therefore, participants and others are not likely to have information they need to raise questions regarding whether a vote has been cast solely in their interest. Second, for DOL, the Employee Retirement Income Security Act of 1974 presents legal challenges for bringing cases such that it is often difficult to obtain evidence that the fiduciary was influenced in his or her voting by something other than the sole interests of plan participants. Finally, even if such evidence existed, monetary damages are difficult to value and fines are difficult to impose. And, DOL has no statutory authority to impose a penalty without first assessing damages and securing a monetary recovery. In part, because of these challenges, DOL has devoted few resources to enforcing proxy voting by plans.
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Report to the Ranking Minority Member, Committee on Health, Education,
Labor, and Pensions, U.S. Senate:
United States Government Accountability Office:
General Accounting Office:
GAO:
August 2004:
PENSION PLANS:
Additional Transparency and Other Actions Needed in Connection with
Proxy Voting:
GAO-04-749:
GAO Highlights:
Highlights of GAO-04-749, a report to the Ranking Minority Member,
Committee on Health, Education, Labor, and Pensions, United States
Senate
Why GAO Did This Study:
In 1998, about 100 million Americans were covered in private pension
plans with assets totaling about $4 trillion. The retirement security
of plan participants can be affected by how certain issues are voted
on during company stockholders meetings. Fiduciaries, having
responsibility for voting on such issues on behalf of some plan
participants (proxy voting), are to act solely in the interest of
participants. Recent corporate scandals reveal that fiduciaries can be
faced with conflicts of interest that could lead them to breach this
duty. Because of the potential adverse effects such a breach may have
on retirement plan assets, we were asked to describe (1) conflicts of
interest in the proxy voting system, (2) actions taken to manage them,
and (3) DOL‘s enforcement of proxy voting requirements.
What GAO Found:
Conflicts of interest in proxy voting can occur because various
business relationships exist, which can influence a fiduciary‘s vote.
When a portion of a company‘s pension plan assets are invested in its
own company stock, the internal proxy voter may be particularly
vulnerable to conflicts of interest because management has an enhanced
ability to directly influence their voting decisions. Although
situations representing conflicts will occur, limited disclosure of
proxy voting guidelines and votes may make proxy voting more vulnerable
to such conflicts. Because of limited transparency, concerned parties
do not have the information needed to raise questions regarding whether
proxy votes were cast solely in the interest of plan participants and
beneficiaries.
Some plan fiduciaries and the Securities and Exchange Commission (SEC)
have taken steps to help manage conflicts of interest in proxy voting.
Specifically, some plans voluntarily maintain detailed proxy voting
guidelines that give proxy voters clear direction on how to vote on
certain issues. The SEC has imposed new proxy voting regulations on
mutual funds and investment advisers, requiring that specific language
be included in the fund‘s guidelines on how fiduciaries will handle
conflicts of interest. Some plan fiduciaries voluntarily make their
guidelines available to participants and the public. In addition, some
plans voluntarily disclose some or all of their proxy votes to
participants and the public. Some plans also voluntarily put additional
procedures in place to protect proxy voters from conflicts of interest
in order to avoid breaches of fiduciary duty. For example, some plan
sponsors hire independent fiduciaries to manage employer stock in their
pension plans and vote the proxies associated with those stock. Plans
may also hire proxy-voting firms to cast proxies to ensure that they
are made solely in the interest of participants and beneficiaries.
DOL‘s enforcement of proxy voting requirements has been limited for
several reasons. First, participant complaints about voting conflicts
are infrequent, at least in part, because votes cast by a plan
fiduciary or proxy voter generally are not disclosed; therefore,
participants and others are not likely to have information they need
to raise questions regarding whether a vote has been cast solely in
their interest. Second, for DOL, the Employee Retirement Income
Security Act of 1974 presents legal challenges for bringing cases such
that it is often difficult to obtain evidence that the fiduciary was
influenced in his or her voting by something other than the sole
interests of plan participants. Finally, even if such evidence existed,
monetary damages are difficult to value and fines are difficult to
impose. And, DOL has no statutory authority to impose a penalty
without first assessing damages and securing a monetary recovery. In
part, because of these challenges, DOL has devoted few resources to
enforcing proxy voting by plans.
What GAO Recommends:
GAO recommends that Congress consider amending ERISA to require
fiduciaries to (1) develop proxy-voting guidelines, (2) disclose
guidelines and votes annually, and (3) appoint an independent
fiduciary to vote the company‘s own stock in its pension plan in
certain instances. GAO recommends that DOL conduct another proxy
enforcement study, and enhance coordination of enforcement strategies
with SEC. DOL generally disagreed with our recommendations, but we
believe that additional transparency and enhanced enforcement are
needed.
www.gao.gov/cgi-bin/getrpt?GAO-04-749.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Barbara Bovbjerg at
(202) 512-7215 or bovbjergb@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Business Relationships and Limited Disclosure of Votes Can Make Proxy
Voting Vulnerable to Conflicts:
Some Plan Fiduciaries Have Taken Actions to Manage Conflicts:
The Department of Labor's Related Enforcement Efforts Have Been
Limited:
Conclusions:
Matters for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Obtaining Total Number of Employer Securities Held in the Company's Own
Pension and Welfare Benefit Plans:
Obtaining the Total Number of Shares Outstanding for Selected Fortune
500 Companies:
Obtaining the Closing Price for Our Fortune 500 Companies:
Computing the Number of Voting Shares Held in Fortune 500 Company
Pension and Welfare Benefit Plans:
Appendix II: Comments from the Department of Labor:
Appendix III: GAO Contacts and Staff Acknowledgments:
Contacts:
Staff Acknowledgments:
Table:
Table 1: Summary of the Department of Labor's Proxy Projects:
Abbreviations:
AMEX: American Stock Exchange:
DeAM: Deutsche Bank Asset Management:
DeIB: Deutsche Bank's Investment Banking:
DOL: Department of Labor:
EBSA: Employee Benefits Security Administration:
EIN: Employer Identification Number:
ERISA: Employee Retirement Income Security Act of 1974:
ESOP: employee stock ownership plan:
HP: Hewlett-Packard:
IB: Interpretive Bulletin:
IMs: investment managers:
NASDAQ: National Securities Dealers Stock Exchange:
NYSE: New York Stock Exchange:
SARs: summary annual reports:
SEC: Securities Exchange Commission:
SPDs: summary plan descriptions:
TAQ: Trade and Quote:
United States Government Accountability Office:
Washington, DC 20548:
August 10, 2004:
The Honorable Edward M. Kennedy:
Ranking Minority Member:
Committee on Health, Education, Labor, and Pensions:
United States Senate:
Dear Senator Kennedy:
Pensions are an important source of income for millions of retirees,
and the federal government has encouraged private employers to sponsor
and maintain private pension and retirement savings plans for their
employees. In 1998, about 100 million workers and retirees were covered
in private defined benefit[Footnote 1] or defined contribution[Footnote
2] pension plans with assets totaling about $4 trillion. In 2001,
pension plans, as a whole, owned about 20 percent of the total
corporate equity issued by U.S. companies, with private pension funds
owning about 59 percent of that amount.[Footnote 3] As shareholders,
pension plans have certain rights, including the right to vote on
certain corporate governance matters. Some matters such as the election
of directors, executive compensation packages, and mergers and
acquisitions are significant voting items that may affect long-term
share value, while other matters may not. While they may vote in
person, fiduciaries typically do not attend the annual meetings in
which corporate policies are voted. Instead, they usually submit
ballots prior to the meeting, generally via mail or online
instructions. This is called proxy voting. According to the Department
of Labor's (DOL's) interpretation of the Employee Retirement Income
Security Act (ERISA) of 1974, with these voting rights, fiduciaries are
required to cast votes solely in the interest of plan participants and
beneficiaries.[Footnote 4]
The retirement security of these plan participants can be affected by
how certain issues are voted on during company stockholder meetings
and, therefore, relies on fiduciaries acting solely in the interest of
pension plan participants and beneficiaries. However, recent corporate
scandals have highlighted the fact that fiduciaries are faced with
conflicts of interest that could lead them to breach their
responsibility to act solely on behalf of participants. For example, in
2002, the Securities Exchange Commission (SEC) investigated whether a
vote cast in favor of a merger between Hewlett-Packard (HP) and Compaq
by Deutsche Bank Asset Management (DeAM), a large asset manager with
the fiduciary responsibility for voting proxies, was influenced by a
conflict of interest. The SEC found that a material conflict of
interest was created when DeAM failed to disclose to its advisory
clients that Deutsche Bank's Investment Banking (DeIB) division was
working for HP on the merger and had intervened in DeAM's proxy process
on behalf of HP.
Because of conflicts of interest in the proxy voting system and the
potential adverse effects of such conflicts on the retirement security
of Americans, you asked us to describe (1) conflicts of interest in
proxy voting, (2) actions taken by plans and plan fiduciaries to manage
conflicts of interest, and (3) DOL's enforcement of proxy voting
requirements.
To determine what conflicts exist in proxy voting, we conducted face-
to-face and telephone interviews which included officials at DOL's
Employee Benefits Security Administration (EBSA) and at SEC, securities
and proxy voting industry professionals, officials of public and
private pension plans, ERISA attorneys, asset managers, and proxy
voting firms, research organizations, and proxy solicitors. We asked 25
shareholder activist professionals, academics, and economists to
respond to a series of questions for a written reply and received 14
responses. To determine the extent to which certain companies' pension
plans hold proxy voting power within the plan sponsor, we analyzed plan
financial information filed annually (Form 5500 data) with DOL's EBSA.
We analyzed data for the Fortune 500 companies for plan year 2001,
which was the most recent year for which complete plan-specific data
were available. To determine what safeguards fiduciaries have put in
place to manage conflicts of interest, we reviewed proxy voting
guidelines and interviewed a number of public and private pension plan
sponsors, asset managers, proxy voting firm representatives, and other
experts. To determine DOL's enforcement efforts in this area, we
reviewed DOL enforcement material and previously issued GAO reports on
DOL's enforcement program and interviewed officials at EBSA.
We conducted our work between April 2003 and May 2004 in accordance
with generally accepted government auditing standards. See appendix I
for more information on our scope and methodology.
Results in Brief:
Experts we interviewed said that conflicts of interest exist in proxy
voting and occur because of the various business relationships that may
influence a proxy voter's vote. These experts also said that conflicts
can exist in situations when an employee of the plan sponsor votes
proxies--internally--or by a person or entity outside of the plan--
externally. When a portion of a company's pension plan assets are
invested in its own company stock, the internal proxy voter may be
particularly vulnerable to conflicts of interest because management has
the ability to directly influence voting decisions. For the external
proxy voter, a variety of conflicts may arise due to business
relationships. For example, when the external proxy voter is an
investment manager that is part of a larger corporation that provides a
variety of services, business relationships between branches of the
corporation and the plan sponsor may influence the investment manager's
proxy voting decisions. Consistent with current DOL requirements, proxy
votes and guidelines are disclosed to the plan. Proxy voters are not
required to publicly disclose proxy voting guidelines and votes, though
plans are required to make voting guidelines available to participants
upon request. Although conflicts will exist, limited disclosure may
make proxy voters more vulnerable to such conflicts. Because of this
limited transparency, concerned parties do not have the information
needed to raise questions regarding whether proxy votes were cast in
the sole interest of plan participants and beneficiaries.
