July 03, 2009
Findings of Chamber Report on Proxy Voting are Challenged
by Robert Kropp
Adam Kanzer of Domini Social Investments analyzes report issued by the US Chamber of Commerce, and
finds questionable methodology and political bias.
In a recently released report entitled Analysis of the
Wealth Effects of Shareholder Proposals—Volume 2, the US Chamber of Commerce sought to evaluate the economic impacts
of shareowner proposals on target companies. The report was authored by Navigant Consulting.
In the report,
the authors assert that "The Employee Retirement Income Security Act (ERISA), as clarified in
recent guidance provided by the US Department of Labor, stipulates that pension fund managers may
only engage in such shareholder activism so as to promote the economic interests of the plan
beneficiaries. In order to satisfy fiduciary requirements, pension fund managers may only take
action if they can reasonably conclude the economic benefits outweigh the additional costs
associated with shareholder activism."
According to guidance issued by the Department of
Labor in October, 2008, "Plan fiduciaries, who are charged by law with the responsibility for
operating employee benefit plans on behalf of plan participants, may never increase expenses,
sacrifice investment returns, or reduce the security of plan benefits in order to promote
legislative, regulatory or public policy goals that have no connection to the payment of benefits
or plan administrative expenses."
Arguing in favor of "overturning efforts to undercut the
consensus view that fiduciary duty may compel fiduciaries to consider environmental, social and
governance (ESG) factors," the Social
Investment Forum (SIF) wrote the following to the incoming administration in January: "In
October 2008, the Assistant Secretary of Labor for the Employee Benefit Security Administration
took the unfortunate step of issuing two bulletins modifying the Department of Labor's official
view on fiduciary duties … We call on the President-elect and the incoming Administration to reject
the outgoing Assistant Secretary's guidance and instead provide fiduciaries with clear, consistent
and unambiguous guidance that adheres to the contemporary and principled understanding of fiduciary
Interpreting the guidance to include the incurred costs and economic impacts of
shareowner proposals, the authors of the report submitted a selection of shareowner proposals to
their analysis. The authors found that there is no evidence that "announcements related to
shareholder proposals result in a material increase in companies' market value," that "both target
firms and the sponsors incur costs as a result of the proxy proposal process," and that shareowner
proposals do not improve firm value.
The report concludes that "anecdotal evidence
combined with the above conclusions suggests that such expenditures produce little if any value,
especially when one considers the potential opportunity costs arising in connection with the
introduction, analysis and voting of shareholder proposals."
Adam Kanzer, Managing
Director and General Counsel of Domini Social
Investments, submitted the Chamber report to analysis, and told SocialFunds.com of his concerns
about the lack of rigorous methodology and the political bias that he discovered in the report.
"If you go to the Chamber's web site and read its press releases, you'll find that the
Chamber itself puts these studies in a political context," Kanzer said. "It's part of the Chamber's
campaign against fiduciaries."
In its June 23 press release announcing the publication of
the report, the Chamber asserted that "shareholder activism by union pension funds provides no
economic benefit for plan participants, and may actually reduce shareholder value." The press
release also refers to a letter sent by Chamber President and CEO Tom Donohue to Secretary of Labor
Hilda Solis, "calling on her to protect retirees from politically driven union activism by using
the authority of the Department of Labor to investigate potential abuses."
political propaganda masquerading as an academic study," Kanzer said of the report.
Referring to the report's methodology, Kanzer said, "The authors acknowledge that most of what
they find in the study is not statistically significant, but they draw negative conclusions from it
"What they're trying to get at is that stock prices should have jumped
significantly, and if they didn't jump at all, it shows that there is no value in the shareowner
resolutions," Kanzer continued.
"Shareholder proposals are not filed to affect stock
price," Kanzer said. "If you want to ensure that your study shows that something has failed,
measure it against something it is not designed to do. For instance, how well does your camera
hammer in nails?"
"The authors fail to identify any causal link between the publication of
a proposal in the proxy statement and stock price," Kanzer continued. "And then they don't even try
to describe a hypothesis that would account for that causal link."
The sample of proposals
used in the report were selected by the authors from AFL-CIO Key Votes
Survey, which the labor union issues in order to "assist trustees in exercising their ownership
rights in ways that achieve long-term value by supporting important shareholder initiatives on
corporate accountability." However, the authors chose to omit from their study the names of the
companies targeted by the shareowner proposals included in the Key Votes Survey.
actually go back to the AFL-CIO Key Votes Survey, you see that a number of the companies that were
seriously affected by the financial crisis last year were in there," Kanzer said. "CitiGroup and
Washington Mutual were in there. General Motors was in there. Are you actually telling me that
CitiGroup's stock price since some time in 2008 was somehow affected by a shareholder resolution
filed three years earlier on executive compensation or board independence?"
continued, "There's no mention anywhere in the study that there was a financial crisis going on,
where stocks went through the floor and the market performed totally irrationally." The omission of
such information was "irresponsible," according to Kanzer.
Furthermore, Kanzer said, "The
authors don't separate out the kinds of shareholder proposals that were filed. It's all blended and
averaged together. If you take ten successful proposals and average them with fifteen proposals
that failed, you come up with mud."