Most California State employees and retirees have their retirement funds invested largely through two vehicles. CalPERS is the nation’s largest public pension, with almost $300B in assets. Many employees also have smaller amounts invested in CalHR‘s Savings Plus program, with assets of $10B. Both vehicles invest a large proportion of their funds in corporate stock, which carries voting power that can not only impact the value of the companies and potentially our retirement income but also the quality of our environment and our political framework.
Over the course of several decades the Department Labor and the SEC have ruled that proxy voting rights are assets. Fiduciaries of funds, such as CalPERS and Savings Plus, must ensure the underlying shares are voted for the benefit of the employees and retires whose funds they hold in trust.
CalPERS and CalHR’s Savings Plus offer different approaches to voting proxies, with radically different results. CalPERS is devoting considerable resources to ensure proxies are voted in a conscientious attempt to benefit employees and retirees. CalHR appears to make no such effort. CalHR should use their current contracting process to improve proxy voting within the Savings Plus Program. Participants in the Savings Plus should demand action from CalHR, both directly and through their representatives. Those invested in other deferred compensation plans should perform similar analysis and take similar action.
CalPERS, the California Public Employees Retirement System is administered by a 13-member Board of Administration who are elected, appointed, or ex officio:
Six elected members:
- Two elected by and from all CalPERS members
- One elected by and from all active State members
- One elected by and from all active CalPERS school members
- One elected by and from all active CalPERS public agency members (employed by contracting public agencies)
- One elected by and from the retired members of CalPERS
Three appointed members:
- Two appointed by the Governor – an elected official of a local government and an official of a life insurer
- One public representative appointed jointly by the Speaker of the Assembly and the Senate Rules Committee
Four ex officio members:
- The State Treasurer
- The State Controller
- The Director of the California Department of Human Resources
- A designee of the State Personnel Board
CalHR Administration of Savings Plus
The California Department of Human Resources (CalHR), which operates the Savings Plus program, provides no direct voice in electing or appointing those who administer its program. Currently, the sole administrator is Acting Director Richard Gillihan, who contracts almost, if not all, responsibilities to the private sector. Gillihan reports to Marybel Batjer, California Government Operations Agency, who reports in turn to Governor Edmund G. Brown Jr.
Proxy Voting at CalPERS
CalPERS has extensive information on its website concerning how proxies are voted. It includes several documents on proxy voting policies, the findings of commissioned research, a video report from Anne Simpson, many quick links, and much more. Members are encouraged to vote along with CalPERS when voting stock they may hold in their own individual portfolios.
To take just one example of many, CalPERS calls upon all the public companies it invests in to disclose charitable and political expenditures, which allows it and other shareowners to assess if such spending aligns with the interests of shareowners.
ProxyDemocracy.org is a nonprofit, nonpartisan project supported by foundations and individuals interested in being responsible shareowners. The website provides tools to help investors use their voting power to produce positive changes in the companies they own. ProxyDemocracy publicizes the intended votes of institutional investors with a track record of shareowner engagement, including a limited number of votes by CalPERS. Additionally, ProxyDemocracy helps investors understand the voting records of leading funds, making it possible for them to purchase funds that better represent their interests and pressure those that don’t.
Detailed Vote Record of CalPERS
|Activism Score||Activism Plot||Votes|
|Against mgmt||With mgmt||Abstain|
|Board Independence and Performance||86.5||115||18||0|
|Employment and Working Conditions||76.9||70||21||0|
|Environmental and Social||78.7||155||42||0|
|Political Influence and Charitable Contributions||83.1||162||33||0|
As you can see, CalPERS voted against corporate directors 7.5% of the time and voted in favor of 78.3% of shareowner proposals. CaPERS also voted for most proposals aimed at improving employment and working conditions as well as the natural and social environment and also vot to curb or report on money spent by corporations for political influence or charitable contributions.
Proxy Voting at Savings Plus Under CalHR
In contrast to CalPERS, I could find no information on proxy voting posted on the Savings Plus site. Back in June of 2012, I asked CalHR where I could find how funds in the plan voted their proxies. I was hoping for at least a few tables that compare voting records, such as those at ProxyDemocracy.org or FundVotes.com. This was their response:
The funds offered by Savings Plus operate like mutual funds in that they are invested in a whole bunch of different types of stocks already. Therefore, there are no proxy votes associated with our investment options.
