CalHR Savings Plus

California’s Savings Plus: Better Proxy Voting Disclosure Needed Part II

CalHR Savings Plus

This is the second of a two part series. Part I discussed proxy voting at Savings Plus, as compared with at CalPERS. 

CalHR’s Current RFP for Savings Plus

CalHR recently released a Request for Proposal (RFP 700-14-01) seeking bids for investment management services for Savings Plus. Unfortunately, the RFP fails to require Savings Plus participants be informed of proxy voting policies or decisions.  

CalHR solicited bids from qualified firms to provide five (5) Passive Index Funds benchmarked to the: S&P 500 Index, S&P 400 Index, Russell 2000 Index, MSCI ACWI ex-US or ACWI ex-US IMI, and Barclays US Aggregate Bond Index or Global Aggregate USD Hedged Index. As described in the RFP, CalHR does not permit these assets to be managed in a securities lending program. Market values at June 30, 2014 in the mandates were (in millions): S&P 500 $1,670; S&P 400 $432; Russell 2000 $200; MSCI ACWI ex-US $429; and Barclays US Aggregate $714. This amounts to more than a third of all funds invested through Savings Plus.

Bid packages can be obtained by visiting bidsync.com. First time users must register with BidSync (no cost). Log on and search for bid number 700-14-01. Proposals are due on September 11, 2014. You can find more particulars in the RPF, which I have uploaded as CALHR-BidDocumentsPassivelyManagedFunds (pdf) for future reference. According to the bid package, separate investment management contracts will be awarded to provide one or more of five (5) passively managed funds benchmarked to the:

  • S&P 500 Index
  • S&P 400 Index
  • Russell 2000 Index
  • MSCI ACWI ex-US or ACWI ex-US IMI
  • Barclays US Aggregate Bond Index or Global Aggregate USD Hedged Index

CalHR will select the investment managers through a competitive process. Potential firms must satisfy organizational and strategy-specific minimum qualifications and licensing, experience and business requirements.  CalHR intends that the successful firm(s) will enter into an Agreement(s) for a five-year period beginning February 1, 2015. From the Scope of Work:

While the Plan is not subject to ERISA, the Department intends to operate as though it were. As such, the Contractor shall acknowledge its fiduciary role insofar as the advice and dealings with the Department, and the handling of the Plans’ assets for which it manages…

The Contractor must vote proxies and affect corporate actions in the best interest of Plan participants and their beneficiaries invested in the Account. The Contractor shall provide the Department with quarterly proxy reports within one month following the end of each calendar quarter and will provide to the Department its proxy voting policy at least annually. The Contractor shall provide the Department with these documents more frequently if requested by the Department…

The Contractor shall provide to the Department or its designee copies of any notices of shareholders’ meetings, proxies and proxy soliciting materials, prospectuses, and the annual reports or other reports with respect to the Fund, as requested…

The Contractor shall make available in a format acceptable to the Department information and materials necessary to inform participants of the investment…

As necessary we may make adjustments to the RFP. Such changes are made via addendums which will be posted on bidsync.com

CalHR’s RFP requires the contractor to vote proxies “in the best interest of Plan participants” but provides no further guidance as to what that means. The contractor is required to provide CalHR with its proxy voting policies and quarterly voting reports but is not required to provide such information to Savings Plus participants. We are left out of the loop completely. How do we know if the contractor is voting in our “best interest” if we don’t know how they voted?  

Why Proxy Votes are Important

ERISA requires a fiduciary who contracts with an investment manager to periodically monitor their activities, including actions taken with regard to proxy voting that may affect the value of investments. See my October 1995 post, Fiduciary Responsibilities for Proxy Voting.

The 2010 Supreme Court case of Citizens United v FEC, which limited the government’s ability to constrain corporate expenditures for political purposes, illustrates the general problem of accountability.  Justice Anthony Kennedy’s majority opinion in justifies the Court’s opinion in part by pointing to the ideal of internal democracy within corporate governance.

With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.

With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.

I strongly disagree with the Court’s decision but Kennedy’s opinion does reinforce the idea that real democracy depends on more than just a democratic government. It depends on democratic structures and mindsets throughout society, especially in the operation of corporations, which have so much influence on other social institutions, including governments at all levels.

Yet, corporations are not required to make the disclosures to shareowners or the public as Justice Kennedy seems to have believed when he wrote the Court’s decision. How can we, as shareowners, hold corporate managers accountable when we do not know what candidates or measures they are supporting? Certainly, it is not in the interest of CEOs and entrenched boards to make such disclosures, since doing might anger shareowners and would make it more difficult for them to have politicians in their “pockets.”

How does this apply to the Savings Plus program and Northern Trust? We don’t know if our proxy votes are supporting the open disclosure of political contributions as Justice Kennedy assumed, since we don’t know how Northern Trust voted.

Each year the AFL-CIO puts out a Key Votes Survey so that members can see which funds are voting with in the interests of labor. The 2013 survey included a proxy proposal #7 at Aetna, with the AFL-CIO recommending a vote in favor. How did Northern Trust vote? As I’ve already indicated, you won’t find an answer by searching CalHR or Savings Plus websites, since no votes are posted.