Some plan fiduciaries and SEC have taken steps to help manage conflicts
of interest in proxy voting. Some plans voluntarily maintain detailed
proxy-voting guidelines that give proxy voters clear direction on how
to vote on certain issues. SEC has imposed new proxy voting regulations
on mutual funds and investment advisers requiring that specific
language be included in policies and procedures on how fiduciaries will
handle conflicts of interest. In addition, some plan fiduciaries
voluntarily make their guidelines available to participants and the
public. Furthermore, some plans voluntarily disclose to participants
and the public how they voted on some or all of the issues in which
they voted. Similarly, SEC now requires mutual funds to publicly
disclose all proxy votes and policies and procedures. Some plans
voluntarily put additional procedures in place to protect proxy voters
from conflicts of interest that may lead to breaches of fiduciary duty.
For example, some plans have a rule that, in the event that an attempt
is made to influence a proxy vote, the voting responsibility on that
issue moves from the proxy voter to a committee. Some plan sponsors
have hired independent fiduciaries to manage employer stock in their
pension plans. Plans may also hire an independent proxy voter or proxy-
voting firm to cast proxy votes to ensure that they are solely in the
interest of plan participants.
DOL's enforcement of proxy voting requirements has been limited for
several reasons. First, participant complaints about voting conflicts
are infrequent, at least in part, because votes cast by a plan
fiduciary or proxy voter generally are not disclosed. Therefore, plan
participants and others are not likely to have the information they
need to raise questions regarding whether a vote has been cast solely
in their interest. Second, ERISA presents legal challenges for
prosecuting proxy voting cases. Specifically, it is often difficult to
obtain evidence that the plan fiduciary was influenced in his or her
voting by something other than the interests of plan participants
because, among other things, the fiduciary's vote is based on judgment.
Finally, even if such evidence existed, monetary damages are difficult
to value and, because the department has no statutory authority to
impose a penalty without assessing damages, fiduciary penalties are
difficult to impose. In part, because of these challenges and its
limited resources, DOL has devoted few resources to enforcing proxy
voting practices by fiduciaries. For example, the agency conducted
three enforcement studies between 1988 and 1996 to determine the level
of compliance with proxy voting requirements among select fiduciaries.
According to DOL, as a result of these proxy reviews, they found
improvements over time within the proxy voting system as the number of
voting fiduciaries and plan administrators who voted and established
proxy voting guidelines increased. The department has not conducted
similar reviews in recent years. DOL officials told us that they
believe that proxy voters are generally in compliance, they receive few
complaints and that with limited resources they focus instead on other
priority areas, which may result in identifying violations that can be
corrected. Furthermore, DOL officials said that they do not have
specific investigations focused on proxy voting, and they do not
allocate many resources to this issue.
This report contains Matters for Congressional Consideration to improve
the disclosure of proxy voting guidelines and votes and the
independence of fiduciaries voting proxies in certain circumstances.
The report also contains recommendations for executive agency action to
improve oversight and enforcement in this area. In its response to our
draft report, DOL generally disagreed with our matters for
congressional consideration and recommendations, saying that conflicts
of interest affecting pension plans are not unique to proxy voting and
that requiring independent fiduciaries and increased disclosures would
increase costs and discourage plan formation. While we acknowledge that
fiduciaries face conflicts beyond proxy voting issues and that DOL has
limited statutory authority related to proxy voting, we believe that
additional transparency and an enhanced enforcement presence are
needed.
Background:
ERISA established the broad fiduciary requirements related to private
pension plans and was designed to protect the pension and welfare
benefit rights of workers and their beneficiaries. The act requires a
plan fiduciary to act "—solely in the interest of plan participants and
beneficiaries and for the exclusive purpose of providing benefits" to
them and to act "—with the care, skill, prudence, and diligence under
the circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use." Failure to act in
accordance with these requirements might constitute a breach of
fiduciary duty. Breaches of the fiduciary duty to act solely in the
interest of plan participants and beneficiaries with respect to proxy
voting could arise when a fiduciary has a conflict of interest.
Conflicts of interest occur in a variety of ways in proxy voting.
Conflicts occur when a plan fiduciary or proxy voter has either
business or personal interests that compete with the interests of
participants. When conflicts are not appropriately managed, they could
lead to a breach of fiduciary responsibility or, at least, may raise
concern that a breach has occurred. For example, an SEC investigation
showed that DeIB division had an undisclosed business relationship with
HP, which may have influenced the proxy voter's vote cast by DeAM about
a merger between HP and Compaq Computer Corporation.[Footnote 5]
ERISA's fiduciary requirements apply to plan sponsors, trustees,
managers, and others who act as fiduciaries. These requirements do not
explicitly address proxy voting; however, DOL--having responsibility
for the investigation and enforcement of violations of ERISA, which
includes provisions related to fiduciary responsibility--has stated
that the fiduciary act of managing plan assets that are shares of
corporate stock generally includes the voting of proxies pertaining to
those shares of stock. The provisions of ERISA were enacted to address
public concerns that funds of private employee benefit plans were being
mismanaged and abused. DOL can take several actions to correct
fiduciary violations it identifies. These include acceptance of
voluntary fiduciary agreements to implement corrective actions,
initiation of civil litigation in federal district court, and referral
of certain violations to other enforcement agencies.
On the matter of proxy voting, DOL has issued several letters and
bulletins discussing the duties of pension plan fiduciaries. For
example, the "Avon Letter," released in 1988, stated that the voting of
a proxy is a fiduciary duty and that the responsibility for voting
falls on the plan's trustee unless otherwise delegated.[Footnote 6]
Through its "ISS letter," issued in 1990, among other things, DOL
stated that with respect to monitoring activities, that the plan
fiduciary, in order to carry out his or her fiduciary responsibilities,
must be able to periodically review voting procedures and actions taken
in individual situations so that a determination can be made whether
the investment manager is fulfilling its fiduciary responsibility.
Furthermore, DOL issued Interpretive Bulletin (IB) 94-2 in 1994, which
clarified the guidance in the previous two letters and also stressed
the importance of statements of investment policy, including voting
guidelines. While DOL said that maintenance of such statements of
investment policy are consistent with ERISA, DOL officials said that
they do not have the statutory authority to require plans to maintain
such statements.
SEC, under the Investment Company Act of 1940, regulates companies,
including mutual funds, that engage primarily in certain operations,
such as investing, reinvesting, and trading in securities, and whose
own securities are offered to the investing public. A primary mission
of SEC is to protect investors and maintain the integrity of the
securities markets through disclosure and enforcement. Employees in
participant-directed pension plans might be given the choice of
investing in securities, including employer securities, as well as a
variety of mutual funds. Because plan participants may have such
investment options, securities law protections applicable to investors
are relevant to plan participants. In addition, some pension plans use
investment managers to oversee plan assets and these managers may be
subject to securities laws.
Congress previously studied the issue of DOL's enforcement and proxy
voting. In the 1980s, reports emerged that fiduciaries were not voting
their proxies or that conflicts of interest may have influenced the
decisions of some plan fiduciaries. The Congress consequently became
concerned about whether fiduciaries were fulfilling their
responsibility to protect the interests of pension plan participants
and beneficiaries. Because ERISA does not specifically lay out what the
fiduciary responsibility is regarding proxy voting, many fiduciaries
were thought to be unclear about their responsibility to vote proxies
and maintain voting guidelines. This was cited as one of the major
factors that led the Subcommittee on Oversight of Government
Management, Senate Committee on Governmental Affairs, to conduct an
investigation of and hold hearings in 1986 on DOL's enforcement of
ERISA. Among other things, the Subcommittee concluded that disclosure
of proxy votes would facilitate the DOL's enforcement efforts by
providing the agency and other interested parties with much needed
information. DOL officials believe that the agency does not have the
statutory authority to require plan fiduciaries to publicly disclose
their proxy votes and guidelines.
Business Relationships and Limited Disclosure of Votes Can Make Proxy
Voting Vulnerable to Conflicts:
Some experts we interviewed said that conflicts of interest exist in
the proxy voting system and limited disclosure makes proxy voting
vulnerable to conflicts of interest. Conflicts of interest occur
because of the various business relationships that may influence a plan
fiduciary's or proxy voter's vote. For example, when a company provides
investment advisory services for a company-sponsored pension plan and
also provides investment banking services to the company sponsoring
that pension plan. Although conflicts will exist, limited disclosure
makes proxy voting vulnerable to them. Because of this lack of
transparency, participants do not have the information needed to raise
questions regarding whether proxy votes were cast solely in their
interest.
Fiduciary's Business Associations Can Create Conflicts of Interest:
Business associations between a proxy voter and any entity that may
influence their vote presents a conflict of interest. Some experts we
interviewed explained that these associations may form whether proxies
are internally or externally managed because company management has
direct access to the proxy voter who is either an employee, in the case
of internally voted proxies, or is a service provider, in the case of
externally voted proxies.
When a portion of a company's pension plan assets are invested in its
own company stock, the proxy voter may be particularly vulnerable to
conflicts of interest because management has the ability to directly
influence its voting decisions and, since company stock held in the
company's own pension plan is typically managed internally,[Footnote 7]
the proxy voter may at times be more concerned about their own
interests. While ERISA states that fiduciaries must act solely in the
interest of pension plan participants, there is no requirement that an
independent fiduciary be appointed to provide additional protections
for participants with company stock in their pension plans.
Several experts explained that conflicts of interest that occur in this
type of arrangement are considerably problematic. For example, one
expert said that since proxy voting and other decisions relating to
company stock are much more likely to be handled in-house, votes may be
cast in accordance with the wishes of the company's senior
management.[Footnote 8] In such cases, the company's management may not
consider the best interest of plan participants and beneficiaries
independently from management's opinion of what is best for the
company. The Enron case provides an example of how management's own
concerns may come before that of participants and
beneficiaries.[Footnote 9]
In addition, some experts said that when proxies are internally
managed, the proxy vote may be influenced by the fiduciary's own
personal concerns, particularly in instances when casting a vote solely
in the interests of plan participants and beneficiaries means voting
against company management. Specifically, if the plan fiduciary is a
lawyer, investment analyst, or a member of the management team for the
company, their proxy vote on management proposals such as a merger and
acquisition or for individuals they have chosen to serve on the board
of directors could be influenced by concerns about their personal
standing, or job security, in the company. A few experts said that a
fiduciary in this situation is not likely to vote against a management
proposal such as an executive compensation package because of their own
personal concerns. Additionally, DOL officials said that conflicts for
an internal fiduciary could arise when the company is experiencing
problems, which, if publicly known, would cause stock value to decline.