I knew the law requires that CalHR be more diligent than that, so I persisted, citing federal requirements under 29 CFR Part 2509, Interpretive Bulletin Relating to Exercise of Shareholder Rights:
- Proxy voting issues must be examined to determine the positions that are in the best interest of plan participants and beneficiaries. Proxies shall be voted on all issues that affect the value of the shares;
- A system to verify and track receipt and accuracy of proxies must be in place, with reasonable steps taken to secure any missing proxies and to correct discrepancies in shares on proxies when so indicated;
- Trustees who assign voting authority to fiduciaries must periodically monitor their activities to verify that tracking procedures are utilized and that proxy voting records are kept in order that trustees can review the actions taken in individual proxy voting situations;
Probably more pertinent than the obscure bulletin I cited to CalHR are the SEC requirements that all mutual funds report their voting policies and records. Eventually, I was able to obtain what amounts to an unorganized dump of voting files from contractors and confirmed CalHR has no voting policies, does not track funds to ensure funds vote in the interest of fund holders and maintains little documentation, if any, with regard to monitoring or verifying proxy records. A July 27, 2012 email from Hannah K. Yu, Labor Relations Counsel, included the following:
CalHR has determined it has no documents responsive to this request. Please note that the investment contracts with the separate funds contain general language regarding proxy voting, but CalHR provides no explicit guidance or policy to the separate funds regarding their voting…
you requested written examples of actions CalHR takes to verify, track receipt and accuracy of proxies and correct discrepancies. CalHR has determined it has no documents responsive to this request. In addition, please note that pursuant to Government Code section 6253, CalHR is obligated to provide identifiable record or records prepared, owned, used or retained by CalHR; it is not obligated to create a new document…
you requested minutes or other evidence of meetings held where CalHR trustees reviewed, monitored and verified and/or corrected actions taken in individual proxy voting situations. CalHR has determined it has no documents responsive to this request.
By looking at my own current investment options on the Savings Plus site after logging in, it appears the current S&P 500 fund and other passively managed funds are invested by Northern Trust, based on the following sentence:
Performance, Fees, Risk, and Inception Date information are specific to Savings Plus. All other information is specific to the Northern Trust Index fund.
I could not find a similar disclosure on a publicly available portion of the Savings Plus website. Although the site available to participants makes various disclosures, such as the fund’s top holdings as of Jun 30, 2014 (Apple 3.18% of fund, Exxon Mobil 2.45%, Microsoft 1.78%, etc.), there is no indication provided as to how proxies have been or will be voted for the underlying shares.
However, I was able to find the voting profile for Northern Trust on ProxyDemocracy.
Detailed Vote Record of Savings Plus Contractor Northern Trust
|Activism Score||Activism Plot||Votes|
|Against mgmt||With mgmt||Abstain|
|Board Independence and Performance||6.1||2||31||0|
|Employment and Working Conditions||0.0||0||26||0|
|Environmental and Social||0.0||0||61||0|
|Political Influence and Charitable Contributions||3.3||1||29||0|
From that information available, we can see that Northern Trust does not vote very often in comparison with CalPERS, and when they do, they vote overwhelmingly with management. For example, Northern Trust voted against directors less than 1% of the time, whereas CalPERS voted against 7.5% of directors. Additionally, Northern Trust voted in favor of only 29.3% of shareowner proposals, which are typically aimed at holding management more accountable to shareowners, improving financial performance and improving environmental sustainability. CalPERS voted in favor of 78.3% of shareowner proposals.
An even greater contrast can be seen when we compare Northern Trust’s votes in favor of proposals aimed at improving working conditions, environmental and social, as well as improving reporting of funds used for political influent and charitable contributions. Northern Trust voted in favor of only one such resolution, whereas CalPERS voted in favor of 387 such resolutions. State employees, who often spend their days regulating working conditions, environmental and political activities might be disappointed to learn their investments are sometimes working at cross purposes.
Why the Difference in the Proxy Voting of CalPERS and Savings Plus?
Of course, I can’t really know the real reason without spending a lot more time researching the history of these vehicles but I can make some educated guesses.
- Size matters. Just as the vast majority of retail shareowners don’t vote their proxies because they assume it will make little difference, perhaps CalHR fails to put any pressure on Northern Trust and other contractors to vote in a way that is more aligned with the values of participants because it deems those proxies of little consequence. Even participants in Savings Plus are more likely to be watching the $156.4B in public equity investments at CalPERS, rather than the $10B invested through the Savings Plus program. Still, $10B is a lot of money. How those shares are voted does have an impact.
- Cost. If CalHR insists contractors perform some basic analysis and reporting, say of the variety performed by ProxyDemocracy, that will add some very minor cost and will complicate the contracting process. Requiring bidders to follow the voting policies of CalPERS, for example, would probably add slightly even more costs and complications. Surveying the values of participants and formulating a proxy policy for CalHR might cost even more. However, basic voting information can be disclosed for free or practically no cost.
- Politics. Participants have no direct voice into who manages the contracts issued by CalHR, although we do have some small influence on gubernatorial elections. Changing proxy voting at the Savings Plus program is not high on the agenda of most participants but it would probably take only a few voices to make relatively minor changes that could lead to greater accountability.
These barriers are not insurmountable if members, their representatives, and/or the press take an interest in proxy voting at the Savings Plus program.
Part II will reiterate why proxy votes are important, will provide a couple of examples of proxy votes made by current Savings Plus contractors that may be working against the best interest of participants, and will suggest three actions participants can take to ensure we at least know how our proxies are being voted. See also another followup at Savings Plus: Transparent Proxy Voting Needed.