Skytop Strategies ESG3 Summit: Shareholder Engagement Underutilized by Pension Plans

Rhode Island treasurer says plan voted against board candidates 257 times last year.

Public pension funds are still slow to embrace shareholder activism, according to Rhode Island General Treasurer Seth Magaziner. This is something he’d like to see change.

“If you look at the trillions of public pension fund dollars across the country, a vast majority of them are still on the sidelines,” Magaziner said.

Magaziner shared Rhode Island’s experience in shareholder engagement and discussed the challenges within the space at Skytop Strategies’ ESG3 Summit on April 7th in New York City.

“A pension fund should care about long-term sustainability, should be engaging with companies with an eye towards the long term,” he said. “We are the ultimate long-term investors. It is a perpetual fund.” As the state’s general treasurer, Magaziner heads the $8 billion Employees’ Retirement System of Rhode Island.

Challenges plans face in becoming more actively engaged shareholders include: educating the investment staff and committee about engagement, understanding when and how to engage, elements of the plan’s governance structure, and managing public opinion. “When you talk about public pension funds, it is always political,” Magaziner said. “You’re always in the spotlight in a way that other institutional investors may not be.”

Becoming an active shareholder was a slow process for the Rhode Island fund. In order to actively engage, the state had to amend its investment strategy, changing some of its passively indexed commingled equity holdings to a separate account, thereby taking more direct ownership of its public equities. After moving its holdings to a separately managed account, the plan developed and formalized a voting policy based in part on best practices around the country.

Board diversity is an important issue for the state. “We know that companies with diverse leadership teams, the data shows, are more likely to be more profitable, have stronger stock performance, have lower debt and better performance over time,” Magaziner said. But, “despite the wealth of data that shows that diverse teams make better decisions, we still have only about 20% of board seats at Fortune 500 companies held by women and only about 15% by people of color.”

The state implemented a policy whereby it will vote “no” on proposed board candidates if approval would result in board representation falling to less than 30% diverse. Given the time it took the state to position itself to vote as a shareholder, the fund only started implementing this policy halfway through last year’s proxy season, but on 257 occasions subsequently, it voted against a proposed board member. 

The plan is now able to co-file proxy proposals as well. Political spending in the energy industry, governance practices at Wells Fargo, and student loan debt servicing practices are among the issues it intends to tackle.

“Engagement is often a better way to get things done and drive change,” Magaziner said. “[It is] better to be engaging and pestering someone, all else being equal.”

By Amrita Sareen-Tak