Since average Americans are reliant upon retirement plans that invest in corporate stock, they are entitled to know whether or not shareholder recommendations are made with an eye toward potential financial gain, or if public policy motives have worked their way into the process.

Proxy advisory firms, which make shareholder recommendations to investors and research proxy issues, are an integral part of this equation and deserve more scrutiny. Institutional Shareholder Services (ISS), formerly RiskMetrics, is widely viewed as the most influential of the advisory firms. It also appears to be joining forces with organized labor. That’s bad news for investors and bad news for the economy.

Bradford Campbell, who oversaw EBSA as the Assistant Secretary of Labor during the Bush Administration warns that, “The law protects workers by prohibiting pension plan officials and others in charge of the plan’s assets from using their positions to benefit themselves or to pursue a political agenda. Proxy voting is a fiduciary duty, and the economic interests of the plan cannot be subordinated to the personal, union or corporate interests of the person casting the vote on the plan’s behalf.”

In the run up to Exxon Mobil Corp’s annual meeting in May, ISS joined with the American Federation of State, County and Municipal Employees (AFSCME) to encourage shareholders to vote down ratification of Exxon’s executive compensation. ISS and AFSCME also recommended that shareholders support a proposal for an independent board chairman. Rex Tillerson now serves as both CEO and chairman. Both recommendations were rejected at the annual meeting. Shareholders also turned away a proposal that called for Exxon Mobil to adopt greenhouse gas emission reduction targets. So far, so good from the free market perspective, but anti-corporate efforts are still gaining momentum and will be back in full force at subsequent.

Most companies are understandably reticent to speak out about ISS since the firm does have the ability to lower their ratings. Union officials and green activists who have lost out in the political arena have very shrewdly seized upon shareholder activism as a way to advance their agenda.

The Office of Inspector General (OIG) report on the Employee Benefits Administration (EBSA) concluded that the agency, which is part of the U.S. Labor Department, “does not have adequate assurances that fiduciaries or third parties voted proxies solely for the economic benefit of plans.” This means organizations like AFSCME and the Sierra Club are strongly positioned to use ISS as a conduit to cajole corporate America into accepting their agenda.

Americans for Limited Government President Bill Wilson charges, “These union and environmental groups are putting working American worker’s pensions at risk in order to pursue their radical policies over the financial interests of the company and the pensions they run.  This is nothing more than a direct attack on the American worker.”

Some of the key findings from the Office of Inspector General report confirm the concerns voiced by Campbell and Wilson as they state: “Without additional transparency and enhanced enforcement activities, concerns about the fiduciary use of plan assets to support or pursue proxy proposals for personal, social, legislative, regulatory, or public policy agendas, which have no clear connection to increasing the value of investments used for payment of benefits or plan administrative expenses, may  not be properly addressed.”

The report also identified some the key factors responsible for the problems with enforcing proxy-voting rules.

(1)  Lack of a Documentation Requirement: EBSA’s proxy-voting requirements do not specifically require fiduciaries or investment managers to document (1) the monitoring of proxy-voting activities or (2) the economic rationale for proxy-voting decisions.  OIG found that economic benefits were not documented for 77 percent of proxy voting decisions studied during 2008-09.

(2)  Statutory Monetary Losses Requirement: ERISA ties enforcement actions to monetary losses and it is difficult, if not impossible, to attribute monetary losses to proxy-voting decisions. (The report notes that the SEC is not subject to the monetary damages requirement, which makes enforcement of proxy voting rules by the SEC more likely.)

The OIG made three recommendations to the EBSA, none of which the EBSA accepted. They are:

(1)  propose amending ERISA to give the Secretary of Labor the authority to assess monetary penalties against fiduciaries for failure to comply with proxy-voting requirements,

(2)  revise proxy-voting requirements in 29 CFR 2509.08-2 to require documented support for fiduciary monitoring and the economic benefit for proxy-voting decisions, and

(3)  include fiduciary proxy-vote monitoring in enforcement investigations to ensure that the economic benefit for proxy-voting decisions are appropriately documented.

Fortunately, some commentators are beginning to take notice of ISS and the disproportionate influence it is now exerting. ISS has ability to sway 30 percent of the vote in any proxy battle and is very adept and skilled at getting “whatever it wants,” according to some financial blogs.

Going forward, here is what investors, shareholders and corporate officers should take away from the OIG report and the EBSA’s reaction.

• EBSA does not currently appear interested in expanding enforcement of proxy voting rules.
• The SEC may be a more appropriate venue for attempting to tighten proxy voting requirements, given the lower threshold for enforcement actions.

Enhanced enforcement by EBSA of proxy rules may have implications for ISS’s Taft-Hartley voting policy, an off-the-shelf policy tailored to pension funds and generally considered more activist or socially-oriented than the better known ISS benchmark policy.

