Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

What rights do you
have when you own shares of a company?



That’s the central question at the heart of a recent <a href="https://www.cii.org/files/issues_and_advocacy/correspondence/2019/201910015proxy_advisor_sign_on_final.pdf">letter</a> to the Securities and Exchange Commission (SEC) that Colorado PERA Executive Director Ron Baker cosigned as part of a coalition of investors and other organizations.



The tone and subject of the letter—which addresses “proxy adviser interpretation and guidance” and “proxy adviser rulemaking”—is technical and measured. But that buttoned-up surface belies an important debate underneath.



Proxy voting: What it is, and why it
matters



When an individual
owns a share of a company, he or she owns a piece of that company. Institutional
investors, like Colorado PERA, also hold shares—lots of them. For example, at
the end of 2018, <a href="https://content.copera.org/proxy-voting-an-obscure-term-with-real-implications-for-pera/">PERA held</a> millions of shares of Microsoft.



When ownership of
a company is divided among multiple investors, important decisions are often made
using shareholder ballots. Owning a share means having the right and
responsibility to vote in important company decisions. Institutional investors
like PERA vote a lot. In 2018, PERA staff cast votes on 63,031 individual
proposals for 6,025 companies.



Voting allows
investors to hold companies accountable to shareholders and decide on important
issues such as executive pay and who sits on a company’s board of directors.
“We don’t want to promote excessive risk taking with executive compensation,”
said Luz Rodriguez, Colorado PERA’s Senior Corporate Governance Analyst. “We
think pay should be aligned with performance. Those decisions ultimately affect
profits, which can, in turn, affect PERA’s members.”



PERA takes voting
on issues like this seriously. For example, it voted against about 18 percent
of management proposals in 2018. <a href="https://content.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/">Encouraging strong corporate governance</a> is a concrete way to align board decisions
with shareholder interests.



Exercising that right to vote is an essential component of owning a company. However, it would take significant resources to research every one of the tens of thousands of votes institutional investors like Colorado PERA make every year. So, for more than three decades, large investors have employed “proxy advisers”—third-party firms that do the research necessary to inform the votes institutional shareholders cast. PERA’s investment staff can disagree with the research and advice they receive from proxy advisers, and, in the end, PERA&#8217;s investment staff are the ones who cast the votes in accordance with the PERA Board’s <a href="https://content.copera.org/pera-joins-a-lawsuit-to-defend-transparency-and-shareholder-rights/">Policy on Proxy Voting</a>. Proxy advisory services simply allow institutional investors to be better-informed voters at a fraction of the cost of performing all of the research in-house. “Being cost conscious protects the assets of the plan,” Rodriguez said.



The SEC issues new guidance



Earlier this year, the SEC issued <a href="https://content.copera.org/proxy-voting-an-obscure-term-with-real-implications-for-pera/">guidance</a> and <a href="https://www.copera.org/proxy-voting-an-obscure-term-with-real-implications-for-pera" class="broken_link">interpretation</a> statements that could add administrative layers and regulatory burdens to this process. Many institutional investors are concerned about the effects this potential regulation could have. For example, proxy advisers could be required to share their research with the very companies that are the subject of their research before the research is shared with the institutional investors who paid for the research. “Why should companies have the chance to influence the product we’re buying?” said Rodriguez. “It affects the independence of that research.”



The Council of Institutional Investors (CII) sent a letter to the SEC in response to this guidance (Ron Baker is a member of CII’s board of directors). In the letter, the group expressed disappointment that the SEC did not ask for public comment before issuing its new Proxy Adviser Interpretation and Guidance. They also expressed concern that the SEC issued the Interpretation and Guidance without a demonstrated need to do so. The letter asked the SEC to reconsider its position and the opportunity for CII to provide comment. In addition to cosigning CII’s letter, Baker sent a letter on behalf of Colorado PERA to the SEC. The SEC will address this topic next on <a href="https://content.copera.org/proxy-voting-an-obscure-term-with-real-implications-for-pera/">November 5</a>.