In order to protect participants, fiduciary duty might require the
fiduciary to publicly disclose the information to participants and
other shareholders and sell shares of the company stock. Insider
trading rules would, however, prevent the fiduciary from taking action
on nonpublic information.[Footnote 10] However, making this information
public could cause a rapid decline in share value as investors sell off
their shares of stock, thereby, potentially harming the company and the
fiduciary's own personal standing in the firm.
Because company management could influence the fiduciary responsible
for voting the proxies related to the company's own stock,[Footnote 11]
management may have a significant amount of influence over the outcome
of a proxy contest.[Footnote 12] In order to assess the influence
management could have in a proxy contest, we conducted an analysis of
Fortune 500 companies. (See appendix I for further information on our
methodology.) In our analysis, we compared the number of voting shares
of company stock held in a company's pension plans[Footnote 13] to the
total voting shares held in the market. About 272 of the Fortune 500
companies that reportedly had their own company stock in their pension
plans and in separate accounts, such as master trust agreements held
over $210 billion in employer securities in plan year 2001. Of those
companies, 27 percent held at least 5 percent or more of company stock
in their company's pension and benefit plans, while another 26 percent
held between 2 and 5 percent. None of the Fortune 500 firms we analyzed
held more than 21 percent of the total voting power of their company's
stock in their pension and welfare benefit plans, while 47 percent held
less than 2 percent of company stock in their company's pension and
benefit plans.
While the results showed that the pension and welfare benefit plans of
the Fortune 500 companies we analyzed were not holding large
percentages of the total voting power of a company's shares, these
findings may still be significant. For example, in a contentious proxy
contest such as a merger and acquisition where 51 percent of
outstanding shares is needed to complete the merger, a company whose
pension assets comprise just 2 percent of the total stock issued by a
company might act as the deciding vote if the proxy contest is close.
In this case, how the plan fiduciary or proxy voter casts its vote
could make the difference between 49 percent and 51 percent--that is,
the difference between the merger being approved or rejected. Some of
the largest and most influential pension plans typically hold no more
than 1 to 2 percent of any one company's shares in their plan's
investment portfolios. As such, a Fortune 500 company whose pension
plans holds more than 1 or 2 percent of its own company stock could
give them an advantage in a proxy contest.
When the fiduciary is not an employee of the plan sponsor--that is, he
or she is external to the company---experts explained that a variety of
different types of conflicts might also arise because of business
associations. For example, when the proxy voter is an investment
manager that is part of a larger corporation that provides a variety of
services, experts said that business relationships between the
company's other branches and the plan sponsor might influence the
investment manager's voting decisions. These relationships may
influence the proxy voter to vote with the plan sponsor's management,
particularly if the proxy voter wishes to maintain business
relationships with the plan sponsor or create an opportunity for future
business relationships. For instance, some experts we interviewed
contend that DeAM division--the proxy voter in this case--was
influenced by a business relationship between DeIB division and their
mutual client, HP. SEC records reveal that DeAM reversed its vote to
vote in favor of HP's merger after the investment banking division set
up a meeting between the proxy voter and HP management. SEC found that,
unbeknownst to DeAM's advisory clients, DeIB was working for HP on the
merger and had intervened in DeAM's proxy process on behalf of HP. This
created a material conflict of interest for DeAM, which has a fiduciary
duty to act solely in the interests of its advisory clients. The SEC
action found that DeAM violated this duty by voting the proxies on the
HP stock owned by its advisory clients without first disclosing the
conflict.[Footnote 14]
While some experts we interviewed said that they believe most plan
fiduciaries vote solely in the interest of participants and
beneficiaries, others said that some fiduciaries might prioritize other
interests when casting their votes. For example, a few experts said
that fiduciaries are taking their proxy voting responsibility seriously
and voting appropriately. Other experts we interviewed said that the
proxy voting decisions of some external asset managers are often
influenced by short-term quarterly returns on assets rather than on
voting patterns that support long-term goals that benefit shareholders
and participants. Some experts we interviewed also said that some
external asset managers believe that they are retained and compensated
because of superior investment performance and not because of how they
vote proxies. Last, some experts said that there are only downsides to
devoting resources to proxy voting.
Limited Disclosure May Make Proxy Voting Vulnerable to Conflicts of
Interest:
Experts we interviewed said that the limited disclosure might create
inappropriate incentives and result in inadequate accountability, which
may make proxy voting especially vulnerable to conflicts of interest.
Proxy votes, in some cases, may not be monitored by the plan fiduciary
and are not routinely disclosed to the public, two actions that could
help ensure that fiduciaries cast votes solely in the interest of
pension participants.
Limited disclosure and lack of adequate monitoring of proxy voting
practices by plans hinders accountability for how votes are cast.
Consistent with current DOL requirements, votes are disclosed to the
appropriate plan fiduciaries.[Footnote 15] Fiduciaries are not required
to publicly disclose proxy voting guidelines and votes, though the plan
would be required to make any written proxy voting guidelines available
to participants upon request.[Footnote 16] Hence, only plans have easy
access to the information that allows them to monitor how proxy voters
are voting. However, not all plans have the resources to devote to such
monitoring; therefore, the attention given to the proxy voting
responsibility can vary greatly by plan. Some large plans devote a
significant amount of expertise and resources to proxy voting while
other plans may not. Furthermore, a few experts said that in many cases
where the proxy voting responsibility is delegated externally, the plan
provides limited to no review of how the proxies were voted.
Experts we interviewed said that limited disclosure might provide
incentives for fiduciaries to cast their votes according to their own
interests. These experts also said that publicly disclosing proxy votes
could help discourage voting that is inconsistent with participants'
interests. For example, a few experts believed that the economic
incentives for fiduciaries to vote with management could be significant
enough, and the potential for penalties as a fiduciary weak enough, to
make voting with management hard to resist.[Footnote 17] Several
experts explained that since breaches of fiduciary duty are very
difficult to uncover, limited transparency prevents participants and
others from raising questions regarding whether votes were made solely
in the interest of participants. They also contend that increased
transparency provided by public disclosure may provide participants,
regulators, and others with more comprehensive information needed to
hold fiduciaries and corporations accountable for their actions. In
this regard, SEC concluded that shedding light on mutual fund proxy
voting could illuminate potential conflicts of interest and discourage
voting that is inconsistent with fund shareholders' best interests.
SEC's new disclosure rules for mutual funds and investment advisers may
provide a limited benefit to some pension plan participants, while the
new rule for investment advisers may also benefit pension plans whose
proxies are voted externally. In 2003, SEC issued a final rule
requiring mutual funds to publicly disclose their proxy votes on an
annual basis and to adopt and disclose proxy voting policies and
procedures to shareholders. However, this rule may provide some benefit
for pension plan participants in defined contribution plans.
Specifically, pension plan participants who invest their defined
contribution dollars in mutual funds might find proxy voting results
cast by investment managers of their funds on the web site of the
mutual fund provider. On the other hand, defined benefit plan
participants may receive little benefit from this rule if defined
benefit plans invest few assets in mutual funds.[Footnote 18]
Furthermore, SEC's new disclosure rule for investment advisers requires
investment advisers to inform their clients how they can obtain
information on how the clients' securities were voted. However, this
rule may provide little benefit to plan participants in defined
contribution and defined benefit plans since this ruling requires
disclosure to the plan as the client and not to plan participants.
SEC's new disclosure rule for investment advisers may also provide
protections beyond those provided by ERISA for private pension plans
whose proxies are voted externally. SEC's new disclosure rule for
investment advisers may provide requirements that are either not
specifically stated or covered in DOL interpretations of ERISA. For
example, SEC requires, in part, that investment advisers[Footnote 19]
exercising proxy voting authority over client securities adopt and
implement proxy voting policies and procedures for voting clients'
proxies.[Footnote 20] ERISA, on the other hand, does not require
fiduciaries to maintain statements of investment policy, which includes
statements of proxy voting policy. Also, SEC requires that voting
policies and procedures must describe how the adviser addresses
material conflicts between its interests and those of its clients with
respect to proxy voting, while ERISA does not. SEC's investment adviser
rule may provide no benefit to plans that retain voting responsibility
because it covers only investment advisers that exercise proxy voting
authority over client securities.
Certain changes in the retirement savings environment are making the
need for enhanced transparency more important. For example, the shift
from defined benefit plans to defined contribution plans increases the
need for disclosure to plan participants.[Footnote 21] Because under a
defined contribution plan participants bear the investment risk, as
with shareholders, participants need information to be more active in
protecting their retirement assets. SEC reported that the proposal
generated significant comment and public interest. Of the approximately
8,000 comment letters, the overwhelming majority supported the
proposals and urged SEC to adopt the proposed amendments. Many
commenters, including individual investors, fund groups that currently
provide proxy-voting information to their shareholders, labor unions,
and pension and retirement plan trustees, supported the
proposals.[Footnote 22] Furthermore, one expert said that pension plans
should be required to disclose votes and guidelines to participants
because participants cannot switch plans the way shareholders can
switch their money from one investment company to another. This expert
further said that having policies such as these in place makes ERISA
stronger especially given the impact that having their money tied up in
a retirement portfolio could potentially have on a participant's
retirement assets. Additionally, the expert said that the differences
between disclosures provided to shareholders and pension plan
participants should be eliminated.
Some Plan Fiduciaries Have Taken Actions to Manage Conflicts:
To manage conflicts, some plan fiduciaries have taken special actions,
some of which are similar to SEC requirements for mutual funds. One
such action is the maintenance by fiduciaries of detailed proxy voting
guidelines that give proxy voters clear direction, reducing ambiguity
and vulnerabilities related to conflicts that may influence the voter.
Additionally, some fiduciaries include in their guidelines information
on what the plan does when a conflict of interest exists on a proxy
vote; they also publicly disclose their guidelines. Some plans also
disclose a record of all their votes cast to participants and the
public. Some pension plans also put additional procedures and
structural protections in place to help manage conflicts.
