The Department of Labor (DOL) rescinded Interpretive Bulletin 2008-2 relating to the Exercise of Shareholder Rights and replaced it with Interpretive Bulletin 2016-01 which reinstates the language of Interpretive Bulletin 94-2 with some modifications. US SIF supports this change as IB 2008-2 was not only inconsistent with prior guidance, but may have discouraged ERISA plan fiduciaries from exercising their shareholder rights.
The guidance appropriately notes the positive role fiduciaries play through the exercise of shareholder rights. Additionally, this guidance also reinforces the language of IB 2015-1 on economically targeted investments which clarified that environmental, social and governance (ESG) impacts can be intrinsic to the market value of an investment.
Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment noted that
Fiduciaries have been engaging portfolio companies on environmental and social matters in a productive fashion for years. Institutional investors are increasingly engaging companies on ESG issues to address risks and opportunities. The US SIF Foundation’s 2016 Report on US Sustainable, Responsible and Impact Investing Trends found that 225 institutional investors or money managers with combined assets of $2.56 trillion filed or co-filed shareholder resolutions on environmental, social an governance issues at publicly traded companies from 2014 through 2016. We believe shareholder engagement is consistent with the fiduciary duties of prudence and the goal of increasing long-term risk-adjusted returns. We commend the Department of Labor for its leadership on this issue.
Key points made in the new guidance and in the DOL news release include:
- The DOL reinforced the legitimacy and importance of investors’ engagement with their portfolio holdings noting that IB 2008-2 is out of step with important domestic and international trends in investment management. The guidance removes perceived impediments to the prudent management of plans’ rights as shareholders and encourages fiduciaries to manage those rights in the best interest of plan participants and beneficiaries.
- The updated guidance clarifies how a plan may consider ESG issues in proxy voting and other shareholder engagement activities.
- In its comments, the DOL recognizes the pervasiveness of US publicly-traded stocks in ERISA plan investment portfolios, both direct holdings and through pooled investment funds, including index funds and that this is another factor that contributes to the importance of proxy voting and shareholder engagement practices. The DOL noted that if there is a problem identified with a portfolio company’s management, selling the stock and finding a replacement investment may not be a prudent solution for a plan fiduciary. Often, engagement with the company is the prudent course of action.
- Issues appropriate for shareholder engagement include governance structures and practices, the nature of long-term business plans including plans on climate change preparedness and sustainability, the corporation’s workforce practices, and policies and practices to address environmental or social factors that have an impact on shareholder value, among other issues.
- Companies themselves are seeking more engagement as a way of understanding and responding to their shareholders’ views. There have also been market events that were catalysts for the growth of shareholder engagement. The financial crisis of 2008, for example, exposed some of the pitfalls of shareholder inattention to corporate governance and highlighted the merits of shareholders taking a more engaged role with the companies.