However, if you know where to look, you can find out because like most funds Northern Trust uses a voting platform developed by Institutional Shareholder Services (ISS), which is already designed to meet required SEC disclosure requirements. I found it by Googling “Northern Trust proxy voting policies.” I clicked on Northern Funds’ Proxy Voting Policies And Procedures and then on proxy voting records. Choose Northern Stock Index Fund. Click on Aetna and you can clearly see Northern Trust voted against the proposal.

From the current RFP, we can see that CalHR’s only apparent requirement on how funds in the Savings Plus program are to vote is the following:

The Contractor must vote proxies and affect corporate actions in the best interest of Plan participants and their beneficiaries invested in the Account.

How is it in our interest to vote against a proposal that would enhance oversight of political contributions by the Aetna board of directors? Let’s look at one more. The AFL-CIO recommended a vote in favor of a supplier “sustainability report” at Hasboro. I looked up the proposal and found the resolved clause reads as follows:

Shareholders request that the Board of Directors take the steps necessary to require the Company’s significant suppliers to each publish an annual, independently verifiable sustainability report that the Company makes available to its shareholders. Among other disclosures, reports should include the supplier’s objective assessments and measurements of performance on workplace safety, human and worker rights, and environmental compliance using internationally recognized standards, indicators and measurement protocols. In addition, reports should include incidents of non-compliance, actions taken to remedy those incidents, and measures taken to contribute to long-term prevention and mitigation.

Significant suppliers are those from which the Company reasonably expects to purchase at least $1 million in goods and services annually.

As State employees, many of us spend a great deal of time an effort as part of our job to ensure workplace safety, human rights, worker rights, and environmental protection. How is it in our interest to vote against a shareowner proposal that seeks to ensure Hasboro suppliers comply with the standards we are daily trying to enforce?

According to the Key Votes Survey, Northern Trust voted as recommended by the AFL-CIO less than 14% of the time. I don’t expect that everyone investing in the Savings Plus program fully embraces all recommendations by the AFL-CIO. However, shouldn’t we be able to see for ourselves what our proxy votes are supporting? Shouldn’t we have some voice in determining what votes are in our “best interest”? How can we, in Justice Kennedy’s words, “hold corporations and elected officials accountable for their positions,” if votes made on our behalf aren’t disclosed. How can we “determine whether their corporation’s political speech advances the corporation’s interest in making profits” if the corporations contributions aren’t disclosed? Why did Norther Trust vote against such making such disclosures at Aetna?

The vast majority of funds use the ISS voting platform, so seeing how they vote is simply a matter of them putting a link on their website to their existing platform. Doing so would allow you to see how funds vote in real time. As soon as they cast their ballot you would be able to see their vote. Like CalPERS tells its members, if you own stock in the company as an individual investor, you’d be able to follow along and vote with the Savings Plus contractor.

Some funds don’t use the ISS voting platform. Instead, like CalSTRS they use the Glass Lewis voting platform. Either way, if a link were provided it would be easy for Savings Plus participants to look up votes as they are cast, without the need of the contractor or anyone else lifting a finger.

calhr-savings-plusSavings Plus Participants Should Take Action

  • Send an email to the Acting Director Richard Gillihan ([email protected]), referencing this post. Ask him to amend CalHR’s recently released Request for Proposal (RFP 700-14-01), seeking bids for investment management services for Savings Plus, to require contractors to provide a link to their proxy voting platform like that provided by CalSTRS or Florida SBA.
  • Urge your union, association or other advocacy group to do the same.
  • Write to your Assemblymember and State Senator asking them to introduce legislation requiring CalHR to report to Savings Plus participants how proxies in held by participating funds are voted. Here’s what I wrote to both. You’ll want to leave off the last sentence.

The $10B CalHR Savings Plus program does not disclose to participants how proxies in the underlying securities are voted.

Northern Trust, a current contractor for passive index funds, is voting against measures that would require companies to report on political contributions. They are also voting against shareholder proposals at companies that would better ensure supply chain companies follow health and safety, as well as environmental laws.

Simple fix. CalHR should require a link on the Saving Plus site to the fund’s voting platform. As an example, here’s Northern Trust’s http://vds.issproxy.com/FundList.php?CustomerID=550&FundFamilyID=74

This change shouldn’t cost contractors or CalHR a dime. All funds use voting platforms so they can meet SEC reporting requirements. According to law, proxies must be voted “in the best interest of Plan participants.” How do we know if votes are in our interest if CalHR and its contractors never disclose to Savings Plus participants what votes were cast?

This is an easy fix that will earn you gratitude, especially from State employees in your district. Please contact me. I was a legislative advocate for many years and can help you draft and pass a bill requiring such action.

Not a Savings Plus Participant?

Even if you aren’t a California state employee, you probably participate in a deferred compensation plan. If your plan doesn’t disclose the votes, ask them to do so.

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