Some Fiduciaries Have Developed Detailed Proxy-Voting Guidelines to
Manage Conflicts:
To help manage conflicts, some fiduciaries use detailed proxy voting
guidelines that they make public. However, such guidelines are not
required by ERISA, nor does DOL give guidance to fiduciaries as to the
level of detail and specificity that guidelines should contain. Hence,
some plan guidelines vary widely in their level of detail and
specificity and some provide only minimal guidance. For example, some
plan officials we interviewed said that their guidelines instruct proxy
voters to always vote in the best economic interest of participants,
while other experts said that some guidelines only instruct proxy
voters to vote with management but offer no guidance beyond this broad
statement. Other plans, on the other hand, create detailed, up-to-date
guidelines. Some plans that we reviewed, for example, maintain
guideline documents that direct proxy voters which way to vote, or
factors to consider in deciding which way to vote, on a wide range of
routine and non-routine proxy issues. The issues include, but are not
limited to, board of director elections, auditor selections, executive
compensation, reincorporation, capital issues (such as stock issuance),
environmental and social concerns, and mergers and acquisitions. In
addition, some plans, according to plan officials we spoke with, review
their guidelines on a regular basis, and update them if needed. This
allows the guidelines to reflect new issues in corporate governance.
For example, in 2002, one plan updated its guidelines twice to reflect
new corporate governance issues arising from the Sarbanes-Oxley
Act.[Footnote 23]
Detailed guidelines reduce ambiguity in the proxy voting process by
providing direction to help fiduciaries determine how to vote. For
example, detailed guidelines may instruct a voter how to analyze an
executive compensation vote based on a number of factors, so that the
vote is made in what the fiduciary believes is solely in the interest
of participants. As a result, proxy voters have clear direction on how
to vote on a specific voting issue. For example, one plan official said
that because their guidelines are clear, there is no confusion about
how to vote on any proxy issue. Furthermore, a plan fiduciary or proxy
voter may use detailed guidelines to defend against complaints about
votes by demonstrating that a given vote was based on their guidelines
and was not influenced by a conflict of interest.
Some guidelines include what steps a proxy voter should take to prevent
a fiduciary breach and ensure that the vote is made solely in the
interest of participants when a conflict of interest exists. Similar to
the recent SEC rule requiring mutual funds and investment advisers to
disclose "the procedures that a mutual fund company/complex and
investment advisers use when a vote presents a conflict—." some pension
plan fiduciaries include such a discussion in their guidelines. For
example, the guidelines of one plan fiduciary we examined indicate
that, in the case of a conflict of interest, the issue is to be
reported to the president and general counsel of the plan sponsor who
decide how to proceed and ensure that a record of the conflict and the
related vote is maintained. In addition, some fiduciaries provide
further detail about what constitutes a conflict of interest. For
example, one plan's guidelines define a conflict of interest as being
"a situation where the Proxy Analyst or Proxy Committee member, if
voting the proxy, has knowledge of a situation where either" the plan
fiduciary "or one of its affiliates would enjoy a substantial or
significant benefit from casting its vote in a particular way."
In addition to developing detailed guidelines, some plan fiduciaries
voluntarily make their guidelines/policies and procedures available to
the public, as SEC has required mutual funds to do. Some public pension
plans disclose their guidelines on their Web sites, making them
available not only for participants and beneficiaries but also the
general public. The officials of some private plans indicated to us
that they would probably produce a copy of their guidelines if
explicitly requested by a participant, though they admitted that such a
request is rarely, if ever, made. SEC addressed the issue of
disclosure, when, in 2003, it began to require mutual funds to disclose
their voting policies and procedures in their registration statement.
Mutual fund policies and procedures are required to be available at no
charge to shareholders upon request. Also, mutual funds must inform
shareholders that the policies and procedures and votes are available
through SEC's Web site, and, if applicable, on the fund's Web site. SEC
made the case for guideline disclosure by stating that, "shareholders
have a right to know the policies and procedures that are being used by
a fund to vote proxies on their behalf." Many fund industry members
publicly supported SEC's disclosure rule through comment letters sent
to SEC after the rule proposal was released. Officials for one mutual
fund company, for example, supported guideline disclosure because the
transparency resulting from disclosure would encourage mutual funds to
make better proxy voting decisions, which in turn could enhance fund
performance. Also, they believed that guideline disclosure would deter
casting proxy votes that are not in the best interest of shareholders.
Some Fiduciaries Disclose Proxy Votes, Providing Greater Incentive to
Vote Appropriately:
Some plan fiduciaries also publicly disclose their proxy votes in an
attempt to manage conflicts of interest. We met with officials of some
public pension plans that disclose proxy votes on their Web sites,
making them available not only to participants and beneficiaries, but
also to the public.[Footnote 24] While some public plans disclose only
the votes of a few hundred different equities, other plans disclose all
their votes. These funds present a list of companies and how relevant
proxies for that company have been voted during a specified timeframe.
In addition, one plan sometimes includes a note that briefly explains
the rationale for their vote (e.g., why they withheld their vote for a
certain director). Two plans, whose officials we met with, also
disclose the number of shares that were voted on each proxy.
In April 2003, a SEC rule went into effect requiring mutual funds to
disclose, on an annual basis, a record of all proxy votes cast during
the previous year. Mutual fund votes are required to be available on
the fund's Web site or provided at no charge to shareholders upon
request. Also, mutual funds must inform shareholders that the votes are
available through SEC's Web site. SEC, in its rule release on mutual
fund proxy vote disclosure, stated that the overall costs of disclosure
are reasonable.[Footnote 25] The experience of the plans we examined
that disclose their votes indicates that their costs are not
substantial and not a serious burden because proxy voting is done
electronically, and voting records are required to be maintained.
Some experts we interviewed argue that proxy vote disclosure can
benefit participants by giving them information on how the plan votes
proxies and providing an incentive to the plan fiduciary or proxy voter
to vote appropriately. Disclosure would allow plan participants to
review votes and raise questions as to whether votes were made
appropriately. The knowledge that participants and beneficiaries might
complain to the plan and to others if they believe a breach of its
fiduciary duty has taken place may encourage fiduciaries to vote
appropriately to avoid such problems. Some experts said that
participants would be overwhelmed by the information and would not
understand what to do with it. In addition, a few experts have said
that it is possible that, while participants might not have the time or
the knowledge to analyze proxy votes, an investigative journalist might
look at votes of a certain pension plan and publicly discuss any
possible breaches they have uncovered or notify the appropriate
authorities if any breaches are found or are suspected.
Proxy voting disclosure may also influence the voting behavior of
fiduciaries, as seen in the example of one large mutual fund. As
reported in the news, one large mutual fund voted in favor of the full
slate of directors nominated to serve on the board of directors on 29
percent of proxy contests in which they voted in 2003, while in 2002
the fund had voted in favor of the full slate in 90 percent of the
contests.[Footnote 26] And while the fund had voted for 100 percent of
auditor approvals in 2002, in 2003 it had voted for only 79 percent.
Experts we interviewed said that SEC's disclosure rules might have
contributed to that change in behavior. Nine of 12 respondents to our
written interview support proxy vote disclosure by pension plan
fiduciaries and many experts we spoke with also support proxy vote
disclosure by plans. Very few respondents and experts we interviewed
believed that disclosure of votes would not benefit pension plan
participants. Specifically, they cited as reasons that: (1) the costs
of disclosure outweigh any benefits to participants; (2) there is the
potential for politicizing proxy voting; (3) disclosure may serve as a
detriment to the investment manager's investment strategy; and (4)
participants lack interest in proxy voting.
Some Fiduciaries Have Voluntarily Taken Additional Steps to Manage
Conflicts of Interest:
Some plan fiduciaries have voluntarily taken additional steps to help
manage conflicts of interest that may lead to breaches of fiduciary
duty, including implementing structural protections and special proxy
voting procedures. For example, a few plans we reviewed structure their
organization to separate those who cast votes from executives who make
policy decisions about the plan. Some plans delegate the responsibility
for proxy voting in a way that protects against fiduciary breaches. One
public plan, for example, had external asset managers cast proxy votes,
but decided to bring the proxy voting process in house to avoid having
the plan's proxies voted on both sides of an issue. By doing all voting
internally, plan fiduciaries can provide better safeguards ensuring
that votes are cast solely in the interest of participants and provide
consistency to how votes were cast.
In order to address concerns about conflicts of interests related to
employer stock in pension plans, a few pension plan officials we
interviewed said that their company stock is managed and proxies are
voted by an independent fiduciary outside of the company. In other
cases, some fiduciaries use independent proxy-voting firms for research
and analysis or to cast proxy votes on their behalf. For example,
officials from one plan that we met with told us that they use an
outside proxy-voting firm to make the vote decision when a conflict
exists. One asset manager, for example, did so during a contentious
merger in which their Chief Executive Officer was a director of the
acquiring company. Some fiduciaries we met with have an outside proxy-
voter execute proxy votes based on their plan's own guidelines. Other
fiduciaries simply use outside proxy-voter firms to provide analysis
and research, which the fiduciary may then use to help determine how to
vote.
Outside proxy voting firms are not without their own conflicts of
interest, however. Some proxy-voting firms have expanded to other
services. One firm, for example, provides a service to corporations in
helping design proxies to improve the chances that proxy issues will
succeed. A conflict of interest would exist when the proxy-voting firm
has to vote on a proxy that it helped create or when it must vote a
proxy for the same company from which it received revenue for some
other service.
In addition to the structural protections some fiduciaries have put
into place, some fiduciaries have implemented special procedures that
are used when a conflict exists. For example, according to officials at
one company we interviewed, if a proxy vote is to be cast not in
accordance with the plan's guidelines, then the vote is decided by the
plan's proxy committee, which is also required to note why the vote was
inconsistent with plan guidelines. At other plans we reviewed, in the
event that an attempt is made to influence a proxy vote, the plan's
executive committee makes the vote decision. Additionally, officials
from one private plan said that when a material conflict of interest
exists an independent third-party proxy voter is given the
responsibility to determine how to vote, based on the plan's
guidelines. Furthermore, this plan has a "Material Conflict of Interest
Form" which is filled out and signed by the voting analyst and a member
of the plan sponsor's proxy committee. This form includes information
on the stock being voted, the issue being voted on, what the plan's
proxy voting guidelines indicate about that issue, details on the
conflict of interest, and certification from the third-party proxy
voter on how the vote was cast. In addition, at another plan, when a
material conflict of interest exists during a proxy vote, the vote is
reported to the president and general counsel of the plan sponsor. They
decide how to address the situation, such as getting an outside vote
recommendation or disclosing the existence of the conflict. A record of
meeting notes and issues surrounding conflicts are maintained by the
plan in case any questions arise.
The Department of Labor's Related Enforcement Efforts Have Been
Limited:
The Department of Labor's enforcement of proxy voting requirements has
been limited for several reasons. First, participant complaints about
voting conflicts are infrequent, at least in part, because votes cast
by a fiduciary or proxy voter generally are not disclosed; therefore,
participants and others are not likely to raise questions regarding
whether a vote may not have been cast solely in their interest. In
addition, for the department, ERISA presents legal challenges for
bringing proxy voting cases.[Footnote 27] Specifically, because of the
subjective nature of fiduciary votes, it is difficult to obtain
evidence that would prove the plan fiduciary was influenced by
something other than the interests of participants. Furthermore, even
if such evidence could be obtained, monetary damages are difficult to
value and, because the department has no statutory authority to impose
a penalty without assessing damages, fiduciary penalties are difficult
to impose. In part, because of these challenges, but also because of
its limited resources, DOL's reviews of proxy voting in recent years
have been limited. As a result, some experts we interviewed do not view
the department as a strong enforcement agent.
