01 May PUBLIC PENSION CORNER, #41: Does Abstention = Neutrality?
NEWS:
I. Asset Managers are Still Learning that Politics Doesn’t Pay
The New York City pension system has decided that two of the four biggest asset managers – one of whom remains the market leader in ESG funds – are not sufficiently aligned with the system on climate matters, to no one’s surprise:
New York City’s pension funds reported that asset managers BlackRock and Fidelity remain “insufficiently aligned” with their net zero expectations, a situation that could lead the public pension system, one of the largest in the U.S., to re-bid or terminate their mandates.
New York City’s pension funds represent nearly $300 billion in assets – making them collectively one of the largest pubic pension systems in the U.S. – and include the New York City Employees’ Retirement System (NYCERS), Teachers’ Retirement System (TRS), and Board of Education Retirement System (BERS). The Comptroller is the investment advisor to and custodian of assets of the city’s pension funds. In 2022, the NYC pension boards launched a Net Zero Implementation Plan, including a goal to achieve net zero emissions by 2040, and a requirement for asset manager to submit net zero plans in 2025.
The new assessment, included within the NYC pension funds’ Fiscal Year 2025 Annual Climate Reports, follows a recommendation last year by former NYC Comptroller Brad Lander that the city’s pension funds drop a $42 billion investment mandates with BlackRock, as well as those with Fidelity and PanAgora, over the asset managers’ failure to submit decarbonization plans that were aligned with the pension system’s net zero investment goals.
II. 23 State Attorneys General Confront Ratings Agencies
A group of 23 state AGs sent a letter to the credit-rating agencies and to the SEC, asking for information and clarification on the agencies’ policies that negatively affected states and municipalities because of ESG factors.
The officials from 23 Republican-led states, which include Texas, Florida and Oklahoma, said Fitch Ratings, Moody’s Corp. and S&P Global Ratings have “undisclosed material conflicts of interest,” in part because they have pledged to a United Nations-backed organization to incorporate ESG into their analysis.
Oklahoma Attorney General Gentner Drummond said Tuesday in a statement that credit-rating companies have taken action against states and municipalities based on “speculative ESG assumptions that never materialized.” He said they “strayed from their own methodologies in downgrading, or threatening to downgrade, states and municipalities with fossil-fuel production revenues, which is why I am stepping in to demand answers.”…
The states’ letter says downgrades are often “premised on far-fetched ESG goals.” It calls on credit-rating companies to “withdraw from or disclose ESG commitments” and “eliminate or disclose ESG consulting conflicts,” among other actions.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Does Abstention = Neutrality?”
What follows here is a true story. The names and dates have been changed to protect the guilty innocent.
No, but seriously. This is a true story. And the names haven’t been changed; they’ve just been left out. There’s no sense in naming and shaming good people who made a mistake. There’s nothing to be gained in that.
Nevertheless, there is plenty to be gained by looking at this situation and analyzing why the decisions made should be understood as mistaken (at best) and in need of remedy. Indeed, looking at situations like this and analyzing the mistaken nature of the decisions is very much the purpose of this newsletter. It is also very much the purpose of the State Financial Officers Foundation’s Public Fiduciary Network (at which I am the Scholar in Residence) and the monthly educational webinars PFN presents (that more of you should definitely attend!). This is basic stuff, basic fiduciary duty, and it is far too easy to get wrong, even when trying to do what is right.
This past winter, a red state – a deep red state – made some changes to the way it handles its investment proxy votes. The state’s investment council was told that the new policy would be politically “neutral,” would meet the state’s needs and desires, would follow state law, and would enable the members of the council to discharge their responsibilities as fiduciaries of public funds. The new investment policy’s section on proxy voting contains the following paragraph on social and political shareholder proposals (emphasis added):
Prudent investment guidelines, including proxy voting, requires the Council to focus on investment returns and management of investment risk for the exclusive benefit of the plan participants. Proxy votes must be based solely on factors that relate to enhancing the value of the investment and cannot contain factors prohibited by federal or state law. The Council avoids taking positions, through its proxy voting, that either support or oppose shareholder resolutions involving social or political issues, including environmental and DEI. All proxy votes should be “neutral” with respect to social or political matters. The most neutral position that the Council could take is to abstain from voting on social or political issues.
