Public Pension Fund Trustees and Proxy Voting

By Morales, Jennifer C. | Government Finance Review, June 1992 | Go to article overview

Public Pension Fund Trustees and Proxy Voting


Morales, Jennifer C., Government Finance Review


The challenges faced by trustees of public employee retirement systems are increasing in number and complexity as trust assets reach sizes that were, just a few years ago, almost unimaginable. Caring for trust assets now involves not only protecting the assets from diversion or mishandling, but insuring that the assets are protected and grown in a prudent manner, with an eye toward the long term. One issue that trustees are increasingly hearing and reading more about, with regard to their pension funds is proxy voting. Proxy voting is an issue that clearly combines administrative and investment aspects of a trustee's fiduciary responsibilities.

What is Proxy Voting?

The first concept, which is not obvious and one which causes some confusion, is what constitutes a proxy and what is "voting?" Proxy voting, in general, relates to the ownership of stocks of corporations. For every share of stock owned by an individual, or in this case, a pension fund, the owner has a right to one vote on each of the issues on the agenda at the corporate annual meeting of the company that issued the stock.

Since institutional owners such as pension funds do not have the means or inclination to attend each of the annual meetings of every company in the pension fund's stock portfolio, they generally choose to vote "by proxy." The actual proxy cards or vote authorization forms that are filled out in order to transmit their voting instructions for each annual meeting have taken on the name "proxies."

Today, most public employee retirement systems have anywhere from 25 percent to 70 percent of the trust assets allocated to stocks of U.S. companies. Pension funds, generally through their custodian banks and/or the independent Election Corporation of America (IECA) will receive a proxy for each company in which there is a stock holding. The pension fund will receive the proxy material approximately four weeks prior to the company annual meeting date.

Fiduciary Aspects of Proxy Voting

Trustees, becoming increasingly aware of proxy voting, are interested in what their responsibilities are, for a number of reasons. Although not governed by the Employee Retirement Income Security Act (ERISA), many public pension fund trustees have taken note of the Department of Labor's pronouncements with regard to proxy voting. The Labor Department's administrator in charge of ERISA has made public announcements emphasizing the fact that the Labor Department construes the ability to vote proxies as pension fund plan assets and as such, they are subject to the fiduciary duty of care that must be accorded to all plan assets.

The publicity of the Labor Department's position on the matter has forced managers of pension fund assets and trustees of all pension plans to evaluate seriously their oversight responsibilities with regard to proxy voting. Public pension fund trustees have been establishing comprehensive policy statements on proxy voting, systems to account for the massive number of proxy ballots received each year, and procedures for monitoring the casting of thousands of votes to which their pension funds are entitled.

Among the first questions a pension fund trustee might ask are: Are my funds' proxies being voted? Who is voting them? How are votes being cast? What are the issues that are being voted upon? Are the votes cast in the best interest of the plan participants and beneficiaries of the pension fund?

In addition to these questions, there can be a great deal of confusion and some controversy about the degree of activity a pension fund should have with regard to its portfolio companies. This aspect of proxy voting has fueled discussions about whether to vote proxies or not. The ultimate focus of such discussions is usually the degree of the activity that a pension fund should have, for in actuality, the proxies for all public employee retirement systems are being handled in some manner by some party, whether the trustees are aware of this fact or not. …

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