In an interview with <a href="https://content.copera.org/proxy-voting-an-obscure-term-with-real-implications-for-pera/">Pensions &amp; Investments</a>, Amy Borrus, Deputy Director of CII, summed up the issue when she said: “Many institutional investors rely on proxy advisory reports to help inform their voting decisions and they have a stake in ensuring these votes are independent and as objective as possible and timely. If rules make it more difficult for proxy advisers to get reports to investors in a timely fashion or make proxy advisers more inclined to tilt more toward companies they review, then that&#8217;s a problem.&#8221;

Proxy voting: An obscure term with real implications for PERA

On May 23, Colorado PERA filed a motion to join a
lawsuit to ensure that investors continue to have the right to sue companies
that have engaged in illegal behavior. &nbsp;



The decision is consistent with PERA’s commitment to
its fiduciary duties and to investment stewardship and transparency. The case in
question aims to force the multinational company <a href="https://content.copera.org/pera-joins-a-lawsuit-to-defend-transparency-and-shareholder-rights/">Johnson&#038; Johnson</a> to allow its shareholders to vote on whether
all lawsuits brought against the company for corporate wrongdoing should be
handled through mandatory arbitration, rather than in court. The lawsuit, which
is being heard before the U.S. District Court for the District of New Jersey, could
effectively end shareowner security class action cases against Johnson &amp;
Johnson. 



The
lawsuit was filed by a single Johnson &amp; Johnson shareowner, and the company
opposes the measure. Colorado PERA and the <a href="https://www.calpers.ca.gov/">California
Public Employees’ Retirement System (CalPERS)</a> filed a joint motion on behalf of shareholders and in
support of Johnson &amp; Johnson’s opposition. The pension funds and the
company contend that forced arbitration illegally denies shareholders the right
to protect their investments in court, and would reduce transparency by limiting
public disclosures of settlements. 



In
contrast to forced arbitration, class action securities litigation is a
fundamental right that enables shareholders to seek judicial remedies when a
company has committed securities fraud. Securities fraud is an illegal practice
covering a wide range of financial market manipulation and deception of investors
who are making purchase or sale decisions based on false information.



“Colorado
PERA members rely on PERA’s trust fund and its investment earnings for their
future financial security, and we must protect that financial security by holding
corporate wrongdoers accountable,” said Adam Franklin, General Counsel for
Colorado PERA. “It is imperative that investors retain a proper mechanism to
correct corporate fraud in a judicial forum. Shareholder rights are not
adequately protected by mandatory arbitration—its inherent lack of transparency
fails to serve as a deterrent for future wrongdoing.”&nbsp; 



CalPERS and Colorado PERA together manage more than $400 billion and both hold significant investments in Johnson &amp; Johnson. In joining this suit, the pension funds are protecting their respective stakes in the company while also helping to set a legal precedent that will make it more difficult for other corporations to require forced arbitration. PERA officials previously expressed their opposition to mandatory arbitration in a <a href="https://content.copera.org/advocating-for-investors-benefits-pera-members-and-retirees/">June 2018 letter</a> to SEC Chairman Jay Clayton.



Joining
this lawsuit is <a href="https://content.copera.org/how-pera-advocates-for-responsible-business-practices/">just one example</a> of how Colorado PERA engages with
companies to ensure they adopt responsible business practices and act in the
best interest of their shareholders. Each year, Colorado PERA participates in
more than 6,000 annual and special meetings and actively votes its proxies as a
way to ensure the accountability of public companies in which the fund invests.
PERA’s <a href="https://content.copera.org/pera-joins-a-lawsuit-to-defend-transparency-and-shareholder-rights/">proxy voting policy</a> is unique to the organization and
furthers the goals of promoting performance, transparency, and sound corporate
governance in ways that align with PERA’s fiduciary responsibility. PERA believes
that advocating for best business practices is a critical way to promote the
financial sustainability of the Fund. 



A timetable for the case has not been announced. For more information about Colorado PERA’s approach to <a href="https://content.copera.org/how-pera-advocates-for-responsible-business-practices/">stewardship</a>, visit copera.org.

PERA Joins a Lawsuit to Defend Transparency and Shareholder Rights

Colorado PERA recently submitted two comment letters to the <a href="https://www.copera.org/protecting-shareholder-rights-pera-advocates-for-members-and-investors" class="broken_link">Securities and Exchange
Commission</a> (SEC). Together, the letters argue for increased
transparency in financial markets that would benefit PERA members and other
investors alike. 



