On Dec. 28, 2016, the Department of Labor, or DOL, issued a new interpretive bulletin (IB 2016-01) to clarify that plan fiduciaries can exercise their proxy voting rights as part of their fiduciary duty to manage plan assets. The guidance also clarifies when plan fiduciaries can consider environmental, social, and governance (ESG) matters issues in connection with its shareholder engagement activities.
The DOL was concerned that its prior guidance had been broadly misunderstood by stakeholders to permit the exercise of shareholder rights only where the plan conducted a cost-benefit analysis and concluded that the proxy vote or action is more likely than not to increase the economic value of the plan’s investment.
In its updated guidance, the DOL noted that fiduciaries may engage in shareholder activities intended to monitor or influence corporate management if the fiduciary concludes that there is a reasonable expectation that such monitoring or communication with shareholders is likely to enhance the value of the plan’s investment, after taking into account the costs involved. Active monitoring and communication activities include, among others:
- governance issues including board independence and expertise, board composition, and executive compensation;
- policies regarding mergers and acquisitions;
- the extent of debt financing and capitalization;
- long-term business plans including climate change preparedness and sustainability; and
- policies and practices to address environmental or social factors that have an impact on shareholder value.
Active monitoring and communication may be carried out by various means, including correspondence and meetings with management and exercising shareholder rights.
The guidance also provides that a plan may include in its statement of investment policy voting guidelines as well as policies concerning economically targeted investments or ESG factors.
The new guidance became effective on Dec. 29, 2016.