Superficially, this seems perfectly reasonable and sensible. Abstaining from controversial political and social proxy votes sounds like a vigilant but detached way to avoid controversy and contentiousness.
But it’s not.
There are three – admittedly overlapping and interconnected – reasons why abstaining from voting on social and political shareholder proposals is not neutral, not sensible, and not a reasonable proxy-voting policy for the board overseeing the investment of public funds.
First, and likely the most important in terms of real-world consequences, this policy automatically and definitionally cedes ground to shareholder activists – on the Left, on the Right, and everywhere in between. When an investor holding shares declines to vote on a proposal (or declines to engage or address the best interests of the beneficiary owners of the shares), he/she makes it easier for the activists to accomplish their goals, whatever those goals might be. If the goal is to raise awareness by garnering a specific percentage of the vote, that percentage becomes easier to attain when other votes are not cast. Likewise, if the goal is to win the vote outright, a majority becomes easier to reach. If the goal is to use the proposal and the associated shares to negotiate, then the weight of those shares and the leverage they provide increases relative to the shares automatically not voted. Perhaps most importantly, while abstaining may only very rarely push a proposal toward passage, it will, far more frequently, push it toward the resubmission floor that enables the same activists to bring the same proposal back the next year, and the year after that.
Now, to be clear, under most U.S. corporate bylaws and Delaware practice, shareholder proposals are reported as a percentage of votes cast for or against, with abstentions excluded from the denominator. Although that ensures that votes aren’t perceived unwittingly as opposition to a given proposal, it nevertheless reduces the denominator, thereby inflating the significance of the numerator. It makes each share/vote more potent in percentage terms and thereby makes the exercise of a smaller number of shares/votes relatively more significant.
In short then, a position of automatic abstention is not truly neutral. It is, rather, effectively pro-activist.
A second reason that abstention is problematic in this sense is that all social and political shareholder proposals are not created equally. Some are objectively good and move business practices in the direction of productivity and shareholder returns, while some are objectively bad and move in the other direction, toward the sacrifice of returns for specific ideological aims. Each proposal should be evaluated on its own merits or at least by a standard set of criteria designed specifically to address those merits.
Along these lines, it is important to remember that political/social shareholder activism has been the exclusive purview of one ideological perspective for most of this century (at least). For two decades, internal activists were able to influence corporate boards and leaders, while external activists were able to advocate for policies and practices that detract from and even undermine shareholder value. Often this was done based on flawed statistics, poor scholarship, and (much more rarely) outright deception. Pushing back against all of this and attempting, thereby, to re-center the corporate Overton Window is both reasonable and, in some cases, necessary.
Often, we in the business suggest that a return to corporate social and political neutrality is a goal of the post-ESG. And it is. But it is not the ultimate goal. The ultimate goal, as Milton Friedman put it in a slightly different context, “generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” What that means is that shareholder value is the driving force here, and a policy of blanket abstention from votes on social and political proposals can and will precipitate the destruction of that value.
Third – and most important from a public fiduciary’s perspective – abstention is not the exercise of duty and responsibility. It is, in fact, their denial. Abstention here equals abdication. Or, as the former Treasurer of the state in question put it:
A blanket abstention policy is not neutrality—it’s a conscious decision to ignore fiduciary responsibility.
Whether the issue is proposals pushing companies to fund abortion services, efforts to undermine animal agriculture under the banner of climate policy, or mandates around disclosure of exposure to the Chinese Communist Party, the analysis should be the same: does this create or destroy value for…beneficiaries? If it does, vote accordingly. If it doesn’t, vote accordingly. But vote.
A standing policy of abstention guarantees that analysis never happens. That is the problem. Fiduciaries don’t get to sit out hard questions—they are legally obligated to engage them. Refusing to do so isn’t caution; it’s nonfeasance.
Neutrality is a goal; shareholder value is the goal. But neither can be achieved through abdication.
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