Pension funds are getting in on the activism action with a record number of shareholder proposals already this year. However, that may not be a good thing. A new report indicates that in the past, shareholder-proposal activist campaigns run by large public pension funds have generally not created value for shareholders.
The Manhattan Institute put out a special edition of its Proxy Monitor report in which the author offers analysis of public pension funds’ activism efforts so far this year.
New York leads pension fund activism
According to the report, New York City Comptroller Scott Stringer is leading pension funds’ activism this year by a significant margin. Stringer manages the city’s $160 billion public employee pension funds. The Proxy Monitor suggests that the main reason for this is the Boardroom Accountability Stringer launched within the last two years since he was elected in 2013.
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One of the aims of the project is to seek proxy access to get shareholders with at least a certain percentage of a company’s outstanding shares the right to nominate some directors for that company’s board. The data indicates that shareholders have supported most of his proxy-access campaigns.
Five funds introduced most of the proposals
Of course it’s too early to see the long term impact of Stringer’s activist efforts. However, it is possible to get a broader view of public pension funds’ campaigns over the last nine years, and the data isn’t good. It does indicate that New York City and State made up more than two-thirds of the pension fund activism campaigns.
The Proxy Monitor found that only five funds, which are among the market’s biggest investors, made up the greatest majority of shareholder proposals. The report indicates that the biggest 200 “defined-benefit plans” in the U.S. make up two-thirds of the total assets in public employee pension funds. That amounts to $3.2 trillion of the total $4.8 trillion.
The biggest fund is the Federal Retirement Thrift Savings Plan, which is for federal employees. However, it has not practiced any shareholder-proposal activism since 2006. The next five pension funds are: the California Public Employees’ Retirement System (CalPERS), which manages $297 billion in assets; the California State Teachers’ Retirement System (CalSTRS), which manages $187 billion in assets; the New York State Common Retirement Fund, with $178 billion in assets under management; the New York City Retirement Systems, which manages $159 billion; and the Florida State Board of Administration, with $155 billion under management.
Here’s how they stack up in terms of the number of shareholder proposals among Fortune 250 companies since 2006 (All graphs in this article are courtesy the Manhattan Institute/ Proxy Monitor):
In addition to the five pension funds which have filed the most shareholder proposals over the last decade, there are only six other state funds that have filed at least one.
In terms of city funds, there were only three other funds which sponsored shareholder proposals. The Philadelphia Employee Retirement System made 14 proposals, while the Kansas City firefighters’ pension fund filed 14 proposals and the Miami firefighters’ pension fund filed six.
Activism among public pension funds growing
The Proxy Monitor also reports that just as activism has been growing overall, so activism among public pension funds has also been growing.
This has especially been true over the last two years, mainly because of the New York State Common Retirement Fund, which went from sponsoring no proposals at Fortune 250 companies between 2006 and 2009 and then upping the number of its proposals through 2014. This year, however, the fund has cut back on the number of proposals.
As noted above, Stringer is also responsible for the recent uptick in shareholder-proposal activism among public pension funds. New York City funds filed between 18 and 22 under comptroller William Thompson between 2006 and 2009 but only eight to 14 under John Liu. Then when Stringer was elected in 2013, the funds filed a staggering 28 proposals in his first full proxy season in office. That set a new record high for an institutional investor since 2006.
New York pension funds’ proposals not supported
Interestingly, the rise in proposals from the New York funds seems to be in vain. The Proxy Monitor discovered that the percentages of proposals with majority shareholder support from the New York State and City funds are quite low. Stringer has had a bit more success than the state funds, but he still hasn’t been very successful.
On the other hand, the Florida State Board of Administration and CalPERS have had the majority of their funds supported by the majority of shareholders.
The Florida pension fund filed just four proposals, all focusing on board declassification. The Proxy Monitor states that this was “consistent with broad trends for such proposals at large companies.” CalPERS’ proposals focused on corporate governance issues like voting rules.
Do pension funds’ activist campaigns create share value?
Recently there have been several studies about whether activism really creates value for shareholders. The latest edition of the Proxy Monitor examined the share price reaction of companies that have been targeted by public pension funds. While funds claim their activism boosts share price, it turns out that this is not the case.
Among the companies targeted by the five biggest public pension funds, most of their share prices underperform the S&P 500 by 0.9%, although there are some broad variations. Interestingly, the New York City funds saw the stock prices of their targets improve in the year following their proposals even though they saw lower majority support among shareholders.
However, the New York State fund did terribly, as did CalPERS.
The Proxy Monitor found an inverse correlation between the New York City pension fund proposals and shareholder support. When the City funds’ proposal saw at least 40% of shareholder support, that company’s shares underperformed the S&P 500 by 2% to 3% the next year.
The type of proposal matters
While this inverse correlation seems on the surface to be counterintuitive, the Proxy Monitor suggested that it actually makes sense. The reason for this has to do with the types of proposals entered by the respective pension funds. The report indicates that most social or policy proposals are “overwhelming” rejected by most shareholders, so “boards and managers should be expected to ignore them in most cases—at least when implementing the proposal was deleterious to share value.”
When dealing with issues that typically receive support from shareholders, however, boards must spend more time and resources talking to investors. If they don’t, then they risk hostile proxy battles and other negative impacts from shareholders.
The Proxy Monitor looked further into the data by comparing the underperformance of the stocks of companies targeted by public pension funds with the types of proposals. Indeed, it seems as if proposals relating to social issues saw the least underperformance compared to the S&P 500, while executive compensation issues underperformed the most.
The problem with pension funds’ activism
It should be noted that there have been concerns about activism occurring among public pension funds. The biggest concern is that these funds may be putting forth self-interested proposals. The Washington D.C. Circuit Court addressed this issue in 2011 when it threw out the Securities and Exchange Commission’s rule relating to “promulgated mandatory proxy access.” The problem with pension funds is that they may be more interested in issues dealing with jobs than they are in creating share value.
The Proxy Monitor concluded:
“The observed negative relationship between public pension funds’ shareholder proposals and subsequent share-price movements for targeted companies may be a result of public pension activists’ pursuit of what the D.C. Circuit called ‘self-interested objectives’ (including interests in pro-labor goals and political ends), or it may follow from a flawed strategy on the part of the funds. It may also be due to random noise—as the positive returns witnessed after the New York City pensions’ least-supported shareholder proposals would suggest.”