Identifying and Proving Breaches in the Proxy Voting System Is
Difficult:
Challenges exist in the proxy voting system that limit DOL's ability to
identify breaches and to prove that a fiduciary was influenced to act
contrary to the interests of plan participants. In March 2002, we
reported that DOL enforces ERISA primarily through targeted
investigations. DOL determines what issues it will investigate using a
multifaceted enforcement strategy, which ranges from responding to
participant and others' concerns to developing large-scale projects
involving a specific industry, plan type, or type of
violation.[Footnote 28] DOL also uses the Annual Returns/Reports of
Employee Benefit Plans (Form 5500 Returns) to identify potential issues
for investigation.[Footnote 29] In addition, its regional outreach
activities, while aimed primarily at educating both plan participants
and sponsors, are used to gain participants' help in identifying
potential violations.
Although DOL's strategy includes a number of ways to target
investigations, DOL officials consider information provided by plan
participants and beneficiaries an integral starting point to developing
many of its investigations. For instance, through information provided
in summary annual reports (SARs), summary plan descriptions (SPDs),
individual benefit statements, and other related reports, participants
have access to financial and operational information regarding their
pension plan and their accrued benefits. The information provided in
these reports can help participants and beneficiaries monitor their
plans and identify some warning signs that might alert them that
possibly there is a problem warranting DOL's attention.
While participant complaints might be useful in targeting some DOL
investigations, relying on participant complaints may not currently be
the most effective way to identify potential proxy voting cases.
Because of the current limited level of disclosure, DOL receives few
complaints related to proxy voting. For instance, as previously
mentioned, the SARs and other related reports provide plan financial
and operational information; however, they do not contain proxy voting
information such as voting guidelines and a record of how votes were
cast. In addition, DOL officials told us that proxy votes and
guidelines are disclosed to the plan and guidelines must be made
available to participants and beneficiaries when requested. However,
one expert explained that participants generally do not know to ask for
this information. As such, they are not likely to raise questions about
whether or not a vote was cast solely in their interest. Likewise,
because proxy votes are not publicly disclosed, complaints to DOL from
those outside of plan participants and beneficiaries are less likely to
occur.
In addition to difficulties identifying potential breaches in the proxy
voting system, difficulties proving under ERISA that a fiduciary was
influenced to act contrary to the interests of plan participants are
also a challenge for DOL. Because a plan fiduciary's vote requires
judgment, determining what influenced his or her vote can be difficult.
If a plan fiduciary can provide his or her rationale for voting a
certain way--proving that, in his or her opinion, proxies were voted
solely in the interest of plan participants--it is very difficult for
DOL or others to prove otherwise. Proving a fiduciary breach requires
evidence that the plan fiduciary was influenced in the voting by
something other than the interests of plan participants. Certain
information--such as existing conflicts of interest between the plan
fiduciary and some other influential party, the plan fiduciary's own
self-interest, or the potential impact of certain votes, for instance-
-are important when trying to establish that such influence was acted
upon. Absent this or similar information, leaks by informed parties--
whistleblowers--are likely to be the only way one might prove a breach
actually occurred.
Monetary Damages Are Difficult to Value and Penalties Are Difficult to
Impose:
Another challenge that DOL faces is that monetary damages are difficult
to value and, therefore, penalties and other sanctions are difficult to
impose. According to DOL, it is difficult to link a single proxy vote
to damages to the plan participants. This is often the case because
there are many economic variables that have an impact on share value.
That is, underlying economic factors such as fiscal policy, monetary
policy, unemployment, the threat of inflation, the global economy, and
currency valuations are all major determinants of share value.
Therefore, it is difficult to isolate the effect a single proxy vote
may have had. Also, because of the potential for a vote to have a long-
term rather than a short-term effect on share value, damages may not be
immediately evident.
In addition, while the research community and others have differing
opinions about whether proxy votes have economic value, where it is
believed that these votes do have a value, the determination of this
value can be complicated. For example, in response to our written
interview, most experts who responded to this question indicated that
valuing proxy votes is a complex task, its difficulty dependent upon
variables such as the issue being voted on and an entities' governance
structure. One respondent said that a case could possibly be made if a
decline in the value of a company could be tied to the specific point
in time when the plan fiduciary voted for a self-serving measure.
However, the fiduciary's vote would have to be significant enough to
affect the outcome of the proxy contest. Using the Hewlett-Packard
situation as an example, the respondent added that one cannot know what
the value of Hewlett-Packard shares would have been if the merger had
not gone through and thus one cannot calculate the difference between
that value and the current value of the merged Hewlett-Packard/Compaq
shares. Additionally, others commented that, in the end, DeAM's vote
might not have affected the outcome of the proxy contest.
With respect to penalties, unlike SEC, which has the authority to
impose a penalty without first assessing and then securing monetary
damages, DOL does not have such statutory authority and, as such, must
assess penalties based on damages or, more specifically, the
restoration of plan assets.[Footnote 30] Under Section 502(l), ERISA
provides for a mandatory penalty (1) against a fiduciary who breaches a
fiduciary duty under, or commits a violation of, Part 4 of Title I of
ERISA or (2) against any other person who knowingly participates in
such a breach or violation. This penalty is equal to 20 percent of the
"applicable recovery amount," or any settlement agreed upon by the
Secretary or ordered by a court to be paid in a judicial proceeding
instituted by the Secretary. However, the applicable recovery amount
cannot be determined if damages have not been valued. As we reported in
1994, this penalty can be assessed only against fiduciaries or knowing
participants in a breach who, by court order or settlement agreement,
restore plan assets.[Footnote 31] Therefore, if (1) there is no
settlement agreement or court order or (2) someone other than a
fiduciary or knowing participant returns plan assets, the penalty may
not be assessed. Because DOL has never found a violation that resulted
in monetary damages, it has never assessed a penalty or removed a
fiduciary as a result of a proxy voting investigation.
As a Result of Challenges, DOL Has Devoted Few Resources to Proxy
Voting Issues:
As a result of challenges in the proxy voting system, DOL has devoted
few resources to proxy voting over the last several years. Between 1988
and 1996, DOL conducted three enforcement studies to determine the
level of compliance with proxy voting requirements among select
fiduciaries (see table 1). The first of these projects was initiated in
May 1988,[Footnote 32] when the department looked at the management of
plan votes from a broad range of investment managers, with a particular
focus on certain contested issues considered at annual shareholders'
meetings in that year. Then in 1991, DOL started its second project to
determine how banks were fulfilling their responsibilities with respect
to proxy voting practice. DOL looked at proxy voting procedures at 75
banks, covering the application of procedures during the 1989 or 1990
proxy season. Finally, during its last project, the department once
again reviewed the practices of investment managers--12 in total--
alongside 44 pension plans, with respect to corporate governance
issues. It reviewed certain proxy votes at five annual shareholders'
meetings held in 1994 and general proxy voting polices and practices.
According to DOL, overall the enforcement studies found that there were
improvements in proxy voting practices as virtually all plans and
investment managers in the studies voted their proxies. The enforcement
studies also found that additional improvement is needed in the plans'
monitoring of investment managers to ensure that proxies are voted in
accordance with stated policies. Furthermore, they found that although
investment managers appear to have the records to enable clients to
review managers' decisions on proxy voting, few plan clients actually
review the reports that are automatically provided to them. In the
situations in which reports are available upon request, few plans
request a copy. Given these findings, the department has not conducted
similar reviews in recent years to determine current levels of
compliance. DOL officials told us that they believe that proxy voters
are generally in compliance, that they receive few complaints in this
area, and that they focus most of their limited resources on other
priority areas, which may result in identifying violations that can be
corrected.
Table 1: Summary of the Department of Labor's Proxy Projects:
Years: 1988 -1989;
Project: No. 1;
Scope: General fiduciary compliance review of investment managers (IMs)
with control over employee benefit plan assets subject to ERISA;
Focused on certain contested issues considered at annual shareholders'
meetings in 1988;
Summary of findings: Not all investment managers who voted on behalf
of employee benefit plans were delegated the authority to vote
proxies. Instead, many managers assumed the duty of voting as part of
their overall responsibilities; Not all managers had internal decision
making procedures or written proxy voting guidelines in place when they
voted proxies, and those that did often had a policy to simply vote
with management; Managers often lacked accurate recordkeeping with
regard to whether proxies had been received and voted.
Years: 1991 - 1992[A];
Project: No. 2;
Scope: Review of 75 banks' proxy voting practices (covering the
application of procedures during the 1989 or 1990 proxy season only);
Summary of findings: Many banks lacked a policy that addressed the
maintenance and retention of proxy voting records or related
materials'; Several banks had policies to abstain from voting or not
vote on certain issues; Many banks followed the "Wall Street Rule,"
giving the proxy to management of the company or selling the shares of
stock.
Years: 1994 - 1996;
Project: No. 3;
Scope: Review of practices of 12 IMs and 44 pension plans with respect
to corporate governance issues covered by Interpretive Bulletin 94-2;
Focused on certain proxy votes at five annual shareholders' meetings
held in 1994 and the general polices and practices with respect to
proxy voting;
Summary of findings: Most plans delegated the authority to vote
proxies to an IMs via written agreement; Most IMs received written
proxy voting policies from their clients, but on an irregularly basis;
Fourteen of 44 plans reviewed submitted proxy voting guidelines to
their IMs; over half had no proxy guidelines; and 7 retained the
authority to vote proxies; The content of the guidelines were mixed--
some general, some quite detailed; All IMs tracked proxy-related items
and kept written documentation justifying votes cast; most had written
procedures to report votes to clients, but few did so automatically;
Most plans did not monitor proxy voting by their IMs, about 35 percent
appeared to have performed substantive monitoring of IMs.
Source: DOL Proxy Project Report, March 2, 1989; Speech by David George
Ball, Assistant Secretary, Pension and Welfare Benefits Administration,
February 17, 1992; Proxy Project Report, February 23, 1996.
[A] Results of the second proxy project were not released in a formal
report.
[End of table]
DOL officials said that they typically do not conduct specific
investigations focused on proxy voting, and they allocate few resources
to this issue. They, instead, focus its limited resources according to
their Strategic Enforcement Plan.[Footnote 33] However, proxy voting
practices may be examined during their investigations of investment
managers. DOL said that its investment management investigative guide
has steps for reviewing proxy voting, but the investigators have
discretion whether to review proxy voting practices. According to DOL
officials, investigators receive training on the general fiduciary
obligations of named fiduciaries and investment managers with respect
to the voting of proxies on plan-owned stock. When asked how often
these reviews included the examination of proxy voting, DOL officials
responded that this information is not tracked.
