Pension Plans: Additional Transparency and Other Actions Needed
in Connection with Proxy Voting (10-AUG-04, GAO-04-749).
In 1998, about 100 million Americans were covered in private
pension plans with assets totaling about $4 trillion. The
retirement security of plan participants can be affected by how
certain issues are voted on during company stockholders meetings.
Fiduciaries, having responsibility for voting on such issues on
behalf of some plan participants (proxy voting), are to act
solely in the interest of participants. Recent corporate scandals
reveal that fiduciaries can be faced with conflicts of interest
that could lead them to breach this duty. Because of the
potential adverse effects such a breach may have on retirement
plan assets, we were asked to describe (1) conflicts of interest
in the proxy voting system, (2) actions taken to manage them, and
(3) DOL's enforcement of proxy voting requirements.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-749
ACCNO: A11402
TITLE: Pension Plans: Additional Transparency and Other Actions
Needed in Connection with Proxy Voting
DATE: 08/10/2004
SUBJECT: Employee retirement plans
Pensions
Strategic planning
Conflict of interests
Internal controls
Policies and procedures
Voting systems
Fiduciaries
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GAO-04-749
United States Government Accountability Office
GAO Report to the Ranking Minority Member, Committee on Health, Education,
Labor, and Pensions, U.S. Senate
August 2004
PENSION PLANS
Additional Transparency and Other Actions Needed in Connection with Proxy Voting
GAO-04-749
Highlights of GAO-04-749, a report to the Ranking Minority Member,
Committee on Health, Education, Labor, and Pensions, United States Senate
In 1998, about 100 million Americans were covered in private pension plans
with assets totaling about $4 trillion. The retirement security of plan
participants can be affected by how certain issues are voted on during
company stockholders meetings. Fiduciaries, having responsibility for
voting on such issues on behalf of some plan participants (proxy voting),
are to act solely in the interest of participants. Recent corporate
scandals reveal that fiduciaries can be faced with conflicts of interest
that could lead them to breach this duty. Because of the potential adverse
effects such a breach may have on retirement plan assets, we were asked to
describe (1) conflicts of interest in the proxy voting system, (2) actions
taken to manage them, and (3) DOL's enforcement of proxy voting
requirements.
GAO recommends that Congress consider amending ERISA to require
fiduciaries to (1) develop proxy-voting guidelines, (2) disclose
guidelines and votes annually, and (3) appoint an independent fiduciary to
vote the company's own stock in its pension plan in certain instances. GAO
recommends that DOL conduct another proxy enforcement study, and enhance
coordination of enforcement strategies with SEC. DOL generally disagreed
with our recommendations, but we believe that additional transparency and
enhanced enforcement are needed.
www.gao.gov/cgi-bin/getrpt?GAO-04-749.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Barbara Bovbjerg at (202)
512-7215 or [email protected]..
August 2004
PENSION PLANS
Additional Transparency and Other Actions Needed in Connection with Proxy Voting
Conflicts of interest in proxy voting can occur because various business
relationships exist, which can influence a fiduciary's vote. When a
portion of a company's pension plan assets are invested in its own company
stock, the internal proxy voter may be particularly vulnerable to
conflicts of interest because management has an enhanced ability to
directly influence their voting decisions. Although situations
representing conflicts will occur, limited disclosure of proxy voting
guidelines and votes may make proxy voting more vulnerable to such
conflicts. Because of limited transparency, concerned parties do not have
the information needed to raise questions regarding whether proxy votes
were cast solely in the interest of plan participants and beneficiaries.
Some plan fiduciaries and the Securities and Exchange Commission (SEC)
have taken steps to help manage conflicts of interest in proxy voting.
Specifically, some plans voluntarily maintain detailed proxy voting
guidelines that give proxy voters clear direction on how to vote on
certain issues. The SEC has imposed new proxy voting regulations on mutual
funds and investment advisers, requiring that specific language be
included in the fund's guidelines on how fiduciaries will handle conflicts
of interest. Some plan fiduciaries voluntarily make their guidelines
available to participants and the public. In addition, some plans
voluntarily disclose some or all of their proxy votes to participants and
the public. Some plans also voluntarily put additional procedures in place
to protect proxy voters from conflicts of interest in order to avoid
breaches of fiduciary duty. For example, some plan sponsors hire
independent fiduciaries to manage employer stock in their pension plans
and vote the proxies associated with those stock. Plans may also hire
proxy-voting firms to cast proxies to ensure that they are made solely in
the interest of participants and beneficiaries.
DOL's enforcement of proxy voting requirements has been limited for
several reasons. First, participant complaints about voting conflicts are
infrequent, at least in part, because votes cast by a plan fiduciary or
proxy voter generally are not disclosed; therefore, participants and
others are not likely to have information they need to raise questions
regarding whether a vote has been cast solely in their interest. Second,
for DOL, the Employee Retirement Income Security Act of 1974 presents
legal challenges for bringing cases such that it is often difficult to
obtain evidence that the fiduciary was influenced in his or her voting by
something other than the sole interests of plan participants. Finally,
even if such evidence existed, monetary damages are difficult to value and
fines are difficult to impose. And, DOL has no statutory authority to
impose a penalty without first assessing damages and securing a monetary
recovery. In part, because of these challenges, DOL has devoted few
resources to enforcing proxy voting by plans.
Contents
Letter
Results in Brief
Background
Business Relationships and Limited Disclosure of Votes Can Make
Proxy Voting Vulnerable to Conflicts Some Plan Fiduciaries Have Taken
Actions to Manage Conflicts The Department of Labor's Related Enforcement
Efforts Have
Been Limited Conclusions Matters for Congressional Consideration
Recommendations for Executive Action Agency Comments and Our Evaluation 1
3 5
8 16
22 28 29 30 30
Appendix I Scope and Methodology
Obtaining Total Number of Employer Securities Held in the Company's Own
Pension and Welfare Benefit Plans Obtaining the Total Number of Shares
Outstanding for Selected
Fortune 500 Companies Obtaining the Closing Price for Our Fortune 500
Companies Computing the Number of Voting Shares Held in Fortune 500
Company Pension and Welfare Benefit Plans
34
35
36 36
37
Appendix II Comments from the Department of Labor
Appendix III GAO Contacts and Staff Acknowledgments 40
Contacts 40 Staff Acknowledgments 40
Table
Table 1: Summary of the Department of Labor's Proxy Projects 27
Abbreviations
AMEX American Stock Exchange
DeAM Deutsche Bank Asset Management
DeIB Deutsche Bank's Investment Banking
DOL Department of Labor
EBSA Employee Benefits Security Administration
EIN Employer Identification Number
ERISA Employee Retirement Income Security Act of 1974
ESOP employee stock ownership plan
HP Hewlett-Packard
IB Interpretive Bulletin
IMs investment managers
NASDAQ National Securities Dealers Stock Exchange
NYSE New York Stock Exchange
SARs summary annual reports
SEC Securities Exchange Commission
SPDs summary plan descriptions
TAQ Trade and Quote
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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copyright holder may be necessary if you wish to reproduce this material
separately.
United States Government Accountability Office Washington, DC 20548
August 10, 2004
The Honorable Edward M. Kennedy
Ranking Minority Member
Committee on Health, Education, Labor, and Pensions
United States Senate
Dear Senator Kennedy:
Pensions are an important source of income for millions of retirees, and
the federal government has encouraged private employers to sponsor and
maintain private pension and retirement savings plans for their employees.
In 1998, about 100 million workers and retirees were covered in private
defined benefit1 or defined contribution2 pension plans with assets
totaling
about $4 trillion. In 2001, pension plans, as a whole, owned about 20
percent of the total corporate equity issued by U.S. companies, with
private pension funds owning about 59 percent of that amount.3 As
shareholders, pension plans have certain rights, including the right to
vote
on certain corporate governance matters. Some matters such as the
election of directors, executive compensation packages, and mergers and
acquisitions are significant voting items that may affect long-term share
value, while other matters may not. While they may vote in person,
fiduciaries typically do not attend the annual meetings in which corporate
policies are voted. Instead, they usually submit ballots prior to the
meeting, generally via mail or online instructions. This is called proxy
voting. According to the Department of Labor's (DOL's) interpretation of
the Employee Retirement Income Security Act (ERISA) of 1974, with these
1A defined benefit plan promises to provide a benefit that is generally
based on an employee's salary and years of service. Defined benefit plans
use a formula to determine the ultimate pension benefit that participants
are entitled to receive. The employer, as plan sponsor, is responsible for
making contributions that are sufficient for funding the promised benefit,
investing and managing the plan assets, and bearing the investment risk.
2Under defined contribution plans, employees have individual accounts to
which the employee, employees, or both make periodic contributions.
Defined contribution plan benefits are based on the contributions to and
investment returns (gains and losses) on individual accounts. In a defined
contribution plan, the employee bears the risk and often controls, at
least in part, how his or her individual account assets are invested.
3These data are according to the flow of funds data issued on March 2004
from the Federal Reserve Board. Mutual funds own about 18 percent of total
corporate equity, while households directly own about 39 percent.
voting rights, fiduciaries are required to cast votes solely in the
interest of plan participants and beneficiaries.4
The retirement security of these plan participants can be affected by how
certain issues are voted on during company stockholder meetings and,
therefore, relies on fiduciaries acting solely in the interest of pension
plan participants and beneficiaries. However, recent corporate scandals
have highlighted the fact that fiduciaries are faced with conflicts of
interest that could lead them to breach their responsibility to act solely
on behalf of participants. For example, in 2002, the Securities Exchange
Commission (SEC) investigated whether a vote cast in favor of a merger
between Hewlett-Packard (HP) and Compaq by Deutsche Bank Asset Management
(DeAM), a large asset manager with the fiduciary responsibility for voting
proxies, was influenced by a conflict of interest. The SEC found that a
material conflict of interest was created when DeAM failed to disclose to
its advisory clients that Deutsche Bank's Investment Banking (DeIB)
division was working for HP on the merger and had intervened in DeAM's
proxy process on behalf of HP.
Because of conflicts of interest in the proxy voting system and the
potential adverse effects of such conflicts on the retirement security of
Americans, you asked us to describe (1) conflicts of interest in proxy
voting, (2) actions taken by plans and plan fiduciaries to manage
conflicts of interest, and (3) DOL's enforcement of proxy voting
requirements.