The first letter, sent in late January and signed by PERA
Chief Investment Officer <a href="https://content.copera.org/protecting-shareholder-rights-pera-advocates-for-members-and-investors/">AmyMcGarrity</a>, called for the SEC to allow U.S. investment managers to separate
payments for trade executions from investment research costs. This echoed previous
PERA views on the most recent <a href="https://www.investopedia.com/terms/m/mifid-ii.asp">Markets in Financial
Instruments Directive, or MiFID II</a>, which has required asset
managers in Europe to separate out the cost of research from the commissions
paid to brokers for executing trades.



As discussed in a <a href="https://content.copera.org/protecting-shareholder-rights-pera-advocates-for-members-and-investors/">previous PERA on the Issues post</a>,
McGarrity has called for the SEC to increase pricing transparency by providing
clear guidance that would allow U.S. investors to pay directly for research,
rather than receiving research as part of a bundle of services paid for by
commissions.



McGarrity noted concerns about the “bundling” of investment
research with trading costs, which she had also expressed back in 2017. In her
January 2019 letter, she wrote that “U.S. investors should not be at an
unnecessary disadvantage relative to our European peers.” McGarrity’s actions
on behalf of the investor community and the PERA membership were highlighted in
a recent article in <a href="https://www.ft.com/content/f2a46c41-4bd4-3580-92a0-3dd0bae8daf3">The
Financial Times</a>. 



<a href="https://peraontheissues.com/wp-content/uploads/2020/07/SEC-Document.pdf">Read McGarrity’s letter.</a>



Continuing the theme of pressing for more disclosure and
transparency that benefits both investors and PERA stakeholders, PERA Executive
Director Ron Baker joined three dozen public retirement system directors and
chief investment officers in signing a letter to the SEC penned by the <a href="https://ilpa.org/">International Limited Partners
Association</a> (ILPA). The ILPA is an organization created “to enhance
and improve investor reporting and transparency” for private equity investors
and stakeholders.



In the ILPA letter to the SEC, institutional investors
called for the SEC to clearly define the fiduciary protections investors require
in the <a href="https://content.copera.org/pera-board-meeting-notes-setting-peras-portfolio-mix/">private
equity</a> market and outlined the actions the Commission should take to
ensure investor confidence in the marketplace.



“Strong fiduciary duties are the foundation of the vibrant
private markets in the United States,” the letter stated. “These duties of
care, loyalty, and good faith foster the trust that give investors confidence
to invest with fund managers,” the letter continued.



<a href="https://peraontheissues.com/wp-content/uploads/2019/02/2019.2.12-ILPA-Member-Letter-on-Fiduciary-Duty-Submission-Copy.pdf">Read the ILPA letter.</a>



PERA will continue to advocate for investor transparency by joining
forces with other institutional investors and investment industry organizations
for the benefit of its members and retirees.



For more details on PERA’s investment program, see <a href="https://www.copera.org/protecting-shareholder-rights-pera-advocates-for-members-and-investors" class="broken_link">A closer look at PERA’s investment expenses</a>.

Protecting Shareholder Rights: PERA Advocates for Members and Investors

As an institutional investor, PERA also holds a special position as a shareholder in many major corporations. Shareholders in publicly traded companies are entitled to vote their shares on items that are presented for a vote, whether by management or by other shareholders, at the corporation’s annual general meeting. And it is in its capacity as a shareholder that PERA has exercised its voice as an advocate for strong corporate governance and responsible business practices.



PERA has long been active in advocating for strong <a href="https://www.investopedia.com/terms/c/corporategovernance.asp" target="_blank" rel="noreferrer noopener">corporate governance</a> policies that ensure transparency and ethical behavior. The PERA Board of Trustees’ <a href="https://content.copera.org/how-pera-advocates-for-responsible-business-practices/" target="_blank" rel="noreferrer noopener">Shareholder Responsibility Committee Charter</a> outlines PERA’s objectives in furthering good corporate governance. With just over half of PERA’s <a href="https://www.copera.org/investments" target="_blank" rel="noreferrer noopener">$48 billion investment portfolio in stocks</a>, PERA has a keen interest in being a strong voice in corporate governance issues.



How does PERA do this? First, PERA actively exercises its role as a shareholder by <a href="https://content.copera.org/advocating-for-stronger-markets/" target="_blank" rel="noreferrer noopener">voting proxies</a>. In 2017, PERA participated in over 5,600 annual and special meetings and reviewed over 63,800 shareholder proposals on proxy ballots. The ballots for these companies address a range of issues, such as the election of numerous directors, approval of compensation and acquisitions, shareholder initiatives submitted for shareholder approval and any number of additional matters.



