- - Tuesday, April 23, 2019

An executive order issued by President Trump last week could have a huge impact on the future of Americans’ retirement savings.

Mr. Trump directed the Department of Labor to review energy investment trends and the fiduciary responsibilities linked to proxy voting to determine future guidelines. Last year, the department issued guidance calling for greater restrictions on investment funds promotion of Environmental, Social and Governance-focused investments (ESG). That’s a marked change from President Obama’s administration, which encouraged inclusion of ESG funds.

The bottom line is whether proxies and other financial advisers should recommend what’s best for retirees financial returns or also consider social concerns that may reduce profitability — by possibly voting against new investments in energy companies that would result in the production of more fossil fuels, to give just one example.

The 2019 proxy season begins in earnest this month, and an estimated 600 billion shares will be voted at 13,000 shareholder meetings. The Securities and Exchange Commission (SEC) requires investment management funds to submit proxy votes for all companies in which they own shares. Most fund managers rely on proxy advisery firms for guidance in voting their portfolios. This reliance has led to serious problems.

Just two firms — Institutional Shareholder Services and Glass Lewis — control more than 97 percent of the proxy advisery market. These companies have glaring conflicts of interest, as they provide shareholder voting recommendations on companies and consulting services to those same businesses.

With the rise of ESG-focused investing, a small cadre of activist institutional investors are increasingly pushing public companies to take liberal stands on political issues, no matter the impact on profits.

Activist investors proposed 464 such resolutions in 2018, up from 407 in 2010, according to the Sustainable Investments Institute. More than half of all shareholder proposals submitted during the 2017 proxy season involved social issues with no connection to a company’s financial performance, according to the Manhattan Institute’s annual Proxy Monitor review.

Activist resolutions and the voting recommendations that follow them often hurt average investors because they divert the focus and resources of companies away from increasing shareholder value and toward such hot-button political issues like climate change instead.

Regulators are paying attention to these developments. Besides the recent directive from the White House, last year’s Department of Labor guidance to investment managers held that they “may not sacrifice returns or assume greater risks to promote collateral environmental, social, or corporate governance (ESG) policy goals when making investment decisions.”

As the SEC considers implementing additional guidelines to address the problems in the proxy advisory industry, it should consider three important reforms.

First, the SEC should raise submission standards for proxy votes. An SEC rule established in the 1950s requires repeat submissions to have received 3 percent support after the first submission, 6 percent on the second and 10 percent on the third to be submitted the following year. These standards are artificially low. In 1997, the SEC proposed raising the thresholds to 6, 15 and 30 percent, respectively, but failed to act.

Higher submission thresholds would mean fewer resources wasted by the companies forced to respond these proposals year after year. Simply analyzing a proposal to determine its validity costs public companies at least $87,000, according to data from the U.S. Chamber of Commerce. That burden is even greater on smaller companies, which must make due with fewer resources to analyze and — if necessary — combat politically motivated shareholder proposals that are inimical to profits.

Second, the SEC should raise the standard of ownership to submit a proposal from $2,000 to $10,000, so that proposals come from investors and funds that have a vested stake in the company. In addition, the SEC should increase the time a shareholder seeking to submit a proposal has invested in the company from one year to two years.

Finally, the SEC should consider imposing a time-out phase so that if a proposal fails to secure a low threshold of support for three straight years, it would be shelved for a period of time. This would cut compliance costs for companies dealing with “zombie” shareholder proposals that return year after year from the same activist shareholders and receive minimal backing. A report last year from the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness showed that 32 percent of all failed proposals between 2001 and 2018 were zombie proposals.

It may be tempting to dismiss this issue as an arcane battle over corporate governance nuances, but the proxy process has a huge impact on average investors. More than 100 million retail investors in the United States hold nearly $16.9 trillion in assets in the stock market. These citizens and shareholders with 401(k)s, IRAs and other retirement funds deserve a system that protects their financial futures instead of one that advances a political or social agenda.

• Jeff Patch is an analyst at Capital Policy Analytics and a writer at Iowa Intelligence, a Des Moines-based research and communications firm.

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