To determine what conflicts exist in proxy voting, we conducted
face-toface and telephone interviews which included officials at DOL's
Employee Benefits Security Administration (EBSA) and at SEC, securities
and proxy voting industry professionals, officials of public and private
pension plans, ERISA attorneys, asset managers, and proxy voting firms,
research organizations, and proxy solicitors. We asked 25 shareholder
activist professionals, academics, and economists to respond to a series
of questions for a written reply and received 14 responses. To determine
the
4A plan fiduciary includes a person who has discretionary control or
authority over the management or administration of the plan, including the
management of plan assets. Any person who makes investment decisions with
respect to a qualified employee benefit plan's assets is generally a
fiduciary. The duties the person performs for the plan rather than their
title or office determines whether that person is a plan fiduciary. Unless
otherwise indicated, in this report we use the term fiduciary or plan
fiduciary as those persons who have the responsibility for voting proxies.
Plan fiduciaries have a responsibility to vote proxies on issues,
including those that may affect the value of the shares in the plan's
portfolio.
Results in Brief
extent to which certain companies' pension plans hold proxy voting power
within the plan sponsor, we analyzed plan financial information filed
annually (Form 5500 data) with DOL's EBSA. We analyzed data for the
Fortune 500 companies for plan year 2001, which was the most recent year
for which complete plan-specific data were available. To determine what
safeguards fiduciaries have put in place to manage conflicts of interest,
we reviewed proxy voting guidelines and interviewed a number of public and
private pension plan sponsors, asset managers, proxy voting firm
representatives, and other experts. To determine DOL's enforcement efforts
in this area, we reviewed DOL enforcement material and previously issued
GAO reports on DOL's enforcement program and interviewed officials at
EBSA.
We conducted our work between April 2003 and May 2004 in accordance with
generally accepted government auditing standards. See appendix I for more
information on our scope and methodology.
Experts we interviewed said that conflicts of interest exist in proxy
voting and occur because of the various business relationships that may
influence a proxy voter's vote. These experts also said that conflicts can
exist in situations when an employee of the plan sponsor votes proxies-
internally-or by a person or entity outside of the plan-externally. When a
portion of a company's pension plan assets are invested in its own company
stock, the internal proxy voter may be particularly vulnerable to
conflicts of interest because management has the ability to directly
influence voting decisions. For the external proxy voter, a variety of
conflicts may arise due to business relationships. For example, when the
external proxy voter is an investment manager that is part of a larger
corporation that provides a variety of services, business relationships
between branches of the corporation and the plan sponsor may influence the
investment manager's proxy voting decisions. Consistent with current DOL
requirements, proxy votes and guidelines are disclosed to the plan. Proxy
voters are not required to publicly disclose proxy voting guidelines and
votes, though plans are required to make voting guidelines available to
participants upon request. Although conflicts will exist, limited
disclosure may make proxy voters more vulnerable to such conflicts.
Because of this limited transparency, concerned parties do not have the
information needed to raise questions regarding whether proxy votes were
cast in the sole interest of plan participants and beneficiaries.
Some plan fiduciaries and SEC have taken steps to help manage conflicts of
interest in proxy voting. Some plans voluntarily maintain detailed
proxy-voting guidelines that give proxy voters clear direction on how to
vote on certain issues. SEC has imposed new proxy voting regulations on
mutual funds and investment advisers requiring that specific language be
included in policies and procedures on how fiduciaries will handle
conflicts of interest. In addition, some plan fiduciaries voluntarily make
their guidelines available to participants and the public. Furthermore,
some plans voluntarily disclose to participants and the public how they
voted on some or all of the issues in which they voted. Similarly, SEC now
requires mutual funds to publicly disclose all proxy votes and policies
and procedures. Some plans voluntarily put additional procedures in place
to protect proxy voters from conflicts of interest that may lead to
breaches of fiduciary duty. For example, some plans have a rule that, in
the event that an attempt is made to influence a proxy vote, the voting
responsibility on that issue moves from the proxy voter to a committee.
Some plan sponsors have hired independent fiduciaries to manage employer
stock in their pension plans. Plans may also hire an independent proxy
voter or proxyvoting firm to cast proxy votes to ensure that they are
solely in the interest of plan participants.
DOL's enforcement of proxy voting requirements has been limited for
several reasons. First, participant complaints about voting conflicts are
infrequent, at least in part, because votes cast by a plan fiduciary or
proxy voter generally are not disclosed. Therefore, plan participants and
others are not likely to have the information they need to raise questions
regarding whether a vote has been cast solely in their interest. Second,
ERISA presents legal challenges for prosecuting proxy voting cases.
Specifically, it is often difficult to obtain evidence that the plan
fiduciary was influenced in his or her voting by something other than the
interests of plan participants because, among other things, the
fiduciary's vote is based on judgment. Finally, even if such evidence
existed, monetary damages are difficult to value and, because the
department has no statutory authority to impose a penalty without
assessing damages, fiduciary penalties are difficult to impose. In part,
because of these challenges and its limited resources, DOL has devoted few
resources to enforcing proxy voting practices by fiduciaries. For example,
the agency conducted three enforcement studies between 1988 and 1996 to
determine the level of compliance with proxy voting requirements among
select fiduciaries. According to DOL, as a result of these proxy reviews,
they found improvements over time within the proxy voting system as the
number of voting fiduciaries and plan administrators who voted and
established proxy voting guidelines increased. The department has not
conducted similar reviews in recent years. DOL officials told us that they
believe that proxy voters are generally in compliance, they receive few
complaints and that with limited resources they focus instead on other
priority areas, which may result in identifying violations that can be
corrected. Furthermore, DOL officials said that they do not have specific
investigations focused on proxy voting, and they do not allocate many
resources to this issue.
This report contains Matters for Congressional Consideration to improve
the disclosure of proxy voting guidelines and votes and the independence
of fiduciaries voting proxies in certain circumstances. The report also
contains recommendations for executive agency action to improve oversight
and enforcement in this area. In its response to our draft report, DOL
generally disagreed with our matters for congressional consideration and
recommendations, saying that conflicts of interest affecting pension plans
are not unique to proxy voting and that requiring independent fiduciaries
and increased disclosures would increase costs and discourage plan
formation. While we acknowledge that fiduciaries face conflicts beyond
proxy voting issues and that DOL has limited statutory authority related
to proxy voting, we believe that additional transparency and an enhanced
enforcement presence are needed.
ERISA established the broad fiduciary requirements related to private
pension plans and was designed to protect the pension and welfare benefit
rights of workers and their beneficiaries. The act requires a plan
fiduciary to act "...solely in the interest of plan participants and
beneficiaries and for the exclusive purpose of providing benefits" to them
and to act "...with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like capacity
and familiar with such matters would use." Failure to act in accordance
with these requirements might constitute a breach of fiduciary duty.
Breaches of the fiduciary duty to act solely in the interest of plan
participants and beneficiaries with respect to proxy voting could arise
when a fiduciary has a conflict of interest. Conflicts of interest occur
in a variety of ways in proxy voting. Conflicts occur when a plan
fiduciary or proxy voter has either business or personal interests that
compete with the interests of participants. When conflicts are not
appropriately managed, they could lead to a breach of fiduciary
responsibility or, at least, may raise concern that a breach has occurred.
For example, an SEC investigation showed that DeIB division had an
undisclosed business relationship with HP,
Background
which may have influenced the proxy voter's vote cast by DeAM about a
merger between HP and Compaq Computer Corporation.5
ERISA's fiduciary requirements apply to plan sponsors, trustees, managers,
and others who act as fiduciaries. These requirements do not explicitly
address proxy voting; however, DOL-having responsibility for the
investigation and enforcement of violations of ERISA, which includes
provisions related to fiduciary responsibility-has stated that the
fiduciary act of managing plan assets that are shares of corporate stock
generally includes the voting of proxies pertaining to those shares of
stock. The provisions of ERISA were enacted to address public concerns
that funds of private employee benefit plans were being mismanaged and
abused. DOL can take several actions to correct fiduciary violations it
identifies. These include acceptance of voluntary fiduciary agreements to
implement corrective actions, initiation of civil litigation in federal
district court, and referral of certain violations to other enforcement
agencies.
On the matter of proxy voting, DOL has issued several letters and
bulletins discussing the duties of pension plan fiduciaries. For example,
the "Avon Letter," released in 1988, stated that the voting of a proxy is
a fiduciary duty and that the responsibility for voting falls on the
plan's trustee unless otherwise delegated.6 Through its "ISS letter,"
issued in 1990, among other things, DOL stated that with respect to
monitoring activities, that the plan fiduciary, in order to carry out his
or her fiduciary responsibilities, must be able to periodically review
voting procedures and actions taken in individual situations so that a
determination can be made whether the investment manager is fulfilling its
fiduciary responsibility. Furthermore, DOL issued Interpretive Bulletin
(IB) 94-2 in 1994, which clarified the guidance in the previous two
letters and also stressed the importance of statements of investment
policy, including voting guidelines. While DOL said that maintenance of
such statements of investment policy are
5SEC brought an enforcement action against Deutsche Bank Asset Management
in connection with its voting of client proxies for the HP-Compaq merger
transaction and imposed a $750,000 penalty. The fine was imposed for not
disclosing a conflict. SEC action found that DeAM violated its fiduciary
duty to act solely in the best interests of its advisory clients by voting
the proxies on the HP stock owned by its advisory clients without first
disclosing the conflict.
6The Deputy Assistant Secretary of the Pension Welfare Benefits
Administration (PWBA now known as EBSA) issued the Avon letter to Mr.
Helmuth Fandl, Chairman of the Retirement Board of Avon Products, Inc., on
February 23, 1988. Current U.S. Comptroller General David M. Walker was
the Assistant Secretary of Labor for the PWBA from 1987 to 1989.
consistent with ERISA, DOL officials said that they do not have the
statutory authority to require plans to maintain such statements.
SEC, under the Investment Company Act of 1940, regulates companies,
including mutual funds, that engage primarily in certain operations, such
as investing, reinvesting, and trading in securities, and whose own
securities are offered to the investing public. A primary mission of SEC
is to protect investors and maintain the integrity of the securities
markets through disclosure and enforcement. Employees in
participant-directed pension plans might be given the choice of investing
in securities, including employer securities, as well as a variety of
mutual funds. Because plan participants may have such investment options,
securities law protections applicable to investors are relevant to plan
participants. In addition, some pension plans use investment managers to
oversee plan assets and these managers may be subject to securities laws.