Wilson responded to the Labor Department’s failure to act upon the independent Inspector General recommendations saying, “Unfortunately, the Labor Department’s failure to accept basic recommendations from the independent Office of Inspector General on how to protect workers’ pensions shows that the Obama Administration is more interested in shilling for their political bosses at the AFL-CIO than protecting workers.”

In the absence of improved oversight, the onus will continue to fall upon free market activists to expose and resist politically motivated shareholder recommendations.

October 7th, 2009, Fairfax, VA—Americans for Limited Government President Bill Wilson today condemned members of the House for voting to refer a resolution that would have removed Congressman Charlie Rangel as Chairman of the powerful House Ways and Means Committee.

“Once again, the Democrat-controlled House has voted to sweep outright corruption under the rug on behalf of a fellow party member who failed to report more than $1 million in outside income as required by House rules,” Wilson said.

“The least Congress can do is not have Rangel serving as Chairman of a committee that deals with taxes while an ‘ongoing’ ethics probe into his undisclosed income is taking place,” Wilson added.

The Resolution, proposed by Congressman John Carter, called for Rangel to be removed as Ways and Means Chairman until the Ethics Committee concludes its probe.

Instead, the House voted 246 to 153 to refer the resolution to the Ethics Committee. “A vote to refer the Rangel resolution to the Ethics Committee was a vote against the resolution, plain and simple,” said Wilson.

Rangel is currently under investigation by the House Ethics Committee, but Wilson stated that the committee may be deliberately stalling, writing in a letter last month to House Speaker Nancy Pelosi and Majority Leader Steny Hoyer, “[T]he Ethics Committee — comprised of some of Mr. Rangel’s most ardent apologists — has clearly decided to turn its ‘internal investigation’ into an ‘eternal investigation.’ And justice delayed has long since become justice denied.”

According CBS’ Marcia Kramer, Rangel may have gone as far to “influence” members of the Ethics Committee to look the other way: “CBS 2 HD has discovered that since ethics probes began last year the 79-year-old congressman has given campaign donations to 119 members of Congress, including three of the five Democrats on the House Ethics Committee who are charged with investigating him.

The report continues, “Charlie’s ‘angels’ on the committee include Congressmen Ben Chandler of Kentucky, G.K. Butterfield of North Carolina and Peter Welch of Vermont. All have received donations from Rangel.”

“The House Ethics Committee is a joke. And despite months of inquiry into known and blatant infractions of law and House rules, no action has been taken,” Wilson said, comparing the delay to the speed that Congressman Joe Wilson had a resolution brought against him for shouting “You lie!” at Barack Obama during a joint session of Congress. On September 15th, the House voted 240-179 in a resolution against Congressman Wilson, just six days after the speech.

Wilson cited several transgressions that he said could have already been acted upon by the House at large:

1) failure to report over $1 million in outside income and $3 million in business transactions as required by the House,

2) failure to disclose at least $650,000 in assets he had previously failed to list on his House financial disclosure forms,

3) failure to disclose to the IRS or on his financial disclosure forms $75,000 in rental income for a beach villa in the Dominican Republic,

4) violation of state laws by claiming three primary residences and broke municipal laws by maintaining four rent-controlled apartments,

5) violation of House rules by using congressional letterhead to solicit donations for an education center bearing his name at City College of New York, and

6) delinquency in paying his property taxes on two New Jersey parcels and failure to report the sale of a $1.3 million brownstone.

“There was no reason why these repeated violations could not have been addressed today by the House,” said Wilson

Americans for Limited Government recently a petition website, RangelOutNow.org, to encourage Attorney General Eric Holder to immediately investigate Rangel’s “repeated violation of public disclosure laws… [and] exactly how Mr. Rangel came into at least $650,000 in undisclosed income, and to audit the extent of his income.”

Wilson also called upon Holder to “prosecute Mr. Rangel to the fullest extent of the law for any and all infractions of the law.”

Said Wilson, “This is completely upside down. The Ethics Committee is supposed to act on a non-partisan basis. But instead, it is stonewalling the conclusion of the Rangel investigation. And now the House majority has made it clear that no matter what the ethics probe produces, they will do nothing to remove Rangel from his powerful chairmanship. Nancy Pelosi is encouraging the culture of corruption in Washington to blossom.”

Attachments:
ALG President Bill Wilson Letter to Nancy Pelosi and Steny Hoyer, September 16th, 2009.

“The Man Who Knew Too Little,” by Carter Clews, August 31st, 2009.

Interview Availability: Please contact Alex Rosenwald at (703)383-0880 or at arosenwald@getliberty.org to arrange an interview with ALG President Bill Wilson.

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