05 Jun PUBLIC PENSION CORNER, #45: A Happy Ending in Nebraska?
NEWS:
I. SEC Begins Formal Repeal of Biden-era Emissions Rule
Last week, the Securities and Exchange Commission began the formal process to rescind the Biden/Gensler climate emissions reporting rule, which never went into effect but would have cost American corporations trillions of dollars in compliance costs:
The agency’s proposal called the 2024 climate disclosure rules “a dramatic overreach of the Commission’s statutory authority and, independently, unsound as a matter of policy.”
“Based on an incorrect view of the scope of its authority, the Commission determined that it was appropriate to prescribe dozens of pages of highly specific disclosure rules solely about climate-related matters and apply the bulk of those rules to virtually all public companies, regardless of size, industry, or specific circumstances,” the rule proposing the rescission said.
The SEC also argued in the proposed rescission that, even if the agency had the authority to promulgate the rules, the rules were “inconsistent with a registrant-specific, materiality-based” disclosure approach. The agency also said the rules would have imposed unjustified “substantial costs,” were “at odds” with the agency’s objectives and “well beyond the policy concerns of federal securities laws.”
II. ExxonMobil Shareholders Reject Proxy Advisory Recommendations on Texas Move
Last week, at its annual meeting, ExxonMobil shareholders overwhelmingly rejected the recommendations made by the two major proxy advisory services, Institutional Shareholder Services (ISS) and Glass Lewis, and approved the company’s decision to redomicile from New Jersey to Texas:
Exxon Mobil Corp.’s shareholder meeting last week seemed to signal that the major asset managers have turned the page on progressive-leaning corporate activism. The same can’t be said for the proxy advisory firms that continue to lead many investment managers and pension funds astray.
The oil and gas behemoth voted to move its legal home to Texas with 71.3% approval from shareholders. It was a stark rejection of advice from the two dominant proxy firms, Glass Lewis and Institutional Shareholder Services, which both opposed the move. Given that Vanguard Group Inc., BlackRock Inc., and State Street Corp. hold 22% of Exxon’s shares, it also seems clear that some or all of them ignored the proxy firms and got behind the Lone Star State migration.
If the asset managers backed the Exxon move, as the vote margin suggests, it could have major implications for other large cap public companies that are considering a Texas redomicile. The big three passive investors collectively own approximately 20% of the average S&P 500 company, making them the largest shareholder in nearly 90% of these companies. Moreover, the Exxon approach provides other widely-held public companies with a playbook for how to gain investor approval for a Texas redomicile, even over opposition from the proxy firm duopoly.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“A Happy Ending in Nebraska?”
A few weeks ago, in this space, I discussed a state, which I did not name, that had made a change to its public pension proxy voting procedures. That change was, I argued, fiduciarily questionable at best. I put it this way:
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.
Today, I can reveal the rest of the story: the name of that state, the new changes it has made to its proxy voting policy since I last wrote about it, and the reason for those changes.
The state in question is Nebraska, which has a Republican governor, two Republican senators, three (out of three) Republican House members, and no statewide elected Democrats. Nebraska hasn’t elected a Democrat governor in more than 30 years and hasn’t elected a Democrat to the Senate in 20 years. Except for a bluish/purple pocket in Omaha’s Congressional district, the state is as deep and as consistently Red as states get.
And yet, this winter, it adopted a proxy voting policy that was de facto pro-ESG.
The reasons the Nebraska Investment Council made this unfortunate change are important and worth discussing. They are also beyond the scope of this note. What matters today is what happened after the change was made and what it says about the power that can be wielded by truly informed and dedicated public fiduciaries.
Long story short, the Nebraska Investment Council voted to create the new “neutrality” policy at its February meeting. It did not do so secretly – because it can’t, naturally – but it did so without much fanfare, which is to say that the vote largely went unnoticed. When the schedule for its April meeting was announced, one of the items on the agenda was the formal ratification of the new policy, which, by definition, drew attention to the change, rendering it “unnoticed” no more.
Nebraska’s public fiduciaries, alarmed by the Investment Council’s decision to adopt a questionable policy under the guise of “neutrality,” immediately went to work. The pressure they exerted on the NIC was significant, and the Council agreed, almost immediately, to postpone the ratification of the policy until its June meeting. And then, it went even further. When the schedule for the June meeting was disclosed, the agenda contained the following draft language for a new update to the proxy voting policy:
With respect to the investments managed by the Nebraska Investment Council, the Council recognizes that proxy votes are part of most investments that the Council must manage….
The Proxy Voting Guidelines shall contain only those factors that relate to enhancing or protecting the long-term economic value of each investment, and shall direct the Proxy Advisor to vote against management or shareholder proposals that seek to advance social or political policies, such as DEI and ESG, and shall vote for proposals that eliminate such existing policies.
This marks both a significant change from the policy guidelines the NIC voted to create in February and a huge victory for those who saw the mistake the Council was making and worked diligently to fix it. I could not possibly name and acknowledge all of the Nebraska public officials who helped bring this policy change to the public’s attention and then pushed the Investment Council to reconsider its position. I simply don’t know who all was involved or how significant a role they played. I do know, however, that two officials in particular played outsized roles, and I know this because they told us all so the other day in an op-ed published in the Omaha World-Herald:
The Nebraska Investment Council oversees more than $45 billion in public funds — retirement savings for state and county workers, public school teachers, state troopers and judges, along with reserves held in trust for every Nebraska taxpayer.
As the state’s auditor [Mike Foley] and treasurer [Joey Spellerberg], we share an obligation to ensure those dollars are managed with the single-minded goal of maximizing long-term returns. That is why we are calling on the council to repeal a provision in its proxy voting guidelines that does the opposite: a blanket policy of abstaining from every shareholder vote the council labels a “social or political issue.”…
We are not asking the council to become activists. We are not asking it to vote in favor of any particular social or political agenda. We are asking it to do what fiduciary duty has always required: evaluate every shareholder proposal on its economic merits and vote in the financial interest of Nebraska’s beneficiaries. If a proposal would destroy value, vote against it. If it would protect or enhance value, vote for it. But do not refuse to exercise Nebraska’s vote.
You should, as they say, “read the whole thing.” Nebraska Auditor Mike Foley and Treasurer Joey Spellerberg make a compelling case for the Nebraska Investment Council to abandon its efforts to achieve pseudo-neutrality in its proxy votes and, instead, to embrace its duty to Nebraska’s public servants. Foley and Spellerberg also make a compelling case that by being informed and courageous, public fiduciaries can have a powerful positive impact on their constituents’ finances and investments, even in areas not immediately under their purview.
It looks very much like this story will have the happy ending Nebraska’s public pensioners deserve, and if that’s the case, it will be because of the efforts of dedicated public fiduciaries like Mike Foley and Joey Spellerberg. Well done.