Congress previously studied the issue of DOL's enforcement and proxy
voting. In the 1980s, reports emerged that fiduciaries were not voting
their proxies or that conflicts of interest may have influenced the
decisions of some plan fiduciaries. The Congress consequently became
concerned about whether fiduciaries were fulfilling their responsibility
to protect the interests of pension plan participants and beneficiaries.
Because ERISA does not specifically lay out what the fiduciary
responsibility is regarding proxy voting, many fiduciaries were thought to
be unclear about their responsibility to vote proxies and maintain voting
guidelines. This was cited as one of the major factors that led the
Subcommittee on Oversight of Government Management, Senate Committee on
Governmental Affairs, to conduct an investigation of and hold hearings in
1986 on DOL's enforcement of ERISA. Among other things, the Subcommittee
concluded that disclosure of proxy votes would facilitate the DOL's
enforcement efforts by providing the agency and other interested parties
with much needed information. DOL officials believe that the agency does
not have the statutory authority to require plan fiduciaries to publicly
disclose their proxy votes and guidelines.
Business Relationships and Limited Disclosure of Votes Can Make Proxy
Voting Vulnerable to Conflicts
Some experts we interviewed said that conflicts of interest exist in the
proxy voting system and limited disclosure makes proxy voting vulnerable
to conflicts of interest. Conflicts of interest occur because of the
various business relationships that may influence a plan fiduciary's or
proxy voter's vote. For example, when a company provides investment
advisory services for a company-sponsored pension plan and also provides
investment banking services to the company sponsoring that pension plan.
Although conflicts will exist, limited disclosure makes proxy voting
vulnerable to them. Because of this lack of transparency, participants do
not have the information needed to raise questions regarding whether proxy
votes were cast solely in their interest.
Fiduciary's Business Associations Can Create Conflicts of Interest
Business associations between a proxy voter and any entity that may
influence their vote presents a conflict of interest. Some experts we
interviewed explained that these associations may form whether proxies are
internally or externally managed because company management has direct
access to the proxy voter who is either an employee, in the case of
internally voted proxies, or is a service provider, in the case of
externally voted proxies.
When a portion of a company's pension plan assets are invested in its own
company stock, the proxy voter may be particularly vulnerable to conflicts
of interest because management has the ability to directly influence its
voting decisions and, since company stock held in the company's own
pension plan is typically managed internally,7 the proxy voter may at
times be more concerned about their own interests. While ERISA states that
fiduciaries must act solely in the interest of pension plan participants,
there is no requirement that an independent fiduciary be appointed to
provide additional protections for participants with company stock in
their pension plans.
Several experts explained that conflicts of interest that occur in this
type of arrangement are considerably problematic. For example, one expert
said that since proxy voting and other decisions relating to company stock
are much more likely to be handled in-house, votes may be cast in
7The named fiduciary could also delegate the proxy voting responsibility
to a trustee bank, third-party proxy voting firm, or an independent
fiduciary.
accordance with the wishes of the company's senior management.8 In such
cases, the company's management may not consider the best interest of plan
participants and beneficiaries independently from management's opinion of
what is best for the company. The Enron case provides an example of how
management's own concerns may come before that of participants and
beneficiaries.9
In addition, some experts said that when proxies are internally managed,
the proxy vote may be influenced by the fiduciary's own personal concerns,
particularly in instances when casting a vote solely in the interests of
plan participants and beneficiaries means voting against company
management. Specifically, if the plan fiduciary is a lawyer, investment
analyst, or a member of the management team for the company, their proxy
vote on management proposals such as a merger and acquisition or for
individuals they have chosen to serve on the board of directors could be
influenced by concerns about their personal standing, or job security, in
the company. A few experts said that a fiduciary in this situation is not
likely to vote against a management proposal such as an executive
compensation package because of their own personal concerns. Additionally,
DOL officials said that conflicts for an internal fiduciary could arise
when the company is experiencing problems, which, if publicly known, would
cause stock value to decline. In order to protect participants, fiduciary
duty might require the fiduciary to publicly disclose the information to
participants and other shareholders and sell shares of the company stock.
Insider trading rules would, however, prevent the fiduciary from taking
action on nonpublic information.10 However, making this information public
could cause a rapid decline in share value as investors sell off their
shares of stock, thereby, potentially harming the company and the
fiduciary's own personal standing in the firm.
8Defined benefit plans may not acquire any qualifying employer security or
qualifying employer real property in excess of 10 percent of fair market
value of the plan's assets. Defined contribution plans are generally
exempt from the 10 percent limitation.
9The DOL sued Enron, corporate directors, and the administrative committee
on June 26, 2003, for violating ERISA. The suit alleges that certain
company and plan officials failed to consider the prudence of Enron stock
as an appropriate investment for the retirement plans and did nothing to
protect the workers and retirees from extensive losses. The former
corporate executive was also charged with misrepresenting Enron's
financial condition to employees and plan officials and encouraging them
to buy the stock.
10Insider trading rules state that a person or entity may not sell or buy
stock based on information that is not publicly available.
Because company management could influence the fiduciary responsible for
voting the proxies related to the company's own stock,11 management may
have a significant amount of influence over the outcome of a proxy
contest.12 In order to assess the influence management could have in a
proxy contest, we conducted an analysis of Fortune 500 companies. (See
appendix I for further information on our methodology.) In our analysis,
we compared the number of voting shares of company stock held in a
company's pension plans13 to the total voting shares held in the market.
About 272 of the Fortune 500 companies that reportedly had their own
company stock in their pension plans and in separate accounts, such as
master trust agreements held over $210 billion in employer securities in
plan year 2001. Of those companies, 27 percent held at least 5 percent or
more of company stock in their company's pension and benefit plans, while
another 26 percent held between 2 and 5 percent. None of the Fortune 500
firms we analyzed held more than 21 percent of the total voting power of
their company's stock in their pension and welfare benefit plans, while 47
percent held less than 2 percent of company stock in their company's
pension and benefit plans.
11Management also has access to other proxy voters-employees who
participate in the company's pension plan which has company stock as an
investment choice in their 401(k) plan or if the plan sponsor offers an
Employee Stock Ownership Plan (ESOP). The plan fiduciary is responsible
for voting unallocated stock and stock allocated to pension plan
participants that has not been voted. Unallocated shares of stock are
those that have not been distributed and are held by the company in a
suspense account. Allocated shares of stock are those shares that have
been both distributed to the employees of the company's pension plan and
to outside investors (e.g., by institutional investors such as other
pension plans and mutual funds, or individual investors). How the
fiduciary must vote those stock is outlined in the plan documents. The
directions provided in the plan documents may include voting by the
trustee in accordance with fiduciary principles, voting by the trustee to
mirror the vote for directed shares, and refraining from voting the shares
on the assumption that the employee intended to cast a no vote.
12For defined benefit plans, plan assets are typically institutionally
managed by an external asset manager. The external asset manager also has
the responsibility to vote the proxies unless that responsibility is
retained by the plan trustees. For defined contribution plans, pension
plan participants may have the responsibility to vote the proxies for the
shares of their own company's stock in their 401(k) plan account. This
called pass through voting, which is required for a plan to receive
Section 404(c) relief with respect to the investment in company stock. It
is at the plan's discretion to permit pass thru voting to participants,
though most defined contribution plans are designed to comply with Section
404(c).
13This includes company stock held in defined contribution plans
(including ESOPs) and defined benefit plans, or indirectly through certain
trusts, accounts, and other investment arrangements. This also includes
allocated and unallocated stock.
While the results showed that the pension and welfare benefit plans of the
Fortune 500 companies we analyzed were not holding large percentages of
the total voting power of a company's shares, these findings may still be
significant. For example, in a contentious proxy contest such as a merger
and acquisition where 51 percent of outstanding shares is needed to
complete the merger, a company whose pension assets comprise just 2
percent of the total stock issued by a company might act as the deciding
vote if the proxy contest is close. In this case, how the plan fiduciary
or proxy voter casts its vote could make the difference between 49 percent
and 51 percent-that is, the difference between the merger being approved
or rejected. Some of the largest and most influential pension plans
typically hold no more than 1 to 2 percent of any one company's shares in
their plan's investment portfolios. As such, a Fortune 500 company whose
pension plans holds more than 1 or 2 percent of its own company stock
could give them an advantage in a proxy contest.
When the fiduciary is not an employee of the plan sponsor-that is, he or
she is external to the company--experts explained that a variety of
different types of conflicts might also arise because of business
associations. For example, when the proxy voter is an investment manager
that is part of a larger corporation that provides a variety of services,
experts said that business relationships between the company's other
branches and the plan sponsor might influence the investment manager's
voting decisions. These relationships may influence the proxy voter to
vote with the plan sponsor's management, particularly if the proxy voter
wishes to maintain business relationships with the plan sponsor or create
an opportunity for future business relationships. For instance, some
experts we interviewed contend that DeAM division-the proxy voter in this
case-was influenced by a business relationship between DeIB division and
their mutual client, HP. SEC records reveal that DeAM reversed its vote to
vote in favor of HP's merger after the investment banking division set up
a meeting between the proxy voter and HP management. SEC found that,
unbeknownst to DeAM's advisory clients, DeIB was working for HP on the
merger and had intervened in DeAM's proxy process on behalf of HP. This
created a material conflict of interest for DeAM, which has a fiduciary
duty to act solely in the interests of its advisory clients. The SEC
action found that DeAM violated this duty by
voting the proxies on the HP stock owned by its advisory clients without
first disclosing the conflict.14
While some experts we interviewed said that they believe most plan
fiduciaries vote solely in the interest of participants and beneficiaries,
others said that some fiduciaries might prioritize other interests when
casting their votes. For example, a few experts said that fiduciaries are
taking their proxy voting responsibility seriously and voting
appropriately. Other experts we interviewed said that the proxy voting
decisions of some external asset managers are often influenced by
short-term quarterly returns on assets rather than on voting patterns that
support long-term goals that benefit shareholders and participants. Some
experts we interviewed also said that some external asset managers believe
that they are retained and compensated because of superior investment
performance and not because of how they vote proxies. Last, some experts
said that there are only downsides to devoting resources to proxy voting.
