The US Department of Labor has been accused of bowing to pressure from corporate lobbyists after it proposed “draconian” rules that critics argued would undermine shareholder democracy.
Institutional Shareholder Services, the world’s largest proxy adviser, lambasted the DoL over the new proposals that cover how private pension funds vote at annual meetings. If given the go-ahead, the rules would prohibit some US pension funds from voting at annual meetings “unless the fiduciary prudently determines that the matter has an economic impact on the plan”.
Lorraine Kelly, governance business head at ISS, which advises big investors on how to vote at annual meetings, said the proposals were bad news for shareholder democracy.
“Once again, corporate interests and their lobbyists have successfully engineered action intended to mute the voice of shareholders,” she said.
“By attempting to impose unnecessary and draconian hurdles to proxy voting, this rule proposal and the broader, concerted campaign to disenfranchise investors will ultimately weaken portfolio company oversight and harm the ‘millions of American workers’ the DoL purports to protect.”
The move is the latest sign of how Europe and the US are diverging when it comes to so-called sustainable investing. The EU is set to roll out rules next year aimed at driving cash into sustainable investing and pushing asset managers and pension funds to consider environmental, social and governance issues.
But in the US there is growing regulatory pushback against ESG investing, which has risen in popularity in recent years amid a belief that issues around climate change, labour rights and board governance could have a material impact on companies’ financial performance. Some US companies are worried about shareholders’ focus on ESG and the use of annual meetings to pile pressure on boards over environmental and other issues.
In June the DoL, led by Eugene Scalia, set out plans for a rule that would require private pension administrators to prove that they were not sacrificing financial returns by putting money in ESG-focused investments.
Announcing the latest plans last week, Jeanne Klinefelter Wilson, acting assistant secretary of the department’s employee benefits security administration, said the proposed rules would reduce pension funds’ expenses by “giving fiduciaries clear directions to refrain from spending workers’ retirement savings to research and vote on matters that are not expected to have an economic impact on the plan”.
But Eli Kasargod-Staub, executive director of Majority Action, a non-profit shareholder advocacy organisation, said the proposals would “harm and silence long-term investors”.
“Proxy voting is the means by which shareholders make their voices heard on a company’s direction and who is at the helm,” he said.
“The Trump Department of Labor is trying to shield irresponsible corporate leaders from the consequences of their actions by undermining basic tenets of shareholder democracy and responsible corporate governance,” he said.