The behavior of one of the world’s largest investment advisers has been trending toward social and political activism over the years, a development that should be concerning to anyone who has money in a 401k or other long-term savings vehicle. Sixty percent of American workers have money in defined contribution retirement funds, which amounts to over 90 million people.
Ignorance in Retirement Savings
While some people certainly do take an active role in managing their 401k funds, most lack the time or investment knowledge to study the thousands of decisions investment firms make, ostensibly on their behalf.
Few are even aware of the existence of proxy advisers or the influence they wield.
Proxy advisers advise institutional fund managers on the myriad proxy votes they must make for the stocks they hold in their funds. The proxy firms often provide advice that runs counter to such a goal and is instead motivated by a political agenda. In many situations, investors have outsourced their voting to advisers who even cast votes for the funds they advise.
Problems can arise when the incentives of investors and the proxy firms do not align. While the goal of a pension fund should be to maximize the investors’ return so that workers are able to retire in comfort and security, it appears that the proxy firms often provide advice that runs counter to such a goal and is instead motivated by a political agenda.
Indeed, the nation’s largest proxy adviser, Institutional Shareholder Services (ISS), has even gone so far as to create a series of “specialty” reports aimed at promoting a variety of different social initiatives.
Is Guidance Impartial?
The issuance of guidelines based on “socially responsible investment” or “sustainability” would suggest that the company is either responding to social pressure in an effort to generate good PR or that the advisers themselves have a political agenda they seek to advance through the money managed by their clients.
More concerning, however, is the fact that these reports frequently offer different recommendations on the same votes at the same companies. In other words, investors are able to pick and choose the recommendation they want from a variety of different reports.
ISS is compromising the financial returns of its clients in favor of social activism.
While there’s nothing inherently wrong with investors voting their securities the way they want, it does call into question whether the recommendations are genuinely from an independent third party. Put another way, the safe harbor designation that the SEC provides to those investors who use the guidance of an independent adviser would no longer appear to be applicable when the adviser is offering recommendations that cover all eventualities. Has genuinely impartial guidance been offered?
The fact that each of these specialty reports promotes politically motivated issues also suggests that ISS is compromising the financial returns of its clients in favor of social activism.
The company states in its reports that
Socially responsible investors invest for economic gain, as do all investors, but they also require that the companies in which they invest conduct their business in a socially and environmentally responsible manner.
Of course, an individual investor has every right to sacrifice returns in favor of social causes he or she may believe in, but the responsibility of pension fund managers and the proxy firms that advise them should be to safeguard and nurture the assets of their clients in an unbiased fashion rather than arbitrarily supporting subjective initiatives without members’ approval.
The fact that ISS does not allow all companies outside of the S&P 500 to review its benchmark reports to correct factual inaccuracies before publication raises further concerns about its accountability. That it provides no such service for companies included in its reports on socially responsible investing suggests that errors or inaccuracies introduced into these reports will likely go unchallenged and uncorrected, further compromising the strength of client investments.
Lack of Accountability
There is reason to worry about accountability from ISS. In 2013 it was fined for improperly disclosing confidential information about its clients.
Proxy advisers like ISS are not just a few isolated actors: Their recommendations can have vast implications for firms and investors alike. ISS alone cast over 10 million proxy ballots last year, representing 4.3 trillion shares of stock. If proxy advisers start favoring social activism over good stewardship of their clients’ funds, the results could change the outcome of myriad proxies across the economy.
It is also important to note that there isn’t much individual investors can do to deter this sort of behavior. A worker whose retirement is managed through a pension fund, particularly a public sector one, cannot easily move his funds elsewhere, and even if it were possible, it is not easy to discern which fund managers resist untoward advice from proxy advisers that may harm long-term returns.
Knowledge is power, and as long as investors are being kept in the dark, we can continue to expect fiscally unsound behavior from firms.
This highlights one of the problems with tying benefits like retirement to employment. It becomes more difficult for individual investors to shop around, perform due diligence, and make sure that their money is being handled responsibly. When workers are saddled with the retirement accounts chosen by their employers instead of being able to freely choose in a market, it’s only natural that choice, transparency, and accountability will suffer.
But given the status quo, the most important service we can provide to investors is information about how proxy adviser firms are behaving so that those who object to their money being used for political and social activism can demand change from their investment managers. Knowledge is power, and as long as investors are being kept in the dark about the activities of proxy advisers, we can continue to expect fiscally unsound behavior from firms with no incentive to change.
In a country that is becoming increasingly polarized, a handful of adviser firms wielding the financial resources of millions of workers in the pursuit of various social outcomes is troubling, especially from the point of view of workers at risk of being shortchanged on their retirement.