Limited Disclosure May Make Proxy Voting Vulnerable to Conflicts of
Interest
Experts we interviewed said that the limited disclosure might create
inappropriate incentives and result in inadequate accountability, which
may make proxy voting especially vulnerable to conflicts of interest.
Proxy votes, in some cases, may not be monitored by the plan fiduciary and
are not routinely disclosed to the public, two actions that could help
ensure that fiduciaries cast votes solely in the interest of pension
participants.
Limited disclosure and lack of adequate monitoring of proxy voting
practices by plans hinders accountability for how votes are cast.
Consistent with current DOL requirements, votes are disclosed to the
appropriate plan fiduciaries.15 Fiduciaries are not required to publicly
disclose proxy voting guidelines and votes, though the plan would be
14SEC found that DeAM violated Section 206(a) of the Investment Advisers
Act of 1940 by failing to disclose to its clients any material fact about
a potential or actual conflict of interest that may affect its unbiased
service to its clients.
15According to the January 1990 interpretive letter to the Institutional
Shareholder Services Inc., DOL advised that the named fiduciary must be
able to comprehensively monitor proxy voting activities of the investment
(or asset) manager so as to make an informed determination as to whether
the investment manager has met its fiduciary obligations. Thus, the named
fiduciary must have access to, and the investment manager must maintain
accurate records of, the investment manager's voting procedure and actions
taken in specific cases.
required to make any written proxy voting guidelines available to
participants upon request.16 Hence, only plans have easy access to the
information that allows them to monitor how proxy voters are voting.
However, not all plans have the resources to devote to such monitoring;
therefore, the attention given to the proxy voting responsibility can vary
greatly by plan. Some large plans devote a significant amount of expertise
and resources to proxy voting while other plans may not. Furthermore, a
few experts said that in many cases where the proxy voting responsibility
is delegated externally, the plan provides limited to no review of how the
proxies were voted.
Experts we interviewed said that limited disclosure might provide
incentives for fiduciaries to cast their votes according to their own
interests. These experts also said that publicly disclosing proxy votes
could help discourage voting that is inconsistent with participants'
interests. For example, a few experts believed that the economic
incentives for fiduciaries to vote with management could be significant
enough, and the potential for penalties as a fiduciary weak enough, to
make voting with management hard to resist.17 Several experts explained
that since breaches of fiduciary duty are very difficult to uncover,
limited transparency prevents participants and others from raising
questions regarding whether votes were made solely in the interest of
participants. They also contend that increased transparency provided by
public disclosure may provide participants, regulators, and others with
more comprehensive information needed to hold fiduciaries and corporations
accountable for their actions. In this regard, SEC concluded that shedding
light on mutual fund proxy voting could illuminate potential conflicts of
interest and discourage voting that is inconsistent with fund
shareholders' best interests.
SEC's new disclosure rules for mutual funds and investment advisers may
provide a limited benefit to some pension plan participants, while the new
rule for investment advisers may also benefit pension plans whose proxies
are voted externally. In 2003, SEC issued a final rule requiring mutual
16See DOL Interpretive Bulletin 94-2 and a March 20, 1997 interpretive
letter to Kirkland & Ellis with respect to the scope of the disclosure
requirements of Section 104(b)(4).
17Voting with management is not necessarily against the interests of
participants and beneficiaries. In some cases, voting in favor of a
management proposal would benefit participants. As with any proxy
decision, the vote should be based on analysis and should be made solely
in the interest of participants.
funds to publicly disclose their proxy votes on an annual basis and to
adopt and disclose proxy voting policies and procedures to shareholders.
However, this rule may provide some benefit for pension plan participants
in defined contribution plans. Specifically, pension plan participants who
invest their defined contribution dollars in mutual funds might find proxy
voting results cast by investment managers of their funds on the web site
of the mutual fund provider. On the other hand, defined benefit plan
participants may receive little benefit from this rule if defined benefit
plans invest few assets in mutual funds.18 Furthermore, SEC's new
disclosure rule for investment advisers requires investment advisers to
inform their clients how they can obtain information on how the clients'
securities were voted. However, this rule may provide little benefit to
plan participants in defined contribution and defined benefit plans since
this ruling requires disclosure to the plan as the client and not to plan
participants.
SEC's new disclosure rule for investment advisers may also provide
protections beyond those provided by ERISA for private pension plans whose
proxies are voted externally. SEC's new disclosure rule for investment
advisers may provide requirements that are either not specifically stated
or covered in DOL interpretations of ERISA. For example, SEC requires, in
part, that investment advisers19 exercising proxy voting authority over
client securities adopt and implement proxy voting policies and procedures
for voting clients' proxies.20 ERISA, on the other hand, does not require
fiduciaries to maintain statements of investment policy, which includes
statements of proxy voting policy. Also, SEC requires that voting policies
and procedures must describe how the adviser addresses material conflicts
between its interests and those of its
18Under defined benefit plans, the employer, as the plan sponsor, bears
the investment risk as well as those risks associated with voting proxies.
19This rule applies to all investment advisers registered with SEC that
exercise proxy voting authority over client securities.
20This new rule also requires that the written policies and procedures for
voting client proxies must be reasonably designed to ensure that the
adviser votes client securities in the best interests of the clients, to
disclose to clients how they may obtain information about those policies
and procedures, and to disclose to clients how they may obtain information
on how the adviser has voted their proxies. The rule amendments also
require advisers to maintain certain records relating to proxy voting. The
rule and rule amendments are designed to ensure that advisers vote proxies
in the best interest of their clients and provide clients with information
about how their proxies are voted. This new rule also requires investment
advisers to furnish a copy of written policies and procedures to clients
upon request.
clients with respect to proxy voting, while ERISA does not. SEC's
investment adviser rule may provide no benefit to plans that retain voting
responsibility because it covers only investment advisers that exercise
proxy voting authority over client securities.
Certain changes in the retirement savings environment are making the need
for enhanced transparency more important. For example, the shift from
defined benefit plans to defined contribution plans increases the need for
disclosure to plan participants.21 Because under a defined contribution
plan participants bear the investment risk, as with shareholders,
participants need information to be more active in protecting their
retirement assets. SEC reported that the proposal generated significant
comment and public interest. Of the approximately 8,000 comment letters,
the overwhelming majority supported the proposals and urged SEC to adopt
the proposed amendments. Many commenters, including individual investors,
fund groups that currently provide proxy-voting information to their
shareholders, labor unions, and pension and retirement plan trustees,
supported the proposals.22 Furthermore, one expert said that pension plans
should be required to disclose votes and guidelines to participants
because participants cannot switch plans the way shareholders can switch
their money from one investment company to another. This expert further
said that having policies such as these in place makes ERISA stronger
especially given the impact that having their money tied up in a
retirement portfolio could potentially have on a participant's retirement
assets. Additionally, the expert said that the differences between
disclosures provided to shareholders and pension plan participants should
be eliminated.
21DOL statistics show that the number of single employer and multiemployer
defined benefit plans are on the decline, while the number of defined
contribution plans being adopted is on the rise. The decline in defined
benefit plans is attributed to the fact that fewer plans are being
adopted, some employers are replacing defined benefit plans with defined
contribution plans, and some defined benefit plans have been terminated.
22Many fund industry members supported the proposed amendments regarding
the disclosure of policies and procedures. However, most fund industry
members opposed the proposed amendments that would require disclosure of a
fund's complete proxy voting record and disclosure of votes that are
inconsistent with fund policies and procedures.
Some Plan Fiduciaries Have Taken Actions to Manage Conflicts
To manage conflicts, some plan fiduciaries have taken special actions,
some of which are similar to SEC requirements for mutual funds. One such
action is the maintenance by fiduciaries of detailed proxy voting
guidelines that give proxy voters clear direction, reducing ambiguity and
vulnerabilities related to conflicts that may influence the voter.
Additionally, some fiduciaries include in their guidelines information on
what the plan does when a conflict of interest exists on a proxy vote;
they also publicly disclose their guidelines. Some plans also disclose a
record of all their votes cast to participants and the public. Some
pension plans also put additional procedures and structural protections in
place to help manage conflicts.
Some Fiduciaries Have Developed Detailed Proxy-Voting Guidelines to Manage
Conflicts
To help manage conflicts, some fiduciaries use detailed proxy voting
guidelines that they make public. However, such guidelines are not
required by ERISA, nor does DOL give guidance to fiduciaries as to the
level of detail and specificity that guidelines should contain. Hence,
some plan guidelines vary widely in their level of detail and specificity
and some provide only minimal guidance. For example, some plan officials
we interviewed said that their guidelines instruct proxy voters to always
vote in the best economic interest of participants, while other experts
said that some guidelines only instruct proxy voters to vote with
management but offer no guidance beyond this broad statement. Other plans,
on the other hand, create detailed, up-to-date guidelines. Some plans that
we reviewed, for example, maintain guideline documents that direct proxy
voters which way to vote, or factors to consider in deciding which way to
vote, on a wide range of routine and non-routine proxy issues. The issues
include, but are not limited to, board of director elections, auditor
selections, executive compensation, reincorporation, capital issues (such
as stock issuance), environmental and social concerns, and mergers and
acquisitions. In addition, some plans, according to plan officials we
spoke with, review their guidelines on a regular basis, and update them if
needed. This allows the guidelines to reflect new issues in corporate
governance. For example, in 2002, one plan updated its guidelines twice to
reflect new corporate governance issues arising from the Sarbanes-Oxley
Act.23
Detailed guidelines reduce ambiguity in the proxy voting process by
providing direction to help fiduciaries determine how to vote. For
23The Sarbanes-Oxley Act was passed in 2002 and contained a number of
corporate governance and accounting provisions in response to recent
corporate scandals.
example, detailed guidelines may instruct a voter how to analyze an
executive compensation vote based on a number of factors, so that the vote
is made in what the fiduciary believes is solely in the interest of
participants. As a result, proxy voters have clear direction on how to
vote on a specific voting issue. For example, one plan official said that
because their guidelines are clear, there is no confusion about how to
vote on any proxy issue. Furthermore, a plan fiduciary or proxy voter may
use detailed guidelines to defend against complaints about votes by
demonstrating that a given vote was based on their guidelines and was not
influenced by a conflict of interest.