Some plan fiduciaries and industry experts that we interviewed have
indicated that DOL lacks visibility as an enforcement agent in this
area. For example, some experts said that DOL's examination of proxy
voting practices does not seem to occur routinely and that it is not
clear what enforcement action DOL has taken in recent years related to
proxy voting. Additionally, others have described an environment that
provides little incentive to do what is best for participants,
indicating that fiduciaries have no expectation that DOL will take
action should they breach their proxy voting responsibilities. One DOL
official said that the department has made its position on proxy voting
known and issued clear guidance on what is required of fiduciaries.
Also, given its limited statutory authority and resources, the
department has a strategic enforcement plan, and based on this plan,
they place their limited resources in areas that will result in
identifying violations that can be corrected.[Footnote 34]
Conclusions:
The retirement security of pension plan participants is dependent on
decisions made each day in the market place by pension plan
fiduciaries. DOL guidance requires fiduciaries to cast proxy votes
solely in the interest of plan participants and beneficiaries. While
ERISA requires that voting guidelines be made available to participants
upon request, ERISA does not require disclosure of proxy votes to
participants and the public. Increased transparency of both proxy
guidelines and votes could provide participants and others with
information needed to monitor actions that affect retirement assets.
Nor does ERISA require, as current SEC regulations do for mutual fund
investment companies and investment advisers, that plans include in
their guidelines language regarding what actions fiduciaries will take
to respond to conflicts of interest. However, some plan fiduciaries
have taken actions to manage conflicts of interest, including
maintaining proxy voting guidelines and disclosing votes. Likewise, a
few plan sponsors have hired independent fiduciaries to manage company
stock in their pension plans.
DOL's role in enforcing ERISA's fiduciary provisions, including proxy
voting requirements, is essential to ensuring that plan fiduciaries are
voting solely in the interest of plan participants and beneficiaries.
Yet, DOL has faced a number of enforcement challenges, including legal
requirements restricting its ability to assess penalties under ERISA.
Furthermore, DOL officials said that the agency does not have the
statutory authority to require plan fiduciaries to periodically and
publicly disclose proxy votes and guidelines. SEC, because of its role
in protecting all investors, including those in participant-directed
retirement savings plans, has taken steps to increase transparency in
the mutual fund industry. DOL's inability to take similar steps with
respect to pension plan fiduciaries may provide inappropriate
incentives for fiduciaries not to act solely in the interest of plan
participants when voting proxies. Furthermore, given both DOL and SEC
goals to protect plan participants as investors, coordination of their
efforts to achieve this goal is important.
Matters for Congressional Consideration:
If the Congress wishes to better protect the interest of plan
participants and increase the transparency of proxy voting practices by
plan fiduciaries, it should amend ERISA to require that plan
fiduciaries:
* develop and maintain written proxy-voting guidelines;
* include language in voting guidelines on what actions the fiduciaries
will take in the event of a conflict of interest; and:
* given SEC's proxy vote disclosure requirements for mutual funds,
annually disclose votes as well as voting guidelines to plan
participants, beneficiaries, and possibly also to the public. From a
practical perspective, this disclosure could apply to all votes, but at
a minimum, it should include those votes that may affect the value of
the shares in the plan's portfolio. Such disclosures could be made
electronically on the applicable Website. Since many plans often use
multiple fiduciaries for voting proxies, the plan also could provide
participants and others directions on how voting records by the various
fiduciaries could be obtained. We believe that Congress should assure
that participants have the right to request proxy voting records at
least annually, consistent with their current right to request other
plan documents.
Congress should also consider amending ERISA to give the Secretary of
Labor the authority to assess monetary penalties against fiduciaries
for failure to comply with applicable requirements.
Finally, Congress should consider amending ERISA to require that, at a
minimum, an independent fiduciary be used when the fiduciary is
required to cast a proxy vote on contested issues or make tender offer
decisions in connection with company stock held in the company's own
pension plan. In our view, this independent fiduciary requirement would
not affect votes by a participant in an eligible individual account
plan.
Recommendations for Executive Action:
To improve oversight and enforcement of proxy voting, we recommend that
the Secretary of Labor direct the Assistant Secretary of EBSA to
increase the Department's visibility in this area by:
* conducting another enforcement study and/or taking other appropriate
action to more regularly assess the level of compliance by plan
fiduciaries and external asset managers with proxy voting requirements.
Such action should include examining votes, supporting analysis, and
guidelines to determine whether fiduciaries are voting solely in the
interest of participants and beneficiaries, and:
* enhancing coordination of enforcement strategies in this area with
SEC.
Agency Comments and Our Evaluation:
We provided a draft of this report to DOL and SEC for their review and
comment. DOL's comments are included in appendix II; SEC did not
provide written comments. Both agencies provided technical comments,
which we have incorporated as appropriate. In its response to our draft
report, DOL generally disagreed with our matters for congressional
consideration and recommendations, saying that conflicts of interest
affecting pension plans are not unique to proxy voting and that
requiring independent fiduciaries and increased disclosures would
increase costs and discourage plan formation. DOL also said that the
enforcement studies of proxy voting practices undertaken previously by
the department provide an adequate measure of compliance in this area
and, therefore, to undertake new such studies, with an expectation of
finding no significant level of noncompliance, would be an
inappropriate use of resources.
Our recommendations and matters for congressional consideration are
predicated on two principles: additional transparency and enhanced
enforcement presence. We believe that disclosing pension plans' proxy
voting guidelines and votes makes it more likely that votes will be
cast solely in the interest of plan participants, and that a visible
enforcement presence by DOL helps to reinforce the public interest in
this result. So although we agree with certain of DOL's points, we
cannot agree that additional transparency and an enhanced enforcement
presence would not be beneficial. Furthermore, because DOL believes
that it does not have the authority to require proxy voting guidelines
and disclosure of votes, and, in our view, it is important to shed more
light on events such as proxy voting---particularly contested proxy
votes---we believe Congress should consider amending ERISA to include
such requirements.
We acknowledge that plan fiduciaries face conflicts beyond proxy voting
and that conflicts associated with casting a proxy vote may be no
greater than the potential for conflicts in making other fiduciary
decisions. However, our work and, therefore, our recommendations are
focused on issues related to proxy voting. Furthermore, we found that
DOL's enforcement in this area has been limited, which may not be the
case in its oversight of other fiduciary actions. For example, tender
offer decisions made by fiduciaries may suffer from similar conflicts.
DOL, however, has been able to develop investigative cases and secure
positive results for plan participants and beneficiaries in connection
with this area. However, DOL has not been similarly successful in
developing proxy voting cases. Given that plan participants may be
particularly vulnerable when internal fiduciaries vote employer stock
held in the plan sponsor's s own pension plan, we believe it is an
appropriate safeguard to require an independent fiduciary be appointed
to vote these proxies. We are recommending independent fiduciaries for
certain circumstances. Furthermore, in our view, this independent
fiduciary requirement would not affect votes by a participant in an
eligible individual account plan.
In disagreeing with our recommendation that Congress consider amending
ERISA to require that an independent fiduciary be used to vote proxies
for employer stock held in a plan sponsor's own pension plan, DOL said
that the Congress already considered, but did not include, an
independence requirement for plan fiduciaries when it passed ERISA in
1974. We acknowledge that Congress did not require independent
fiduciaries when it originally enacted ERISA. However, the conflicts of
interest associated with plan holdings of company stock have received
increased public attention in the last several years, and we believe
the Congress should reconsider ERISA's current legal requirements in
connection with company stock.
In response to our recommendation that DOL conduct another enforcement
study to determine the level of compliance with proxy voting
requirements, DOL said that it has seen no evidence of a negative
change in the level of compliance and that another proxy enforcement
study would absorb a considerable amount of resources. Rather than
conducting another proxy enforcement study, DOL said that it would
evaluate proxy voting information during its investigations in the
financial services area. As we discuss in our report, limited statutory
authority and other challenges are obstacles to effective DOL
enforcement in this area. Furthermore, we understand that DOL must
balance efforts in this area with other enforcement priorities. The
statutory changes we have suggested, if enacted, may help DOL's
enforcement efforts in the future. Nonetheless, even with such changes,
we believe that conducting reviews of proxy voting issues on a periodic
basis is important to ensure compliance and increase DOL's presence and
visibility in this area. We acknowledge that conducting another
enforcement study is just one of various options available to DOL to
accomplish these goals and have altered our recommendation to be
explicit on this point. However, in our view, any review in this area
should go beyond simply determining whether fiduciaries cast proxy
votes, and should include assessing whether plans are monitoring proxy
voting practices by external investment managers and evaluating whether
fiduciaries voted solely in the interest of plan participants and
beneficiaries.
Regarding our matter for congressional consideration that plan
fiduciaries be required to disclose proxy voting guidelines and votes,
at a minimum, to plan participants, DOL noted that appropriate plan
fiduciaries are required to monitor proxy voting information and that
proxy voting guidelines are available to participants upon request. DOL
further said that requiring disclosure to the general public or even to
all participants would significantly increase costs to plans.
Recognizing that ERISA's disclosure requirements are focused on plan
participants and beneficiaries, not the general public, we modified our
matter for congressional consideration to state that proxy guidelines
and votes should at a minimum be disclosed to participants and
beneficiaries. Our report addressed concerns about the potential costs
of disclosing proxy voting guidelines and votes by suggesting that such
information could be made available electronically.
Unless you publicly announce its contents earlier, we plan no further
distribution until 30 days after the date of this report. At that time,
we will send copies of this report to the Secretary of Labor, the
Chairman of the Securities and Exchange Commission, appropriate
congressional committees, and other interested parties. We will also
make copies available to others on request. In addition, the report
will be available at no charge on GAO's Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact me at
(202) 512-7215 or George Scott at (202) 512-5932. See appendix III for
other contributors to this report.
Sincerely yours,
Signed by:
Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Scope and Methodology:
To determine what conflicts exist in the proxy voting system and the
extent to which fiduciary breaches occur as a result of these
conflicts, we interviewed officials at the Department of Labor's
Employee Benefits and Security Administration (DOL) and at the
Securities and Exchange Commission (SEC). Using a standard set of
questions, we conducted interviews with proxy voting experts,
academics, economists, and Employee Retirement Income Security Act
(ERISA) attorneys. We also interviewed various proxy voting experts
which include academics, ERISA lawyers, industry experts, pension plan
sponsors, asset managers, proxy voting firm representatives, proxy
soliciting companies, and plan practitioners. These experts were, in
part, selected from news articles involving abuses in the mutual fund
industry, from news reports regarding corporate scandals such as Enron,
from reported highly contested proxy contests, from historical articles
dated back to the proxy scandals in the 1980s and 1990s, and from
recent reports in the news and SEC's Web site pertaining to SEC's proxy
voting disclosure proposals. Experts were also selected based on
published research on proxy voting, based on discussions with plan
sponsors and industry experts, congressional testimony, and
Congressional Research Service reports.
