Fiduciary Duty Guidance for Proxy Voting Reform

Summary of Study

Bottom Line: Greater attention to fiduciary duty fundamentals could help drive an increase in company and investor performance over the long term, enhance sustainability and encourage more effective management of systemic risks. This has implications for the content of proxy analyses, staffing of proxy voting functions and structure of proxy policies.

Shareholder voting is an essential corporate governance right under state laws. It is an important channel of communication between shareholders and companies that supports corporate governance balance between the board, shareholders and management. Accordingly, integrity and alignment of the proxy voting process are critical investor fiduciary concerns.

Decisions on management of the proxy processes, service standards and related costs for administration of proxy voting constitute investor fiduciary acts that should be linked with implementation of fiduciary obligations. Legal obligations of prudence, loyalty and cost management are rooted in the common law of trusts and transcend the debates currently occurring at the SEC and in Congress. Application of a 21st century understanding of these fiduciary duties serves as a guide for proxy voting policies, analyses and reports.

Proxy voting as a fiduciary function comes with several duties:

1) Duty of Prudence -- Investor fiduciaries are required to exercise their management responsibilities prudently, in a fact-based and forward-looking manner, with reference to the care, skill, diligence and prudence used by similar investors. 

2) Duty of Loyalty -- Investor fiduciaries must also exercise their responsibilities with absolute loyalty to the interests of fund participants and beneficiaries, managing assets to provide promised benefits and cover reasonable administrative expenses. 

3) Duty of Impartiality -- The duty of impartially (often considered part of the duty of loyalty) requires that fiduciaries balance conflicting interests of different beneficiary groups. 

4) Duty to Manage Costs -- Put simply, wasting the money of participants and beneficiaries is imprudent. A fiduciary must be alert to balancing projected benefits against the likely costs when selecting, delegating duties to and compensating an agent, such as an investment advisor or manager. 

The realignment of proxy voting policies and procedures with fiduciary duty fundamentals could be driven by greater investor and proxy service provider focus on:

1) The evolving research and knowledge base that leads proxy voting trends.

2) Oversight of how proxy voting conflicts of interest at investment managers are managed.

3) Explicit attention to balancing short- and long-term effects of aggregated proxy votes. 

4) Consideration of systemic risks that can spread across portfolio companies and compound over time. 

5) Recognition of the long-term benefits, as well as the costs, associated with opportunities to collaborate on these fiduciary process improvements.

Read the full comment letter here