Some guidelines include what steps a proxy voter should take to prevent a
fiduciary breach and ensure that the vote is made solely in the interest
of participants when a conflict of interest exists. Similar to the recent
SEC rule requiring mutual funds and investment advisers to disclose "the
procedures that a mutual fund company/complex and investment advisers use
when a vote presents a conflict...." some pension plan fiduciaries include
such a discussion in their guidelines. For example, the guidelines of one
plan fiduciary we examined indicate that, in the case of a conflict of
interest, the issue is to be reported to the president and general counsel
of the plan sponsor who decide how to proceed and ensure that a record of
the conflict and the related vote is maintained. In addition, some
fiduciaries provide further detail about what constitutes a conflict of
interest. For example, one plan's guidelines define a conflict of interest
as being "a situation where the Proxy Analyst or Proxy Committee member,
if voting the proxy, has knowledge of a situation where either" the plan
fiduciary "or one of its affiliates would enjoy a substantial or
significant benefit from casting its vote in a particular way."
In addition to developing detailed guidelines, some plan fiduciaries
voluntarily make their guidelines/policies and procedures available to the
public, as SEC has required mutual funds to do. Some public pension plans
disclose their guidelines on their Web sites, making them available not
only for participants and beneficiaries but also the general public. The
officials of some private plans indicated to us that they would probably
produce a copy of their guidelines if explicitly requested by a
participant, though they admitted that such a request is rarely, if ever,
made. SEC addressed the issue of disclosure, when, in 2003, it began to
require mutual funds to disclose their voting policies and procedures in
their registration statement. Mutual fund policies and procedures are
required to be available at no charge to shareholders upon request. Also,
mutual funds must inform shareholders that the policies and procedures and
votes are available through SEC's Web site, and, if applicable, on the
fund's Web
site. SEC made the case for guideline disclosure by stating that,
"shareholders have a right to know the policies and procedures that are
being used by a fund to vote proxies on their behalf." Many fund industry
members publicly supported SEC's disclosure rule through comment letters
sent to SEC after the rule proposal was released. Officials for one mutual
fund company, for example, supported guideline disclosure because the
transparency resulting from disclosure would encourage mutual funds to
make better proxy voting decisions, which in turn could enhance fund
performance. Also, they believed that guideline disclosure would deter
casting proxy votes that are not in the best interest of shareholders.
Some Fiduciaries Disclose Proxy Votes, Providing Greater Incentive to Vote
Appropriately
Some plan fiduciaries also publicly disclose their proxy votes in an
attempt to manage conflicts of interest. We met with officials of some
public pension plans that disclose proxy votes on their Web sites, making
them available not only to participants and beneficiaries, but also to the
public.24 While some public plans disclose only the votes of a few hundred
different equities, other plans disclose all their votes. These funds
present a list of companies and how relevant proxies for that company have
been voted during a specified timeframe. In addition, one plan sometimes
includes a note that briefly explains the rationale for their vote (e.g.,
why they withheld their vote for a certain director). Two plans, whose
officials we met with, also disclose the number of shares that were voted
on each proxy.
In April 2003, a SEC rule went into effect requiring mutual funds to
disclose, on an annual basis, a record of all proxy votes cast during the
previous year. Mutual fund votes are required to be available on the
fund's Web site or provided at no charge to shareholders upon request.
Also, mutual funds must inform shareholders that the votes are available
through SEC's Web site. SEC, in its rule release on mutual fund proxy vote
24A public pension plan is a pension, annuity, retirement, or similar fund
or system maintained by a state or local government that provides a
retirement benefit to the state or local government employee. Some of the
largest pension plans in the United States such as the California Public
Employees Retirement System and the New York City Employees Retirement
System are public pension plans. These public plans are not governed by
ERISA.
disclosure, stated that the overall costs of disclosure are reasonable.25
The experience of the plans we examined that disclose their votes
indicates that their costs are not substantial and not a serious burden
because proxy voting is done electronically, and voting records are
required to be maintained.
Some experts we interviewed argue that proxy vote disclosure can benefit
participants by giving them information on how the plan votes proxies and
providing an incentive to the plan fiduciary or proxy voter to vote
appropriately. Disclosure would allow plan participants to review votes
and raise questions as to whether votes were made appropriately. The
knowledge that participants and beneficiaries might complain to the plan
and to others if they believe a breach of its fiduciary duty has taken
place may encourage fiduciaries to vote appropriately to avoid such
problems. Some experts said that participants would be overwhelmed by the
information and would not understand what to do with it. In addition, a
few experts have said that it is possible that, while participants might
not have the time or the knowledge to analyze proxy votes, an
investigative journalist might look at votes of a certain pension plan and
publicly discuss any possible breaches they have uncovered or notify the
appropriate authorities if any breaches are found or are suspected.
Proxy voting disclosure may also influence the voting behavior of
fiduciaries, as seen in the example of one large mutual fund. As reported
in the news, one large mutual fund voted in favor of the full slate of
directors nominated to serve on the board of directors on 29 percent of
proxy contests in which they voted in 2003, while in 2002 the fund had
voted in favor of the full slate in 90 percent of the contests.26 And
while the fund had voted for 100 percent of auditor approvals in 2002, in
2003 it had voted for only 79 percent. Experts we interviewed said that
SEC's disclosure rules might have contributed to that change in behavior.
Nine of 12 respondents to our written interview support proxy vote
disclosure by
25Opponents to vote disclosure argued against the rules largely by arguing
that disclosure would be prohibitively costly. However, in its final rule,
SEC noted that several fund groups that currently provide disclosure of
their complete proxy voting records to their shareholders commented that
although there are start-up costs for compliance systems, this cost
decreases over time, and that the overall costs of the disclosure are
minimal. SEC found arguments made by funds that are providing this
disclosure to be particularly persuasive and continue to believe that the
costs of disclosure are reasonable.
26Ken Brown, "Vanguard Gives Corporate Chiefs A Report Card," Wall Street
Journal, November 10, 2003. pg. C.1.
pension plan fiduciaries and many experts we spoke with also support proxy
vote disclosure by plans. Very few respondents and experts we interviewed
believed that disclosure of votes would not benefit pension plan
participants. Specifically, they cited as reasons that: (1) the costs of
disclosure outweigh any benefits to participants; (2) there is the
potential for politicizing proxy voting; (3) disclosure may serve as a
detriment to the investment manager's investment strategy; and (4)
participants lack interest in proxy voting.
Some Fiduciaries Have Voluntarily Taken Additional Steps to Manage
Conflicts of Interest
Some plan fiduciaries have voluntarily taken additional steps to help
manage conflicts of interest that may lead to breaches of fiduciary duty,
including implementing structural protections and special proxy voting
procedures. For example, a few plans we reviewed structure their
organization to separate those who cast votes from executives who make
policy decisions about the plan. Some plans delegate the responsibility
for proxy voting in a way that protects against fiduciary breaches. One
public plan, for example, had external asset managers cast proxy votes,
but decided to bring the proxy voting process in house to avoid having the
plan's proxies voted on both sides of an issue. By doing all voting
internally, plan fiduciaries can provide better safeguards ensuring that
votes are cast solely in the interest of participants and provide
consistency to how votes were cast.
In order to address concerns about conflicts of interests related to
employer stock in pension plans, a few pension plan officials we
interviewed said that their company stock is managed and proxies are voted
by an independent fiduciary outside of the company. In other cases, some
fiduciaries use independent proxy-voting firms for research and analysis
or to cast proxy votes on their behalf. For example, officials from one
plan that we met with told us that they use an outside proxy-voting firm
to make the vote decision when a conflict exists. One asset manager, for
example, did so during a contentious merger in which their Chief Executive
Officer was a director of the acquiring company. Some fiduciaries we met
with have an outside proxy-voter execute proxy votes based on their plan's
own guidelines. Other fiduciaries simply use outside proxy-voter firms to
provide analysis and research, which the fiduciary may then use to help
determine how to vote.
Outside proxy voting firms are not without their own conflicts of
interest, however. Some proxy-voting firms have expanded to other
services. One firm, for example, provides a service to corporations in
helping design proxies to improve the chances that proxy issues will
succeed. A conflict of interest would exist when the proxy-voting firm has
to vote on a proxy
that it helped create or when it must vote a proxy for the same company
from which it received revenue for some other service.
In addition to the structural protections some fiduciaries have put into
place, some fiduciaries have implemented special procedures that are used
when a conflict exists. For example, according to officials at one company
we interviewed, if a proxy vote is to be cast not in accordance with the
plan's guidelines, then the vote is decided by the plan's proxy committee,
which is also required to note why the vote was inconsistent with plan
guidelines. At other plans we reviewed, in the event that an attempt is
made to influence a proxy vote, the plan's executive committee makes the
vote decision. Additionally, officials from one private plan said that
when a material conflict of interest exists an independent third-party
proxy voter is given the responsibility to determine how to vote, based on
the plan's guidelines. Furthermore, this plan has a "Material Conflict of
Interest Form" which is filled out and signed by the voting analyst and a
member of the plan sponsor's proxy committee. This form includes
information on the stock being voted, the issue being voted on, what the
plan's proxy voting guidelines indicate about that issue, details on the
conflict of interest, and certification from the third-party proxy voter
on how the vote was cast. In addition, at another plan, when a material
conflict of interest exists during a proxy vote, the vote is reported to
the president and general counsel of the plan sponsor. They decide how to
address the situation, such as getting an outside vote recommendation or
disclosing the existence of the conflict. A record of meeting notes and
issues surrounding conflicts are maintained by the plan in case any
questions arise.
The Department of Labor's Related Enforcement Efforts Have Been Limited
The Department of Labor's enforcement of proxy voting requirements has
been limited for several reasons. First, participant complaints about
voting conflicts are infrequent, at least in part, because votes cast by a
fiduciary or proxy voter generally are not disclosed; therefore,
participants and others are not likely to raise questions regarding
whether a vote may not have been cast solely in their interest. In
addition, for the department, ERISA presents legal challenges for bringing
proxy voting cases.27 Specifically, because of the subjective nature of
fiduciary votes, it is difficult to obtain evidence that would prove the
plan fiduciary was influenced by something other than the interests of
participants. Furthermore, even if such evidence could be obtained,
monetary damages are difficult to value and, because the department has no
statutory authority to impose a penalty without assessing damages,
fiduciary penalties are difficult to impose. In part, because of these
challenges, but also because of its limited resources, DOL's reviews of
proxy voting in recent years have been limited. As a result, some experts
we interviewed do not view the department as a strong enforcement agent.