To determine what safeguards fiduciaries have put in place to protect
against breaches, we interviewed a number of public and private pension
plan sponsors, asset managers, proxy voting firm representatives, and
other experts. These public and private pension plans were selected for
their promising practices based on discussions with industry experts,
from pension industry publications and other published reports of the
corporate governance practices of these plans. To explore the practices
of internally managed plans, we interviewed various proxy voting
experts and interviewed officials of the plans listed in the Pensions
and Investments with internally managed assets.
To determine DOL's enforcement of proxy voting requirements, we
interviewed officials at EBSA and reviewed DOL enforcement material and
previously issued GAO reports on DOL's enforcement program.
Obtaining Total Number of Employer Securities Held in the Company's Own
Pension and Welfare Benefit Plans:
To determine the extent to which private pension plans invested in
their own employer securities, we obtained the total value of the
employer stock in the company's pension and welfare benefit plans. To
do so, we analyzed plan financial information filed annually (Form
5500s) with the Internal Revenue Service and EBSA. The Form 5500 report
is required to be submitted annually by the administrator or sponsor
for any employee benefit plan subject to ERISA as well as for certain
employers maintaining a fringe benefit plan. The report contains
various schedules with information on the financial condition and
operation of the plan. The total value of employer shares information
is provided on either schedule H or schedule I depending on the number
of participants covered by the plan. EBSA provided us with a copy of
the 2001 electronic Form 5500 database for our analysis.[Footnote 35]
We assessed the reliability of these data for our purposes by
evaluating the electronic records selected for analysis for outliers,
duplicate records, and otherwise inappropriate values. Form 5500
records that did not meet our review standards were eliminated from our
analysis.
We decided to focus our analysis of companies with Form 5500 data to
those corporations listed in the Fortune 500.[Footnote 36] To do so, we
matched each Fortune 500[Footnote 37] company to their pension plans on
the basis of their Employer Identification Numbers (EINs).[Footnote 38]
We used several methods to identify EINs associated with each
corporation. We started with a list of EINs for Fortune 500 companies
that was purchased from Compustat (a database from Standard & Poors).
To identify the EINs for the remaining companies, we searched the 10K
annual filing statement for each relevant company. We then searched
those companies whose Form 5500s reported that they held their own
employer securities at the year's plan end year date.[Footnote 39] This
resulted in a database for filing year 2001 containing the information
of 490 Form 5500 returns filed by 272 of the Fortune 500 companies.
Obtaining the Total Number of Shares Outstanding for Selected Fortune
500 Companies:
To analyze the total voting power of those 272 Fortune 500 companies on
our list for plan year 2001, we obtained the proxy statements filed
with SEC as form 14-A DEF for those companies. Form 14-A DEF statements
are the final annual proxy statements sent to all shareholders of a
corporation that detail all the issues that are to be voted on. The
statements also list the number of shares entitled to vote on the proxy
issues and, where applicable, the number of votes per share (e.g., some
companies might issue different classes of preferred stock which
entitle the owner to more than one vote per share). For each company,
we multiplied the number of shares outstanding for each class of share
by the number of votes entitled to that class and added up those
figures for all classes of shares to get a reflection of total number
of shareholder votes. We used data from the 14-A DEF statements filed
as soon after the end of calendar year 2001, which was typically in the
spring of 2002.
Obtaining the Closing Price for Our Fortune 500 Companies:
We also obtained share price data from the New York Stock Exchange's
(NYSE) Trade and Quote (TAQ) database. We used that database to obtain
the closing price (the price of the last transaction of the day) on the
day indicated as the plan end of year date from the Form 5500 for each
company. The TAQ database contains a listing of intraday transactions
(including shares involved and the price) for all companies listed on
the NYSE, the National Securities Dealers Stock Exchange (NASDAQ) and
the American Stock Exchange (AMEX). To ensure the reliability of the
TAQ price date, GAO economists previously conducted a random crosscheck
of the TAQ data with data provided by NADAQ, Yahoo! Finance, and other
publicly available stock data sources.
Computing the Number of Voting Shares Held in Fortune 500 Company
Pension and Welfare Benefit Plans:
From the 5500 data, we obtained the total value at yearend for company
stock holdings by corporations in their pension and welfare benefit
plans. From the TAQ database, we obtained the closing price of the
stock on the plan yearend date. We then divided the closing price of
the stock into the total value at yearend to get a number of voting
shares held in the company's pension and welfare benefit
plans.[Footnote 40]
We then divided the total votes outstanding (i.e., total number of
votes based on available classes of stock for each of our Fortune 500
companies) by the number of votes controlled by the pension plan to
obtain the voting power, or the percentage of votes controlled by the
company's pension and welfare benefit plans.
[End of section]
Appendix II: Comments from the Department of Labor:
U.S. Department of Labor:
Assistant Secretary for Employee Benefits Security Administration:
Washington, D.C. 20210:
July 9, 2004:
Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
United States General Accounting Office:
Washington, DC 20548:
Dear Ms. Bovbjerg:
Thank you for giving the Department of Labor (DOL) the opportunity to
offer remarks regard the General Accounting Office's (GAO) draft report
entitled "Pension Plans: Additional Transparency and Other Actions
Needed in Connection with Proxy Voting" (GAO-04-749). This letter
provides comments on the recommendations contained in the draft report;
we have already provided technical comments directly to you and your
staff.
The GAO report recommends that Congress amend ERISA to require
fiduciaries to implement proxy voting guidelines, to disclose these
guidelines and proxy votes cast on an annual basis, and to require the
appointment of an independent fiduciary to cast proxy votes. These
recommendations appear to be predicated on the notion that proxy-voting
issues present unique conflict of interest concerns for ERISA
fiduciaries, and that these potential conflicts expose plan
participants and beneficiaries to significant risks.
The report concludes legislative action is necessary as "conflicts of
interest in proxy voting can occur because various business and
personal relationships exist, which can influence a fiduciary's vote."
In so concluding, however, the report overlooks the fact that Congress
did not include an independence requirement for plan fiduciaries when
it passed ERISA in 1974, and instead expressly allowed corporate
officers and other persons to "wear two hats." While Congress
recognized that this created the possibility of conflicts of interest,
it addressed these possible conflicts through the high standards of
fiduciary duty, the personal liability of fiduciaries for their
decisions, the creation of prohibited transactions and similar
provisions. Requiring wholly independent fiduciaries would increase
costs and discourage the formation of voluntary employee benefit plans.
The potential for a conflict of interest in casting a proxy vote is no
greater than the potential for a conflict of interest in making dozens
of other fiduciary decisions in an ERISA plan. As in those other
decisions, the issue is whether the fiduciary acted in the best
interests of the participants and beneficiaries.
Part of the Department's duty to oversee ERISA plans is to monitor the
exercise of fiduciary duties, including how fiduciaries manage
potential conflicts. With respect to proxy voting, the Department has
examined the issue on a regular basis, issued several forms of guidance
on ERISA's requirements, and filed amicus briefs in several key court
cases. In addition, the Department has conducted three specific
enforcement studies of
proxy voting practices that determined fiduciaries generally comply
with ERISA and, since the completion of the last study, has seen no
evidence of a negative change in the level of compliance-indeed,
industry best practices embrace proxy guidelines. The Department now
includes steps for reviewing proxy voting in its investment management
investigative guide and, when such reviews have taken place, few, if
any, violations have been uncovered.
The three proxy enforcement studies absorbed a considerable amount of
resources, as would any new proxy enforcement study. Given the DOL's
other pressing enforcement priorities, the diversion of needed
resources to an enforcement study that we have no reason to believe
will find significant non-compliance with ERISA would be an
inappropriate use of resources. Understanding proxy voting practices is
very important, but rather than undertaking another study, the DOL will
capture for further evaluation additional proxy voting information
during our investigations in the financial services area.
The report also concludes that proxy votes and voting guidelines should
be distributed to all participants and be released to the general
public. Proxy voting information is required to be monitored by
appropriate plan fiduciaries and proxy guidelines are available to
participants upon request. Requiring disclosures of proxy voting to all
participants would significantly increase printing, mailing and
administrative costs to the plan. Current law strikes the proper
balance between cost and access by guaranteeing that fiduciaries
monitor compliance with proxy guidelines and any participant who wishes
to may receive copies of any guidelines upon request.
We appreciate having had the opportunity to review and comment on this
draft report.
Sincerely,
Signed by:
Ann L. Combs:
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
Contacts:
George A. Scott, Assistant Director (202) 512-5932 Kimberley M.
Granger, Senior Economist and Analyst-in-Charge (202) 512-3708:
Staff Acknowledgments:
Other major contributors include Gwendolyn Adelekun, Matthew Rosenberg,
Gene Kuehneman, Lawrance Evans, Alison Bonebrake, Derald Seid, Corinna
Nicolaou, Michael Maslowski, Roger J. Thomas, Richard Burkard, and
Kenneth J. Bombara.
FOOTNOTES
[1] A defined benefit plan promises to provide a benefit that is
generally based on an employee's salary and years of service. Defined
benefit plans use a formula to determine the ultimate pension benefit
that participants are entitled to receive. The employer, as plan
sponsor, is responsible for making contributions that are sufficient
for funding the promised benefit, investing and managing the plan
assets, and bearing the investment risk.
[2] Under defined contribution plans, employees have individual
accounts to which the employee, employees, or both make periodic
contributions. Defined contribution plan benefits are based on the
contributions to and investment returns (gains and losses) on
individual accounts. In a defined contribution plan, the employee bears
the risk and often controls, at least in part, how his or her
individual account assets are invested.
[3] These data are according to the flow of funds data issued on March
2004 from the Federal Reserve Board. Mutual funds own about 18 percent
of total corporate equity, while households directly own about 39
percent.
[4] A plan fiduciary includes a person who has discretionary control or
authority over the management or administration of the plan, including
the management of plan assets. Any person who makes investment
decisions with respect to a qualified employee benefit plan's assets is
generally a fiduciary. The duties the person performs for the plan
rather than their title or office determines whether that person is a
plan fiduciary. Unless otherwise indicated, in this report we use the
term fiduciary or plan fiduciary as those persons who have the
responsibility for voting proxies. Plan fiduciaries have a
responsibility to vote proxies on issues, including those that may
affect the value of the shares in the plan's portfolio.
