Last month, important news came out of the U.S. Department of Labor (DOL) which was overshadowed by presidential election coverage. The news involved two agency “interpretive bulletins” issued on October 17 intended to revise previous guidance for ERISA funds in two important areas; investing in economically targeted investments (Bulletin 94-1) and the exercise of shareholder rights, including proxy voting (Bulletin 94-2). However, instead of providing clarification these bulletins stirred a hornet’s nest of activity among pro-business groups (applauding the move) and shareholder advocates (deriding the rulings). While likely viewed as arcane by many outside financial regulatory circles, this announcement is important for two reasons.
The first is that proxy voting is the main method shareholders have to weigh in on the governance of public companies they own. The proxy vote at annual meetings allows pension funds and other investors to vote against the re-election of directors if there are excessive pay practices, possible conflicts of interest on the board of directors or shady accounting practices. So any change as to how pension trustees and other fiduciaries might interpret their responsibility as it relates to voting proxies is an important public policy matter in corporate America.
The second reason these recent DOL rulings are important is that these changes would seem to reflect the strong lobbying efforts by the Chamber of Commerce and other right-wing business groups. Since the Enron meltdown, the U.S. Chamber of Commerce has been on the defensive in trying to counterbalance – some would say rather unsuccessfully – the substantial progress made by investor advocates over the past few years. As a result of these efforts, today corporate executives and directors at public companies are now held to much higher standards of ethics and responsibility which has undoubtedly made corporate boards more accountable to investors and, therefore, more effective in the context of the broader economy. Clearly, the pro-business community and its cheerleader-in-chief Tom Donohue, the Chamber’s CEO since 1997, are hellbent on reversing this progress. It shouldn’t be a surprise that Mr. Donohue serves on the boards at Union Pacific and Sunrise Senior Living, two companies with their share of corporate governance problems.
According to insiders familiar with the matter, officials at the DOL are asserting that the new bulletins are primarily intended to clarify previously established interpretations. If this was indeed the goal, then the agency appears to have missed the mark. The jury is still out as to whether this guidance will dramatically alter the landscape for corporate governance activists in the coming proxy season and beyond. For example, the DOL does cite as an example a proposal requiring corporate directors or officers to disclose their political contributions. So while this new guidance may not impact traditional corporate governance resolutions, it could have an indirect influence on how fiduciaries vote on more “socially directed” items that appear on ballot.
Many are rightfully questioning the DOL’s motive in adopting these interpretive bulletins at the end of an outgoing Administration. Once Obama takes office in the new year, expect investors to seek an official clarification of the new rules. Depending of the outcome of that process, some institutional investors could even mount a legal challenge to reverse the recent rulings.