Identifying and Proving Breaches in the Proxy Voting System Is Difficult
Challenges exist in the proxy voting system that limit DOL's ability to
identify breaches and to prove that a fiduciary was influenced to act
contrary to the interests of plan participants. In March 2002, we reported
that DOL enforces ERISA primarily through targeted investigations. DOL
determines what issues it will investigate using a multifaceted
enforcement strategy, which ranges from responding to participant and
others' concerns to developing large-scale projects involving a specific
industry, plan type, or type of violation.28 DOL also uses the Annual
Returns/Reports of Employee Benefit Plans (Form 5500 Returns) to
27DOL noted, however, that it filed amicus briefs in three proxy voting
cases. In O'Neill v. Davis, 721 F.Supp. 1013, 1015 (N.D.I11. 1989), a DOL
amicus brief was instrumental in obtaining a holding that "the voting of
Plan-owned shares by the Plan's trustees was a fiduciary act under ERISA,
and one which the trustees were bound to exercise in the sole interest of
the Plan participants." DOL also filed two amicus briefs in Grindstaff v.
Green, 133 F.3d 416 (6th Cir. 1998), where, over a strong dissent, the
court rejected DOL's views on the extent to which ERISA's fiduciary duties
attach to plan fiduciaries' voting of plan shares. DOL officials said that
they also filed a brief on the voting of plan shares and exercise of other
shareholder rights on plans' behalf in district court in Krause v.
Columbia Quarry Co., 4:98 CV 01373 ERW (E.D. Mo.), although that case
wound up being decided on other grounds.
28Throughout this report, references to DOL's regular investigations refer
to those investigations that are not specifically aimed at detailed
reviews of proxy voting practices.
identify potential issues for investigation.29 In addition, its regional
outreach activities, while aimed primarily at educating both plan
participants and sponsors, are used to gain participants' help in
identifying potential violations.
Although DOL's strategy includes a number of ways to target
investigations, DOL officials consider information provided by plan
participants and beneficiaries an integral starting point to developing
many of its investigations. For instance, through information provided in
summary annual reports (SARs), summary plan descriptions (SPDs),
individual benefit statements, and other related reports, participants
have access to financial and operational information regarding their
pension plan and their accrued benefits. The information provided in these
reports can help participants and beneficiaries monitor their plans and
identify some warning signs that might alert them that possibly there is a
problem warranting DOL's attention.
While participant complaints might be useful in targeting some DOL
investigations, relying on participant complaints may not currently be the
most effective way to identify potential proxy voting cases. Because of
the current limited level of disclosure, DOL receives few complaints
related to proxy voting. For instance, as previously mentioned, the SARs
and other related reports provide plan financial and operational
information; however, they do not contain proxy voting information such as
voting guidelines and a record of how votes were cast. In addition, DOL
officials told us that proxy votes and guidelines are disclosed to the
plan and guidelines must be made available to participants and
beneficiaries when requested. However, one expert explained that
participants generally do not know to ask for this information. As such,
they are not likely to raise questions about whether or not a vote was
cast solely in their interest. Likewise, because proxy votes are not
publicly disclosed, complaints to DOL from those outside of plan
participants and beneficiaries are less likely to occur.
In addition to difficulties identifying potential breaches in the proxy
voting system, difficulties proving under ERISA that a fiduciary was
influenced to act contrary to the interests of plan participants are also
a challenge for DOL. Because a plan fiduciary's vote requires judgment,
determining what
29The Form 5500 Returns are forms that most qualified retirement plans
must file annually with the Internal Revenue Service.
influenced his or her vote can be difficult. If a plan fiduciary can
provide his or her rationale for voting a certain way-proving that, in his
or her opinion, proxies were voted solely in the interest of plan
participants-it is very difficult for DOL or others to prove otherwise.
Proving a fiduciary breach requires evidence that the plan fiduciary was
influenced in the voting by something other than the interests of plan
participants. Certain information-such as existing conflicts of interest
between the plan fiduciary and some other influential party, the plan
fiduciary's own selfinterest, or the potential impact of certain votes,
for instance-are important when trying to establish that such influence
was acted upon. Absent this or similar information, leaks by informed
parties- whistleblowers-are likely to be the only way one might prove a
breach actually occurred.
Monetary Damages Are Difficult to Value and Penalties Are Difficult to
Impose
Another challenge that DOL faces is that monetary damages are difficult to
value and, therefore, penalties and other sanctions are difficult to
impose. According to DOL, it is difficult to link a single proxy vote to
damages to the plan participants. This is often the case because there are
many economic variables that have an impact on share value. That is,
underlying economic factors such as fiscal policy, monetary policy,
unemployment, the threat of inflation, the global economy, and currency
valuations are all major determinants of share value. Therefore, it is
difficult to isolate the effect a single proxy vote may have had. Also,
because of the potential for a vote to have a long-term rather than a
short-term effect on share value, damages may not be immediately evident.
In addition, while the research community and others have differing
opinions about whether proxy votes have economic value, where it is
believed that these votes do have a value, the determination of this value
can be complicated. For example, in response to our written interview,
most experts who responded to this question indicated that valuing proxy
votes is a complex task, its difficulty dependent upon variables such as
the issue being voted on and an entities' governance structure. One
respondent said that a case could possibly be made if a decline in the
value of a company could be tied to the specific point in time when the
plan fiduciary voted for a self-serving measure. However, the fiduciary's
vote would have to be significant enough to affect the outcome of the
proxy contest. Using the Hewlett-Packard situation as an example, the
respondent added that one cannot know what the value of Hewlett-Packard
shares would have been if the merger had not gone through and thus one
cannot calculate the difference between that value and the current value
of the merged Hewlett-Packard/Compaq shares.
Additionally, others commented that, in the end, DeAM's vote might not
have affected the outcome of the proxy contest.
With respect to penalties, unlike SEC, which has the authority to impose a
penalty without first assessing and then securing monetary damages, DOL
does not have such statutory authority and, as such, must assess penalties
based on damages or, more specifically, the restoration of plan assets.30
Under Section 502(l), ERISA provides for a mandatory penalty (1) against a
fiduciary who breaches a fiduciary duty under, or commits a violation of,
Part 4 of Title I of ERISA or (2) against any other person who knowingly
participates in such a breach or violation. This penalty is equal to 20
percent of the "applicable recovery amount," or any settlement agreed upon
by the Secretary or ordered by a court to be paid in a judicial proceeding
instituted by the Secretary. However, the applicable recovery amount
cannot be determined if damages have not been valued. As we reported in
1994, this penalty can be assessed only against fiduciaries or knowing
participants in a breach who, by court order or settlement agreement,
restore plan assets.31 Therefore, if (1) there is no settlement agreement
or court order or (2) someone other than a fiduciary or knowing
participant returns plan assets, the penalty may not be assessed. Because
DOL has never found a violation that resulted in monetary damages, it has
never assessed a penalty or removed a fiduciary as a result of a proxy
voting investigation.
As a Result of Challenges, DOL Has Devoted Few Resources to Proxy Voting
Issues
As a result of challenges in the proxy voting system, DOL has devoted few
resources to proxy voting over the last several years. Between 1988 and
1996, DOL conducted three enforcement studies to determine the level of
compliance with proxy voting requirements among select fiduciaries (see
table 1). The first of these projects was initiated in May 1988,32 when
the department looked at the management of plan votes from a broad range
of investment managers, with a particular focus on certain contested
issues considered at annual shareholders' meetings in that year. Then in
1991,
30DOL can also seek removal of a fiduciary for breaches of fiduciary duty
or seek other sanctions.
31See U.S. General Accounting Office, Pension Plans: Stronger Labor ERISA
Enforcement Should Better Protect Plan Participants, GAO/HEHS-94-157
(Washington, D.C.: August 8, 1994).
32Current U.S. Comptroller General David M. Walker was the Assistant
Secretary of Labor for the PWBA from 1987 to 1989. The report was issued
in March 1989.
DOL started its second project to determine how banks were fulfilling
their responsibilities with respect to proxy voting practice. DOL looked
at proxy voting procedures at 75 banks, covering the application of
procedures during the 1989 or 1990 proxy season. Finally, during its last
project, the department once again reviewed the practices of investment
managers-12 in total-alongside 44 pension plans, with respect to corporate
governance issues. It reviewed certain proxy votes at five annual
shareholders' meetings held in 1994 and general proxy voting polices and
practices. According to DOL, overall the enforcement studies found that
there were improvements in proxy voting practices as virtually all plans
and investment managers in the studies voted their proxies. The
enforcement studies also found that additional improvement is needed in
the plans' monitoring of investment managers to ensure that proxies are
voted in accordance with stated policies. Furthermore, they found that
although investment managers appear to have the records to enable clients
to review managers' decisions on proxy voting, few plan clients actually
review the reports that are automatically provided to them. In the
situations in which reports are available upon request, few plans request
a copy. Given these findings, the department has not conducted similar
reviews in recent years to determine current levels of compliance. DOL
officials told us that they believe that proxy voters are generally in
compliance, that they receive few complaints in this area, and that they
focus most of their limited resources on other priority areas, which may
result in identifying violations that can be corrected.
Table 1: Summary of the Department of Labor's Proxy Projects
Years Project Scope Summary of findings
1988 -1989 No. 1 General fiduciary compliance review of investment
managers (IMs) with control over employee benefit plan assets subject to
ERISA.
Focused on certain contested issues considered at annual shareholders'
meetings in 1988.
Not all investment managers who voted on behalf of employee benefit plans
were delegated the authority to vote proxies. Instead, many managers
assumed the duty of voting as part of their overall responsibilities.
Not all managers had internal decision making procedures or written proxy
voting guidelines in place when they voted proxies, and those that did
often had a policy to simply vote with management.
Managers often lacked accurate recordkeeping with regard to whether
proxies had been received and voted.
Review of 75 banks' proxy Many banks lacked a policy
1991 -1992a No. 2 voting that addressed the maintenance
and
practices (covering the retention of proxy voting
application of records or related materials'.
procedures during the Several banks had policies to
1989 or 1990 proxy season abstain from voting or not
only). vote on certain issues.
Many banks followed the "Wall
Street Rule," giving the proxy
to
management of the company or
selling the shares of stock.
