Chris Carosa, Chief Contributing Editor of the Fiduciary News, consistently publishes valuable information related to implementation of the fiduciary’s obligations. Chris’s articles are insightful, bringing a fresh angle to the often intractable fiduciary issues we or our clients daily face. However, I found that his August 27 article entitled “Did Business Roundtable Just Break a Fiduciary Oath?” deserves a response-especially since I was already in the midst of writing a blog on the Business Roundtable’s press release.
The Business Roundtable issued a press release on August 19 signed by the CEOs of the largest companies in the U.S. outlining a “Statement on the Purpose of a Corporation .” In it, the CEOs outline a ” modern standard for corporate responsibility” or, as Jamie Dimon, CEO of JP Morgan Chase and the Chair of the Business Roundtable stated, “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term.”
So just why is it both Chris and I undertake to address this issue on retirement plan related sites?
Simply put, Chris passionately feels that these CEOs are abdicating their fiduciary responsibilities to their shareholders by investing corporate assets on the basis of “social responsibility.” In addition to the question of similar fiduciary standards which may apply to the ERISA context, he also raises the question whether it creates problems for investment advisers to recommend investing in these companies.
This really does fall squarely into the ESG discussions which have been raging recently, with the current administration being concerned about retirement plan fiduciaries engaging in shareholder activism based on “social responsibility.”
My take is much different than Chris. I not only believe that the Business Roundtable has it right, but it is a position that properly frames the issues for the ERISA investment fiduciary: prudent assessment of an investment must take into account a broader view than the narrow financial analysis of the books and records of the company, or of current market pricing. Particularly for ERISA fiduciaries, the investment standard is long-term, to provide retirement income. Any valid, long-term analysis has to be able to take into account the social, political, market and scientific trends which will inevitably affect the investment’s value. There is a point at which “social responsibility” and good business have a strong comity of interests, and the Business Roundtable recognizes that. My favorite example of this is the 2010 interpretive guidance related to climate change published by the SEC with the following statement:
This interpretive release is intended to remind companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors.
It is not only appropriate, but necessary, to understand that the plan’s investments do not operate in a vacuum, that they often will be internalizing the costs of the “non-business” markets in which they must operate.
The DOL, on the other hand, has taken an extraordinarily narrow view on an investment’s value and the lack of import of “social issues” on investment decisions at least since 1989.That year, the DOL took it upon itself, without the request of any party, to issue a warning letter (the now infamous “Polaroid Letter”) to the fiduciaries of the Polaroid Plan. Polaroid was engaged in a proxy fight over the takeover of the company. The Polaroid ESOP held a substantial percentage of the company, shares of which were largely allocated to the accounts of union members. The plan also provided for pass through voting rights to those participants. Participants voted overwhelming against the take-over, and against the tendering of the Plan’s shares. The DOL sternly reminded the fiduciaries that they could not honor the voting results of the participants if their vote resulted in an imprudent action.
The Polaroid matter is now known for the litigation which followed, of course, and for the issue of whether or not and under what circumstances should a plan document’s terms be disregarded. At the time, however, it was a much different issue that was contentious: the DOL made it clear that the impact on workers and communities of a hostile takeover of a company cannot be considered in making the fiduciary decision of valuing an offer on the investments. The fiduciaries must only look to the financial statements at the time of the deal, and extraneous facts cannot be considered.
I was in-house ERISA counsel at Kellogg company at the time, in Battle Creek, Michigan, and knew first hand of the economic issues of a Fortune 100 company in a small town in a rural region of Michigan. I also had a front row seat shortly thereafter at Lincoln Financial Group in Fort Wayne, Indiana, where I provided ERISA support in their corporate transactions. The success of these companies were closely tied to that of the workers and of the surrounding communities. Indeed, that was the time period of the brutal corporate takeovers engineered by firms the likes of KKR (remember Kohlberg Kravis Roberts & Co.?) which would rely upon their own version of economic analysis, and then dismantle companies, sell off their pieces, often send them deep into debt, ultimately destroying those companies-and the communities in which they operated-for the benefit of a small number insiders. Though I’ve not done a review of the business literature related to that period, I have little doubt that the destruction wrought by those firms on the “investments” they purchased will be demonstrably not in the long term best interests of these companies and those which invested in them.
This really does have current applicability in the current discussions on economically targeted investments, the so-called “ESG” rules. Of course, making investment decisions based solely on social or political notions without regard to the “economics” is clearly imprudent. However, it is also prudent to include non-traditional factors in any “economic” analysis, including the value of those investments and their viability related to the communities (and the impact on its workforce) and markets in which they operate.