[5] SEC brought an enforcement action against Deutsche Bank Asset
Management in connection with its voting of client proxies for the HP-
Compaq merger transaction and imposed a $750,000 penalty. The fine was
imposed for not disclosing a conflict. SEC action found that DeAM
violated its fiduciary duty to act solely in the best interests of its
advisory clients by voting the proxies on the HP stock owned by its
advisory clients without first disclosing the conflict.
[6] The Deputy Assistant Secretary of the Pension Welfare Benefits
Administration (PWBA now known as EBSA) issued the Avon letter to Mr.
Helmuth Fandl, Chairman of the Retirement Board of Avon Products, Inc.,
on February 23, 1988. Current U.S. Comptroller General David M. Walker
was the Assistant Secretary of Labor for the PWBA from 1987 to 1989.
[7] The named fiduciary could also delegate the proxy voting
responsibility to a trustee bank, third-party proxy voting firm, or an
independent fiduciary.
[8] Defined benefit plans may not acquire any qualifying employer
security or qualifying employer real property in excess of 10 percent
of fair market value of the plan's assets. Defined contribution plans
are generally exempt from the 10 percent limitation.
[9] The DOL sued Enron, corporate directors, and the administrative
committee on June 26, 2003, for violating ERISA. The suit alleges that
certain company and plan officials failed to consider the prudence of
Enron stock as an appropriate investment for the retirement plans and
did nothing to protect the workers and retirees from extensive losses.
The former corporate executive was also charged with misrepresenting
Enron's financial condition to employees and plan officials and
encouraging them to buy the stock.
[10] Insider trading rules state that a person or entity may not sell
or buy stock based on information that is not publicly available.
[11] Management also has access to other proxy voters--employees who
participate in the company's pension plan which has company stock as an
investment choice in their 401(k) plan or if the plan sponsor offers an
Employee Stock Ownership Plan (ESOP). The plan fiduciary is responsible
for voting unallocated stock and stock allocated to pension plan
participants that has not been voted. Unallocated shares of stock are
those that have not been distributed and are held by the company in a
suspense account. Allocated shares of stock are those shares that have
been both distributed to the employees of the company's pension plan
and to outside investors (e.g., by institutional investors such as
other pension plans and mutual funds, or individual investors). How the
fiduciary must vote those stock is outlined in the plan documents. The
directions provided in the plan documents may include voting by the
trustee in accordance with fiduciary principles, voting by the trustee
to mirror the vote for directed shares, and refraining from voting the
shares on the assumption that the employee intended to cast a no vote.
[12] For defined benefit plans, plan assets are typically
institutionally managed by an external asset manager. The external
asset manager also has the responsibility to vote the proxies unless
that responsibility is retained by the plan trustees. For defined
contribution plans, pension plan participants may have the
responsibility to vote the proxies for the shares of their own
company's stock in their 401(k) plan account. This called pass through
voting, which is required for a plan to receive Section 404(c) relief
with respect to the investment in company stock. It is at the plan's
discretion to permit pass thru voting to participants, though most
defined contribution plans are designed to comply with Section 404(c).
[13] This includes company stock held in defined contribution plans
(including ESOPs) and defined benefit plans, or indirectly through
certain trusts, accounts, and other investment arrangements. This also
includes allocated and unallocated stock.
[14] SEC found that DeAM violated Section 206(a) of the Investment
Advisers Act of 1940 by failing to disclose to its clients any material
fact about a potential or actual conflict of interest that may affect
its unbiased service to its clients.
[15] According to the January 1990 interpretive letter to the
Institutional Shareholder Services Inc., DOL advised that the named
fiduciary must be able to comprehensively monitor proxy voting
activities of the investment (or asset) manager so as to make an
informed determination as to whether the investment manager has met its
fiduciary obligations. Thus, the named fiduciary must have access to,
and the investment manager must maintain accurate records of, the
investment manager's voting procedure and actions taken in specific
cases.
[16] See DOL Interpretive Bulletin 94-2 and a March 20, 1997
interpretive letter to Kirkland & Ellis with respect to the scope of
the disclosure requirements of Section 104(b)(4).
[17] Voting with management is not necessarily against the interests of
participants and beneficiaries. In some cases, voting in favor of a
management proposal would benefit participants. As with any proxy
decision, the vote should be based on analysis and should be made
solely in the interest of participants.
[18] Under defined benefit plans, the employer, as the plan sponsor,
bears the investment risk as well as those risks associated with voting
proxies.
[19] This rule applies to all investment advisers registered with SEC
that exercise proxy voting authority over client securities.
[20] This new rule also requires that the written policies and
procedures for voting client proxies must be reasonably designed to
ensure that the adviser votes client securities in the best interests
of the clients, to disclose to clients how they may obtain information
about those policies and procedures, and to disclose to clients how
they may obtain information on how the adviser has voted their proxies.
The rule amendments also require advisers to maintain certain records
relating to proxy voting. The rule and rule amendments are designed to
ensure that advisers vote proxies in the best interest of their clients
and provide clients with information about how their proxies are voted.
This new rule also requires investment advisers to furnish a copy of
written policies and procedures to clients upon request.
[21] DOL statistics show that the number of single employer and
multiemployer defined benefit plans are on the decline, while the
number of defined contribution plans being adopted is on the rise. The
decline in defined benefit plans is attributed to the fact that fewer
plans are being adopted, some employers are replacing defined benefit
plans with defined contribution plans, and some defined benefit plans
have been terminated.
[22] Many fund industry members supported the proposed amendments
regarding the disclosure of policies and procedures. However, most fund
industry members opposed the proposed amendments that would require
disclosure of a fund's complete proxy voting record and disclosure of
votes that are inconsistent with fund policies and procedures.
[23] The Sarbanes-Oxley Act was passed in 2002 and contained a number
of corporate governance and accounting provisions in response to recent
corporate scandals.
[24] A public pension plan is a pension, annuity, retirement, or
similar fund or system maintained by a state or local government that
provides a retirement benefit to the state or local government
employee. Some of the largest pension plans in the United States such
as the California Public Employees Retirement System and the New York
City Employees Retirement System are public pension plans. These public
plans are not governed by ERISA.
[25] Opponents to vote disclosure argued against the rules largely by
arguing that disclosure would be prohibitively costly. However, in its
final rule, SEC noted that several fund groups that currently provide
disclosure of their complete proxy voting records to their shareholders
commented that although there are start-up costs for compliance
systems, this cost decreases over time, and that the overall costs of
the disclosure are minimal. SEC found arguments made by funds that are
providing this disclosure to be particularly persuasive and continue to
believe that the costs of disclosure are reasonable.
[26] Ken Brown, "Vanguard Gives Corporate Chiefs A Report Card," Wall
Street Journal, November 10, 2003. pg. C.1.
[27] DOL noted, however, that it filed amicus briefs in three proxy
voting cases. In O'Neill v. Davis, 721 F.Supp. 1013, 1015 (N.D.I11.
1989), a DOL amicus brief was instrumental in obtaining a holding that
"the voting of Plan-owned shares by the Plan's trustees was a fiduciary
act under ERISA, and one which the trustees were bound to exercise in
the sole interest of the Plan participants." DOL also filed two amicus
briefs in Grindstaff v. Green, 133 F.3d 416 (6TH Cir. 1998), where,
over a strong dissent, the court rejected DOL's views on the extent to
which ERISA's fiduciary duties attach to plan fiduciaries' voting of
plan shares. DOL officials said that they also filed a brief on the
voting of plan shares and exercise of other shareholder rights on
plans' behalf in district court in Krause v. Columbia Quarry Co., 4:98
CV 01373 ERW (E.D. Mo.), although that case wound up being decided on
other grounds.
[28] Throughout this report, references to DOL's regular investigations
refer to those investigations that are not specifically aimed at
detailed reviews of proxy voting practices.
[29] The Form 5500 Returns are forms that most qualified retirement
plans must file annually with the Internal Revenue Service.
[30] DOL can also seek removal of a fiduciary for breaches of fiduciary
duty or seek other sanctions.
[31] See U.S. General Accounting Office, Pension Plans: Stronger Labor
ERISA Enforcement Should Better Protect Plan Participants, GAO/
HEHS-94-157 (Washington, D.C.: August 8, 1994).
[32] Current U.S. Comptroller General David M. Walker was the Assistant
Secretary of Labor for the PWBA from 1987 to 1989. The report was
issued in March 1989.
[33] The primary purpose of the Strategic Enforcement Plan is to
establish a general framework through which EBSA's enforcement
resources may be efficiently and effectively focused to achieve the
agency's policy and operational objectives.
[34] For example, in the area of tender offers, the Polaroid ESOP (or
NationsBank) case was a major enforcement action brought by DOL in a
case where DOL was able to show losses to the plan for fiduciary breach
involving a failure properly to exercise shareholder rights (in that
case, a failure to tender shares). See Harman v. NationsBank Trust Co.
(Georgia) N.A., 126 F.3d 1354 (11TH Cir. 1997), reh'g denied, 135 F.3d
1409 (11TH Cir.), cert. denied, 525 U.S. 816 (1998). Another
enforcement action involving fiduciaries' misuse of shareholder powers
was Martin v. Feilen, 965 F.2d 660 (8TH Cir. 1992), cert. denied, 506
U.S.1054 (1993) (involving, in part, failure of plan fiduciaries to
bring a shareholder derivative action).
[35] Plan year 2001 is the most recent year for which plan-specific
Form 5500 data were available for our review.
[36] Fortune 500 companies are those representing the 500 largest
corporations that are based in the United States, ranked in order of
revenues. The Fortune 500 list is released annually in April. The
rankings are based on reported revenues in corporate annual reports
(10Ks) filed in the year leading up to January 31. Therefore, only
public corporations and private corporations that voluntarily release a
10K are included. For example, the April 2004 Fortune 500 list is based
on revenues reported between February 1, 2003, and January 31, 2004.
[37] Not all 500 companies were included in our analysis. For example,
some companies on the Fortune 500 are privately owned and, therefore,
don't have publicly traded stock. Furthermore, there are a handful of
companies that were on the Fortune 500 in 2001 but have since gone
bankrupt, or are no longer public. This often made it difficult to find
the appropriate data for those companies and when that was the case,
they were eliminated from the analysis.
[38] An EIN, known as a federal tax identification number, is a nine-
digit number that the Internal Revenue Service assigns to
organizations.
[39] Additionally, we included the employer securities held by master
trust investment accounts associated with Fortune 500 benefit plans. A
''master trust'' is a trust in which assets of more than one plan
sponsored by a single employer or by a group of employers under common
control are held. In such cases, a benefit plan reports the value of
its interest in the master trust account and not any employer
securities held by the master trust. Accordingly, we included employer
securities reported by master trusts accounts held by Fortune 500
benefit plans.
[40] We assumed that those shares held by the company and its pension
plan(s) are common stock with one vote per share for computation of
voting power. To the extent that assumption is inaccurate, our
estimates for the voting power of plans in their own company might also
be inaccurate.
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