1994 -1996 No. 3 Review of practices of 12 IMs and 44 pension plans with
respect to corporate governance issues covered by Interpretive Bulletin
94-2.
Focused on certain proxy votes at five annual shareholders' meetings held
in 1994 and the general polices and practices with respect to proxy
voting.
Most plans delegated the authority to vote proxies to an IMs via written
agreement.
Most IMs received written proxy voting policies from their clients, but on
an irregularly basis.
Fourteen of 44 plans reviewed submitted proxy voting guidelines to their
IMs; over half had no proxy guidelines; and 7 retained the authority to
vote proxies.
The content of the guidelines were mixed-some general, some quite
detailed.
All IMs tracked proxy-related items and kept written documentation
justifying votes cast; most had written procedures to report votes to
clients, but few did so automatically.
Most plans did not monitor proxy voting by their IMs, about 35 percent
appeared to have performed substantive monitoring of IMs.
Source: DOL Proxy Project Report, March 2, 1989; Speech by David George
Ball, Assistant Secretary, Pension and Welfare Benefits Administration,
February 17, 1992; Proxy Project Report, February 23, 1996.
aResults of the second proxy project were not released in a formal report.
DOL officials said that they typically do not conduct specific
investigations focused on proxy voting, and they allocate few resources to
this issue. They, instead, focus its limited resources according to their
Strategic Enforcement Plan.33 However, proxy voting practices may be
examined
33The primary purpose of the Strategic Enforcement Plan is to establish a
general framework through which EBSA's enforcement resources may be
efficiently and effectively focused to achieve the agency's policy and
operational objectives.
during their investigations of investment managers. DOL said that its
investment management investigative guide has steps for reviewing proxy
voting, but the investigators have discretion whether to review proxy
voting practices. According to DOL officials, investigators receive
training on the general fiduciary obligations of named fiduciaries and
investment managers with respect to the voting of proxies on plan-owned
stock. When asked how often these reviews included the examination of
proxy voting, DOL officials responded that this information is not
tracked.
Some plan fiduciaries and industry experts that we interviewed have
indicated that DOL lacks visibility as an enforcement agent in this area.
For example, some experts said that DOL's examination of proxy voting
practices does not seem to occur routinely and that it is not clear what
enforcement action DOL has taken in recent years related to proxy voting.
Additionally, others have described an environment that provides little
incentive to do what is best for participants, indicating that fiduciaries
have no expectation that DOL will take action should they breach their
proxy voting responsibilities. One DOL official said that the department
has made its position on proxy voting known and issued clear guidance on
what is required of fiduciaries. Also, given its limited statutory
authority and resources, the department has a strategic enforcement plan,
and based on this plan, they place their limited resources in areas that
will result in identifying violations that can be corrected.34
The retirement security of pension plan participants is dependent on
decisions made each day in the market place by pension plan fiduciaries.
DOL guidance requires fiduciaries to cast proxy votes solely in the
interest of plan participants and beneficiaries. While ERISA requires that
voting guidelines be made available to participants upon request, ERISA
does not require disclosure of proxy votes to participants and the public.
Increased transparency of both proxy guidelines and votes could provide
participants and others with information needed to monitor actions that
affect retirement assets. Nor does ERISA require, as current SEC
Conclusions
34For example, in the area of tender offers, the Polaroid ESOP (or
NationsBank) case was a major enforcement action brought by DOL in a case
where DOL was able to show losses to the plan for fiduciary breach
involving a failure properly to exercise shareholder rights (in that case,
a failure to tender shares). See Harman v. NationsBank Trust Co. (Georgia)
N.A., 126 F.3d 1354 (11th Cir. 1997), reh'g denied, 135 F.3d 1409 (11th
Cir.), cert. denied, 525 U.S. 816 (1998). Another enforcement action
involving fiduciaries' misuse of shareholder powers was Martin v. Feilen,
965 F.2d 660 (8th Cir. 1992), cert. denied, 506 U.S.1054 (1993)
(involving, in part, failure of plan fiduciaries to bring a shareholder
derivative action).
regulations do for mutual fund investment companies and investment
advisers, that plans include in their guidelines language regarding what
actions fiduciaries will take to respond to conflicts of interest.
However, some plan fiduciaries have taken actions to manage conflicts of
interest, including maintaining proxy voting guidelines and disclosing
votes. Likewise, a few plan sponsors have hired independent fiduciaries to
manage company stock in their pension plans.
DOL's role in enforcing ERISA's fiduciary provisions, including proxy
voting requirements, is essential to ensuring that plan fiduciaries are
voting solely in the interest of plan participants and beneficiaries. Yet,
DOL has faced a number of enforcement challenges, including legal
requirements restricting its ability to assess penalties under ERISA.
Furthermore, DOL officials said that the agency does not have the
statutory authority to require plan fiduciaries to periodically and
publicly disclose proxy votes and guidelines. SEC, because of its role in
protecting all investors, including those in participant-directed
retirement savings plans, has taken steps to increase transparency in the
mutual fund industry. DOL's inability to take similar steps with respect
to pension plan fiduciaries may provide inappropriate incentives for
fiduciaries not to act solely in the interest of plan participants when
voting proxies. Furthermore, given both DOL and SEC goals to protect plan
participants as investors, coordination of their efforts to achieve this
goal is important.
If the Congress wishes to better protect the interest of plan participants
and increase the transparency of proxy voting practices by plan
fiduciaries, it should amend ERISA to require that plan fiduciaries
o develop and maintain written proxy-voting guidelines;
o include language in voting guidelines on what actions the fiduciaries
will take in the event of a conflict of interest; and
o given SEC's proxy vote disclosure requirements for mutual funds,
annually disclose votes as well as voting guidelines to plan participants,
beneficiaries, and possibly also to the public. From a practical
perspective, this disclosure could apply to all votes, but at a minimum,
it should include those votes that may affect the value of the shares in
the plan's portfolio. Such disclosures could be made electronically on the
applicable Website. Since many plans often use multiple fiduciaries for
voting proxies, the plan also could provide participants and others
directions on how voting records by the various fiduciaries could be
Matters for Congressional Consideration
Recommendations for Executive Action
Agency Comments and Our Evaluation
obtained. We believe that Congress should assure that participants have
the right to request proxy voting records at least annually, consistent
with their current right to request other plan documents.
Congress should also consider amending ERISA to give the Secretary of
Labor the authority to assess monetary penalties against fiduciaries for
failure to comply with applicable requirements.
Finally, Congress should consider amending ERISA to require that, at a
minimum, an independent fiduciary be used when the fiduciary is required
to cast a proxy vote on contested issues or make tender offer decisions in
connection with company stock held in the company's own pension plan. In
our view, this independent fiduciary requirement would not affect votes by
a participant in an eligible individual account plan.
To improve oversight and enforcement of proxy voting, we recommend that
the Secretary of Labor direct the Assistant Secretary of EBSA to increase
the Department's visibility in this area by
o conducting another enforcement study and/or taking other appropriate
action to more regularly assess the level of compliance by plan
fiduciaries and external asset managers with proxy voting requirements.
Such action should include examining votes, supporting analysis, and
guidelines to determine whether fiduciaries are voting solely in the
interest of participants and beneficiaries, and
o enhancing coordination of enforcement strategies in this area with
SEC.
We provided a draft of this report to DOL and SEC for their review and
comment. DOL's comments are included in appendix II; SEC did not provide
written comments. Both agencies provided technical comments, which we have
incorporated as appropriate. In its response to our draft report, DOL
generally disagreed with our matters for congressional consideration and
recommendations, saying that conflicts of interest affecting pension plans
are not unique to proxy voting and that requiring independent fiduciaries
and increased disclosures would increase costs and discourage plan
formation. DOL also said that the enforcement studies of proxy voting
practices undertaken previously by the department provide an adequate
measure of compliance in this area and, therefore, to undertake new such
studies, with an expectation of finding no significant level of
noncompliance, would be an inappropriate use of resources.
Our recommendations and matters for congressional consideration are
predicated on two principles: additional transparency and enhanced
enforcement presence. We believe that disclosing pension plans' proxy
voting guidelines and votes makes it more likely that votes will be cast
solely in the interest of plan participants, and that a visible
enforcement presence by DOL helps to reinforce the public interest in this
result. So although we agree with certain of DOL's points, we cannot agree
that additional transparency and an enhanced enforcement presence would
not be beneficial. Furthermore, because DOL believes that it does not have
the authority to require proxy voting guidelines and disclosure of votes,
and, in our view, it is important to shed more light on events such as
proxy voting---particularly contested proxy votes---we believe Congress
should consider amending ERISA to include such requirements.
We acknowledge that plan fiduciaries face conflicts beyond proxy voting
and that conflicts associated with casting a proxy vote may be no greater
than the potential for conflicts in making other fiduciary decisions.
However, our work and, therefore, our recommendations are focused on
issues related to proxy voting. Furthermore, we found that DOL's
enforcement in this area has been limited, which may not be the case in
its oversight of other fiduciary actions. For example, tender offer
decisions made by fiduciaries may suffer from similar conflicts. DOL,
however, has been able to develop investigative cases and secure positive
results for plan participants and beneficiaries in connection with this
area. However, DOL has not been similarly successful in developing proxy
voting cases. Given that plan participants may be particularly vulnerable
when internal fiduciaries vote employer stock held in the plan sponsor's s
own pension plan, we believe it is an appropriate safeguard to require an
independent fiduciary be appointed to vote these proxies. We are
recommending independent fiduciaries for certain circumstances.
Furthermore, in our view, this independent fiduciary requirement would not
affect votes by a participant in an eligible individual account plan.
In disagreeing with our recommendation that Congress consider amending
ERISA to require that an independent fiduciary be used to vote proxies for
employer stock held in a plan sponsor's own pension plan, DOL said that
the Congress already considered, but did not include, an independence
requirement for plan fiduciaries when it passed ERISA in 1974. We
acknowledge that Congress did not require independent fiduciaries when it
originally enacted ERISA. However, the conflicts of interest associated
with plan holdings of company stock have received increased public
attention in the last several years, and we believe the Congress should
reconsider ERISA's current legal requirements in connection with company
stock.
