Q & A.
Here, Kelby reads questions from cards sent forward from the audience.
KELBY: First question. Sarah, why do pension assets belong to the beneficiaries and not to the company, which has the obligation to make sure the assets cover the liabilities?
TESLIK: If the assets belonged to the company, then they would be taxable to the company. The idea is that the government has an interest in tax favoring money that is set aside in a variety of ways, such as through defined contribution plans or defined benefit plans. But the key question is this: is the money in fact the pensioners? Because that determines the tax-favored status.
While a company bears the risk of making sure that the assets in its pension plan will pay for the benefits under a defined benefit plan, those assets are still plan assets and thus are owned by the beneficiaries.
I'm not playing ignorant to the overfunding question. I'm awfully sympathetic to companies. If they're bearing the risk and they're overfunded, they ought to be able to get the money back as long as the tax questions are worked out.
KELBY: Dale, why does GE use money managers at all, since the company has the expertise and resources to manage pension funs directly?
FREY: We use them principally in the international area because we like to get their input on various parts of the world. However, we think we contribute as much to that dialogue as we take from it.
KELBY: Phil, would you elaborate on your idea of built-in conflicts that investment managers have in voting proxies?
O'CONNELL: I have in mind the investment manager who comes to the plan sponsor and says, "Here's my record over the past two years. I've outperformed any index you can use for comparison, and I'm going to continue to do that from quarter to quarter." Therefore, the way he puts food on his table at home is by continuing to outperform whatever the index is. When he is presented witha voting decision that will tend to increase the value of the portfolio today rather than tomorrow, he naturally will vote to increase the value of the portfolio today--because that's how he is compensated. Now, is that pattern necessarily his fault? No. It's our fault, the plan sponsors', because we have given him the wrong incentive.
FREY: I'm gald you added that at the end, Phil, because while I agree that investment managers are creaturs of plan sponsors, I question the idea of "built-in" conflicts. I submit that we, the plan sponsors, are guilty of creating those types of conflicts because we expect the investment manager to come in and say, "I beat the index every quarter." I don't see how you can take the proxy issue and totally divorce it from the investment process. We ought to select managers with an investment philosophy that is long term. I believe you'll find a surprising number of these managers agree with your proxy voting philsophy.
O'CONNELL: The conflict I referred to is more a constitutional conflict, if you will, with investment managers, who the plan sponsor has the responsibility to manage. As far as investment managers being better qualified to vote the proxies than plan sponsors, by virture of their experience, I think the ideal answer is to combine the expertise of both parties. Certainly, on the social issues and almost all the corporate governance issues, most of the investment managers I know bring very little to the table.
FREY: I don't totally agree, Phil. I believe that voting requires a knowledge of the company and the industry. And you can't divorce social issues from the health or long-term well-being of the company. What do you do when, for example, a voting issue calls for a company to withdraw from South Africa, and the company gives some strong reasons why it's essential strategically that it stay in South Africa? You have to look at all sides of these issues.
KELBY: Next question. If each investment manager has his own investment style, why not his own unique voting process? And why should the right to vote be taken away from a manager who still has the right to buy and sell?
TESLIK: The goals of buying and selling decisions are the same as those of voting decisions. There is no reason why a plan sponsor cannot, in delegating buying and selling decisions to a money manager, also completely delegate the voting decisions--as long as the right monitoring takes place and guidelines have been established conscientiously.
In fact, there is a lot to be said for doing just that because much of the information you need for one decision is relevant to the other decision.
There is nothing in the Avon letter, in ERISA, or in any state law I know of that suggests you need to treat the voting decisions differently, that you must retain them even if you farm out the buying and selling.
FREY: But I suspect that many plan sponsors don't get involved at all in the proxy process, and I think that's wrong. It is important that plan sponsors communicate investment philosophy and goals to money managers and make sure they are reflected in proxy voting guidelines.
TESLIK: You have to monitor the process.
BERNHARDSON: I think you can draw an analogy here to plan sponsors' making the decisions regarding overall asset allocation for the assets in the pension plans. Since the plan sponsor makes those kinds of choices, I think proxy voting can be viewed in the same light. You're choosing equity managers with various investment styles, but they might, for example, have the same equity in their individual portfolios. The company is in a position to be looking at all of the equities in the pension trust and thus making a consistent voting decision.
