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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 duties."

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 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."

"This is 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 anyway."

"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.

"If you 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?"

Kanzer 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."

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