In today’s rapidly evolving regulatory environment, directors are increasingly expected to act proactively in raising issues and asking questions that delve into every conceivable area of risk. One such area relates to the corporation’s defined benefit and defined contribution plans. Though ERISA permits the board to appoint others to serve in the capacity of “named fiduciaries,” thereby delegating the operational responsibility for managing the pension plan assets, the board retains a residual responsibility to act prudently in overseeing and monitoring how those assets are being handled by the named fiduciaries. The U.S. Department of Labor has long regarded the right to vote the shares owned by the pension plan as a plan asset that must be exercised.
In discharging its duties, the board should therefore inquire how the corporate employees who manage the pension assets are complying with the ERISA rules, which require that the shares be voted in the best interests of the plan participants and beneficiaries. It is not sufficient for corporate employees to just delegate the voting responsibility to the plans outside investment managers and then adopt a “three monkeys” approach.
The board, or an appropriate committee, can and should ask management for a report at least annually on whether, how, and by whom the plan assets are being voted. For example, the board can create an internal fiduciary review committee, which can be composed of company employees, to formulate voting policy guidelines establishing how the shares will generally be voted, and to itself determine the vote in the relatively rare cases which either the guidelines don’t address or which involve exceptional circumstances (e.g., proxy fights). This is the same process that the investment firms, which manage corporate pension assets, typically follow. Regardless of whether the voting decisions are made internally or by an outside investment manager, the ERISA requirement is the same: Votes must be cast in the best interests of the plan participants and beneficiaries.
In its monitoring role, the board should understand which process is being followed, and ask who within the corporation is reviewing both the voting policies and, periodically and on an after-the-fact basis, the actual votes to make certain that the corporation is in compliance with the ERISA mandates. This is especially important because there have been a number of reported instances in which the voting agent, generally through clerical error, failed either to vote the shares at all or to vote them in accordance with the shareowner’s established voting policies.
It should be a simple matter for the corporate managers with responsibility for the pension plan assets to prepare a summary report for the board indicating whether the shares had been voted, and how they were voted. Every mutual fund today must by law prepare such a report once a year and make it publicly available to its shareholders. Given the board’s continuing fiduciary responsibility for the corporation’s pension plan assets, it should expect no less from cognizant corporate employees.
James P. Melican is chairman of PROXY Governance, a provider of proxy voting and corporate governance services.