KELBY: Okay, let's change direction a bit. Ivy, will you give your thoughts on how plan sponsors can vote their own proxies if they want to?
BERNHARDSON: For many years, General Mills, like a lot of other plan sponsors, did not review the issue of proxy voting. In February of 1988, the Labor Department issued "the Avon letter," which was an investigation of proxy voting at Avon Products. In the letter, the Department gave guidelines on how to and who should vote proxies.
In light of that letter, we at General Mills reassessed our voting position. In fact, we did a survey of our investment managers, asking them about their voting policies. The responses ranged from they don't vote the proxies to they have no guidelines to they have very general guidelines.
Based on that survey and an internal legal assessment, we decided to bring the voting in-house. At General Mills, our pension assets are basically in a master trust with a master trustee, and the equities are divided among various outside investment managers. We had no in-house asset management.
To bring the voting in-house in accordance with the terms of the Avon letter, we amended each of our plans that had assets in the master trust to specifically reserve the right for the plan sponsor, General Mills, to vote. We also said that the responsibility could be delegated to the investment manager. I think it's important to note this because lawyers will tell you that it's possible under ERISA to have either the plan sponsor or the investment manager vote your proxies. But that depends on how your fiduciary responsibility is defined in the plan.
At General Mills, the named financial fiduciary of all of our plans is General Mills. The responsibilities that go with that are delegated to our benefit finance committee, which is made up of senior management--all inside people. That committee adopted a general policy on proxy voting that makes it clear that General Mills views proxy voting as an important fiduciary responsibility. The policy includes general statements about voting in the best interest of the participants and beneficiaries as provided by the federal pension law.
The authority to vote was then delegated to a proxy committee, made up of Dave Kelby, senior vice president and treasurer; our CFO; the general counsel; the inside person in our treasurer's department, who is the director of investment management; and me.
I don't think that, at the outset, senior management realized all of the time the process would require. Obviously, we don't have the amount of assets that General Electric does, but in 1989, the first year that we voted our proxies entirely in-house, we voted about 325. In the beginning, we did hold lengthy meetings, struggling over some of the issues and establishing general guideliness for the more routine ones. Some issues we considered case by case.
We sometimes solicit the advice of the investment manager in whose portfolio the equity is placed. And we will be refining our guidelines as we use them, as well as purchasing software to help.
All in all, it's a good process. But no one should underestimate the amount of internal resources it requires. If you're not in a position to commit them, I don't think the plan sponsor should be voting, because there are serious financial and nonfinancial consequences in failing to exercise that responsibility in a prudent way.
KELBY: Sarah, do you believe that investment managers will spend an appropriate amount of time on proxy issues? Aren't we asking them to concentrate on areas that run askew of why we hired them?
TESLIK: Investment managers encounter in their day-to-day operations some of the information that is useful for voting. It would be naive, however, to overlook the conflicts that they have in voting, which in some ways is a more public exercise than other shareholder rights.
It is also naive to think that money managers will spend a good deal of time on voting issues unless plan sponsors indicate that they expect that treatment. In fact, on many voting issues, the kind of time and money required to vote properly is staggering. I've been wallowing in executive compensation issues for the last couple of years, and I finally decided this is one of those problems for which you hire experts.
But you cannot expect a money manager to incur that kind of expense. Certainly, as purchasers of money manager services, you can demand certain things if you are willing to pay for them.
KELBY: Next question. Can a vote for entrenchment be interpreted as being in the best interest of plan participants? Will an entrenched management remain a good management?
O'CONNELL: If a management becomes entrenched, or without accountability, the whole corporate system collapses. It loses its legitimacy. But I find it very difficult to conclude that a management or a board is entrenched when it has to go back to the shareholders once a year and solicit proxies and be reelected. It doesn't take any great effort in terms of time or expense to rob that board of legitimacy if a majority of the shareholders just do not return the proxies.
TESLIK: It may be in the pension fund's interest to vote for management that is entrenched because of various existing provisions, because of the characteristics of the board. I think it is fair to say that the larger pension funds get and the clearer it becomes that they eventually will own significant stakes in most companies in the country, the more important are the independence and accountability.
KELBY: As an aside, of the people here at the conference, the majority of the plan sponsors don't vote their own proxies, based on a show of hands. Finally, I want to thank our entire panel for an enlightening discussion.
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|Title Annotation:||Special Report: Pension Fund Management|
|Date:||Jul 1, 1990|
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