Congress and the Securities and Exchange Commission (SEC) are once again focusing on corporate pushback against proxy voting practices of institutional investors and their proxy voting advisors. However, largely missing from that debate has been an understanding of the investor fiduciary duties which apply to management of proxy voting. This presents major public policy risks for pension funds and other long-term investor fiduciaries with obligations that extend across generations and require creation of sustainable value. Misinformed regulatory interventions that impede the independent communication between shareholders and boards that is provided by proxy voting or which disrupts the state law corporate governance balance between management, boards and shareholders could have serious consequences. This article provides an up-to-date overview of the fiduciary duty principles which underlie proxy voting and offers related guidance for pension fund fiduciaries. We believe that a more robust implementation of fiduciary principles could improve both proxy voting oversight and asset management results, as well as address many of the issues driving the current political pushback.

Application of Fiduciary Duties to Proxy Voting

It is well established that investor fiduciary duties under the Employee Retirement Income Security Act (ERISA), which serve as a model for most public pension funds, apply to management of proxy voting rights. The Federal Department of Labor (DOL) advised ERISA funds in 1988 that "[t]he fiduciary act of managing plan assets that are shares of corporate stock includes the management of voting rights appurtenant to those shares of stock."1

Both the DOL and SEC have more recently confirmed that fiduciary duties apply to proxy voting. For example, in DOL Interpretive Bulletin 2016-01 (December 29, 2016), the DOL noted that "[t]he Department's longstanding position is that the fiduciary act of managing plan assets which are shares of corporate stock includes decisions on the voting of proxies and other exercises of shareholder rights." In Staff Legal Bulletin No. 20 (June 30, 2014), the SEC confirmed, "As a fiduciary, an investment adviser owes each of its clients a duty of care and loyalty with respect to services undertaken on the client's behalf, including proxy voting."

Duty of Prudence

The duty of care cited by the SEC has often been viewed as merely requiring that fiduciaries follow practices that are being used by similar investors. After all, the ERISA prudence standard requires application of the same care, skill, diligence and prudence as peers. However, prudence is not a "lemming standard" which contemplates blindly following peers. Peer practices serve as a reference point, but each fiduciary must undertake due diligence based on its own investment beliefs, strategy, liability structure, risk tolerance, resources and governing documents. Since fiduciary duty is process oriented, it is not unusual for investors using the same prudent processes to reach different results.2

Prudence is also not unidimensional. It has additional aspects which are especially relevant to proxy voting. They include:

  • Prudence is forward looking and not limited to projection of past patterns into the future. The word "prudent" originates from the Latin word meaning to act with or show care and thought for the future.
  • Fiduciaries must investigate and verify facts material to investment decisions. Personal biases or preferences (whether liberal or conservative) cannot be the basis for decisions.
  • Understanding of fiduciary principles is not static. It evolves over time as circumstances and the knowledge base change. For example, after investment theory evolved during the 20th century to finally treat investment in company stock as prudent, an introductory note was added to chapter 17 of the Restatement of Trusts (Third) in 1992 to recognize, "Trust investment law should reflect and accommodate current knowledge and concepts. It should also avoid repeating the mistake of freezing its rules against future learning and developments."

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