Guiding these votes is the PERA Board’s <a href="https://content.copera.org/pera-joins-a-lawsuit-to-defend-transparency-and-shareholder-rights/" target="_blank" rel="noreferrer noopener">Proxy Voting Policy</a> which provides and works with proxy advisory firms to further inform how proxies should be voted. All proxy votes are <a href="https://content.copera.org/proxy-season-is-here/" target="_blank" rel="noreferrer noopener">publicly disclosed</a> after PERA has voted. These proxy vote examples highlight PERA’s actions:



The Walt Disney Company



This year’ say-on-pay vote became the headline as investors took issue with the special mega grant to CEO Bob Iger, valued at $100 million as part of the extension of Iger’s employment agreement in anticipation of the merger with 21st Century Fox. PERA voted against the Executive Compensation package because of concerns with the amendments made to the CEO’s employment agreement during and after the year in review.



Equifax



The severity of the cybersecurity breach and the company’s slow response to the breach damaged the company’s reputation, destroyed shareholder value, and placed a cloud over the company for the foreseeable future. PERA voted against three incumbent Technology Committee members who had oversight responsibility for the relevant areas of risk. The Technology Committee, at a minimum, should have ensured known risks were addressed while being adequately prepared to respond appropriately to the breach; PERA felt this committee failed to do so.



Second, PERA also serves on the <a href="https://www.copera.org/how-pera-advocates-for-responsible-business-practices" target="_blank" rel="noreferrer noopener" class="broken_link">boards of national organizations</a> whose mission it is to promote shareholders rights when it comes to investments made on behalf of the PERA membership.



PERA Executive Director Ron Baker <a href="https://www.copera.org/protecting-shareholder-rights-comment-letter-to-sec-advocates-for-investors-retirement-plan-members" target="_blank" rel="noreferrer noopener" class="broken_link">joined</a> the <a href="https://www.cii.org/board_of_directors" target="_blank" rel="noreferrer noopener">board</a> of the <a href="http://www.cii.org" target="_blank" rel="noreferrer noopener">Council of Institutional Investors</a> (CII) earlier this year. With a membership of more than 125 public, union and corporate employee benefit plans, endowments and foundations, CII supports strong governance standards and shareholder rights at public companies.



Amy McGarrity, PERA Chief Investment Officer (CIO), serves on the U.S. Securities and Exchange Commission’s (SEC) <a href="https://content.copera.org/how-pera-advocates-for-responsible-business-practices/" target="_blank" rel="noreferrer noopener">Fixed Income Market Structure Advisory Committee</a>. McGarrity joins other retail and institutional investors who, according to an SEC <a href="https://content.copera.org/pera-staff-selected-to-serve/" target="_blank" rel="noreferrer noopener">news release</a>, advise on “the efficiency and resiliency of fixed income [bond] markets and identify opportunities for regulatory improvements.”



As PERA notes in its recently published <a href="https://content.copera.org/how-pera-advocates-for-responsible-business-practices/" target="_blank" rel="noreferrer noopener">Stewardship Report</a>, its approach to ensuring good corporate governance practices centers on PERA’s influence as a large institutional investor in the global marketplace. PERA advocates for stakeholder value through ongoing meetings with corporate managers, investment partners and professional and regulatory boards. The proxy voting policy reinforces PERA’s commitment to strong corporate governance – whether the issue at hand is related to financial transparency, director compensation, corporate board appointments, director compensation, financial transparency, social impact or increased disclosure on climate change regulations. As a significant investor in the global market, PERA is continuously seeking opportunities to promote global stewardship while providing strong returns to its most important stakeholders: PERA members and retirees.



<a href="https://content.copera.org/how-pera-advocates-for-responsible-business-practices/" target="_blank" rel="noreferrer noopener">Read more on PERA’s investment stewardship and sustainability efforts</a> and <a href="https://content.copera.org/how-pera-advocates-for-responsible-business-practices/">review the Board’s role in investment oversight.</a>

Tag Archives:

Proxy voting: An obscure term with real implications for PERA

PERA Joins a Lawsuit to Defend Transparency and Shareholder Rights

Protecting Shareholder Rights: PERA Advocates for Members and Investors

How PERA Advocates for Responsible Business Practices

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