In response to our recommendation that DOL conduct another enforcement
study to determine the level of compliance with proxy voting requirements,
DOL said that it has seen no evidence of a negative change in the level of
compliance and that another proxy enforcement study would absorb a
considerable amount of resources. Rather than conducting another proxy
enforcement study, DOL said that it would evaluate proxy voting
information during its investigations in the financial services area. As
we discuss in our report, limited statutory authority and other challenges
are obstacles to effective DOL enforcement in this area. Furthermore, we
understand that DOL must balance efforts in this area with other
enforcement priorities. The statutory changes we have suggested, if
enacted, may help DOL's enforcement efforts in the future. Nonetheless,
even with such changes, we believe that conducting reviews of proxy voting
issues on a periodic basis is important to ensure compliance and increase
DOL's presence and visibility in this area. We acknowledge that conducting
another enforcement study is just one of various options available to DOL
to accomplish these goals and have altered our recommendation to be
explicit on this point. However, in our view, any review in this area
should go beyond simply determining whether fiduciaries cast proxy votes,
and should include assessing whether plans are monitoring proxy voting
practices by external investment managers and evaluating whether
fiduciaries voted solely in the interest of plan participants and
beneficiaries.
Regarding our matter for congressional consideration that plan fiduciaries
be required to disclose proxy voting guidelines and votes, at a minimum,
to plan participants, DOL noted that appropriate plan fiduciaries are
required to monitor proxy voting information and that proxy voting
guidelines are available to participants upon request. DOL further said
that requiring disclosure to the general public or even to all
participants would significantly increase costs to plans. Recognizing that
ERISA's disclosure requirements are focused on plan participants and
beneficiaries, not the general public, we modified our matter for
congressional consideration to state that proxy guidelines and votes
should at a minimum be disclosed to participants and beneficiaries. Our
report addressed concerns about the potential costs of disclosing proxy
voting guidelines and votes by suggesting that such information could be
made available electronically.
Unless you publicly announce its contents earlier, we plan no further
distribution until 30 days after the date of this report. At that time, we
will send copies of this report to the Secretary of Labor, the Chairman of
the Securities and Exchange Commission, appropriate congressional
committees, and other interested parties. We will also make copies
available to others on request. In addition, the report will be available
at no charge on GAO's Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact me at
(202) 512-7215 or George Scott at (202) 512-5932. See appendix III for
other contributors to this report.
Sincerely yours,
Barbara D. Bovbjerg Director, Education, Workforce, and Income Security
Issues
Appendix I: Scope and Methodology
To determine what conflicts exist in the proxy voting system and the
extent to which fiduciary breaches occur as a result of these conflicts,
we interviewed officials at the Department of Labor's Employee Benefits
and Security Administration (DOL) and at the Securities and Exchange
Commission (SEC). Using a standard set of questions, we conducted
interviews with proxy voting experts, academics, economists, and Employee
Retirement Income Security Act (ERISA) attorneys. We also interviewed
various proxy voting experts which include academics, ERISA lawyers,
industry experts, pension plan sponsors, asset managers, proxy voting firm
representatives, proxy soliciting companies, and plan practitioners. These
experts were, in part, selected from news articles involving abuses in the
mutual fund industry, from news reports regarding corporate scandals such
as Enron, from reported highly contested proxy contests, from historical
articles dated back to the proxy scandals in the 1980s and 1990s, and from
recent reports in the news and SEC's Web site pertaining to SEC's proxy
voting disclosure proposals. Experts were also selected based on published
research on proxy voting, based on discussions with plan sponsors and
industry experts, congressional testimony, and Congressional Research
Service reports.
To determine what safeguards fiduciaries have put in place to protect
against breaches, we interviewed a number of public and private pension
plan sponsors, asset managers, proxy voting firm representatives, and
other experts. These public and private pension plans were selected for
their promising practices based on discussions with industry experts, from
pension industry publications and other published reports of the corporate
governance practices of these plans. To explore the practices of
internally managed plans, we interviewed various proxy voting experts and
interviewed officials of the plans listed in the Pensions and Investments
with internally managed assets.
To determine DOL's enforcement of proxy voting requirements, we
interviewed officials at EBSA and reviewed DOL enforcement material and
previously issued GAO reports on DOL's enforcement program.
Appendix I: Scope and Methodology
Obtaining Total Number of Employer Securities Held in the Company's Own
Pension and Welfare Benefit Plans
To determine the extent to which private pension plans invested in their
own employer securities, we obtained the total value of the employer stock
in the company's pension and welfare benefit plans. To do so, we analyzed
plan financial information filed annually (Form 5500s) with the Internal
Revenue Service and EBSA. The Form 5500 report is required to be submitted
annually by the administrator or sponsor for any employee benefit plan
subject to ERISA as well as for certain employers maintaining a fringe
benefit plan. The report contains various schedules with information on
the financial condition and operation of the plan. The total value of
employer shares information is provided on either schedule H or schedule I
depending on the number of participants covered by the plan. EBSA provided
us with a copy of the 2001 electronic Form 5500 database for our
analysis.1 We assessed the reliability of these data for our purposes by
evaluating the electronic records selected for analysis for outliers,
duplicate records, and otherwise inappropriate values. Form 5500 records
that did not meet our review standards were eliminated from our analysis.
We decided to focus our analysis of companies with Form 5500 data to those
corporations listed in the Fortune 500.2 To do so, we matched each Fortune
5003 company to their pension plans on the basis of their Employer
Identification Numbers (EINs).4
We used several methods to identify EINs associated with each corporation.
We started with a list of EINs for Fortune 500 companies that was
purchased from Compustat (a database from Standard & Poors). To
1Plan year 2001 is the most recent year for which plan-specific Form 5500
data were available for our review.
2Fortune 500 companies are those representing the 500 largest corporations
that are based in the United States, ranked in order of revenues. The
Fortune 500 list is released annually in April. The rankings are based on
reported revenues in corporate annual reports (10Ks) filed in the year
leading up to January 31. Therefore, only public corporations and private
corporations that voluntarily release a 10K are included. For example, the
April 2004 Fortune 500 list is based on revenues reported between February
1, 2003, and January 31, 2004.
3Not all 500 companies were included in our analysis. For example, some
companies on the Fortune 500 are privately owned and, therefore, don't
have publicly traded stock. Furthermore, there are a handful of companies
that were on the Fortune 500 in 2001 but have since gone bankrupt, or are
no longer public. This often made it difficult to find the appropriate
data for those companies and when that was the case, they were eliminated
from the analysis.
4An EIN, known as a federal tax identification number, is a nine-digit
number that the Internal Revenue Service assigns to organizations.
Appendix I: Scope and Methodology
Obtaining the Total Number of Shares Outstanding for Selected Fortune 500
Companies
Obtaining the Closing Price for Our Fortune 500 Companies
identify the EINs for the remaining companies, we searched the 10K annual
filing statement for each relevant company. We then searched those
companies whose Form 5500s reported that they held their own employer
securities at the year's plan end year date.5 This resulted in a database
for filing year 2001 containing the information of 490 Form 5500 returns
filed by 272 of the Fortune 500 companies.
To analyze the total voting power of those 272 Fortune 500 companies on
our list for plan year 2001, we obtained the proxy statements filed with
SEC as form 14-A DEF for those companies. Form 14-A DEF statements are the
final annual proxy statements sent to all shareholders of a corporation
that detail all the issues that are to be voted on. The statements also
list the number of shares entitled to vote on the proxy issues and, where
applicable, the number of votes per share (e.g., some companies might
issue different classes of preferred stock which entitle the owner to more
than one vote per share). For each company, we multiplied the number of
shares outstanding for each class of share by the number of votes entitled
to that class and added up those figures for all classes of shares to get
a reflection of total number of shareholder votes. We used data from the
14-A DEF statements filed as soon after the end of calendar year 2001,
which was typically in the spring of 2002.
We also obtained share price data from the New York Stock Exchange's
(NYSE) Trade and Quote (TAQ) database. We used that database to obtain the
closing price (the price of the last transaction of the day) on the day
indicated as the plan end of year date from the Form 5500 for each
company. The TAQ database contains a listing of intraday transactions
(including shares involved and the price) for all companies listed on the
NYSE, the National Securities Dealers Stock Exchange (NASDAQ) and the
American Stock Exchange (AMEX). To ensure the reliability of the TAQ price
date, GAO economists previously conducted a random crosscheck of
5Additionally, we included the employer securities held by master trust
investment accounts associated with Fortune 500 benefit plans. A ``master
trust'' is a trust in which assets of more than one plan sponsored by a
single employer or by a group of employers under common control are held.
In such cases, a benefit plan reports the value of its interest in the
master trust account and not any employer securities held by the master
trust. Accordingly, we included employer securities reported by master
trusts accounts held by Fortune 500 benefit plans.
Appendix I: Scope and Methodology
Computing the Number of Voting Shares Held in Fortune 500 Company Pension
and Welfare Benefit Plans
the TAQ data with data provided by NADAQ, Yahoo! Finance, and other
publicly available stock data sources.
From the 5500 data, we obtained the total value at yearend for company
stock holdings by corporations in their pension and welfare benefit plans.
From the TAQ database, we obtained the closing price of the stock on the
plan yearend date. We then divided the closing price of the stock into the
total value at yearend to get a number of voting shares held in the
company's pension and welfare benefit plans.6
We then divided the total votes outstanding (i.e., total number of votes
based on available classes of stock for each of our Fortune 500 companies)
by the number of votes controlled by the pension plan to obtain the voting
power, or the percentage of votes controlled by the company's pension and
welfare benefit plans.
6We assumed that those shares held by the company and its pension plan(s)
are common stock with one vote per share for computation of voting power.
To the extent that assumption is inaccurate, our estimates for the voting
power of plans in their own company might also be inaccurate.
Appendix II: Comments from the Department of Labor
Appendix II: Comments from the Department of Labor
Appendix III: GAO Contacts and Staff Acknowledgments
Contacts
Staff Acknowledgments
(130243)
George A. Scott, Assistant Director (202) 512-5932
Kimberley M. Granger, Senior Economist and Analyst-in-Charge
(202) 512-3708
Other major contributors include Gwendolyn Adelekun, Matthew
Rosenberg, Gene Kuehneman, Lawrance Evans, Alison Bonebrake, Derald
Seid, Corinna Nicolaou, Michael Maslowski, Roger J. Thomas, Richard
Burkard, and Kenneth J. Bombara.
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