Proxy battles are usually an inefficient use of public pension systems’ resources

Viewers of Berkshire Hathaway’s 2022 Annual Meeting recently learned that some public pension funds feel strongly about how the corporations they own stock in should be governed. At the Berkshire meeting, a group of three pension systems offered a series of shareholder resolutions, all of which were rejected. While there may be instances where it is reasonable for public pension funds to try to influence corporate decision-making, the pension funds should determine whether proxy fights can appreciably enhance the value of their assets before picking a fight.

Each year, publicly held corporations send proxy materials to shareholders. These materials ask shareholders to vote for recommended board candidates and corporate resolutions at the annual meeting. If shareholders are not planning on voting, they may delegate their voting authority to board-selected representatives (otherwise known as choosing a proxy). Shareholders or groups of shareholders may also submit resolutions for consideration at these meetings. Shareholder resolutions must also be included in the proxy statement that is sent to all shareholders before the annual meeting. 

Pension funds and other institutional investors sometimes withhold their support for corporate-endorsed board candidates and submit resolutions. But changing the outcome of corporate elections is typically an uphill battle. According to ProxyPulse, only 2.2% of corporate board candidates failed to obtain majorities during the 2021 proxy season. Sullivan & Cromwell found that only 9% of shareholder proposals submitted were ultimately ratified. 

In comparison, the prospects for shareholder resolutions being adopted appear to be improving. ProxyPulse found that the mean share of votes for shareholder proposals increased from 34% in 2017 to 40% in 2021. The threat of a shareholder proposal passing may also be encouraging boards to go ahead and adopt some recommended policies. 

Between January 1, 2020, and April 30, 2022, pension funds filed 81 forms with the Securities and Exchange Commission in which they disclosed shareholder solicitations, accounting for over 10% of all such disclosures filed during this period. Shareholders who send letters to other shareholders asking them to vote against recommendations of management in their proxy statements disclose the fact that they have done so on SEC Form PX14A6G. 

Of the 81 filings of the PX14A6G form in the 28 months ending April 30, 2022, the California Public Employees’ Retirement System (CalPERS) filed 47, over half, of them. The second most prolific filer, the New York State Common Retirement Fund, submitted 21 forms over the same period. The California State Teachers’ Retirement System (CalSTRS), along with public pension systems in New York City, Rhode Island, and Vermont accounted for the remainder of the filings. 

The SEC only requires filings by shareholders that own over $5 million worth of the company’s stock, but shareholders with smaller holdings can and often do file the form voluntarily. Such non-required filings provide public pension funds (and other activist stock owners) the ability to make the public aware of their opinions because they know the SEC posts all PX14A6G submissions on its website. However, law firm Gibson Dunn has argued that these voluntary filings can cause compliance issues and confusion for other shareholders. 

In some cases, CalPERS, the nation’s largest public pension system, conducted shareholder campaigns despite holding positions in the target company that are well below the $5 million regulatory threshold for mandatory filing. In one extreme case, CalPERS challenged three board members of P.A.M. Transportation Services (NASDAQ: PTSI), a trucking company, despite owning only 426 shares of the firm. At a stock price of around $9 at the time of the filing, the value of CalPERS’ holding in the company was less than $4,000. 

About half of CalPERS filings focused on board election procedure issues. CalPERS advocates for board chairs to be independent rather than an employee of the company, generally opposing any individual having the combined role of chair and chief executive officer. CalPERS also recommends that board members should only be considered elected if they receive votes representing an absolute majority of shareholders rather than winning by default when running unopposed and receiving a minority of potential votes. CalPERS’ views on these and other corporate governance issues are detailed in its Proxy Voting Guidelines. 

Another issue that CalPERS focuses on is board diversity, which was the focus of 12 of its shareholder solicitations. In its guidelines on diversity, equity, and inclusion, CalPERS asserts: “A broad array of studies shows this to be true of corporations guided by diverse boards and executives – that they achieve better investment returns.”

Citations to these studies are, however, not provided. 

Only eight of the CalPERS letters directly referenced climate change. Most of these letters supported shareholder resolutions that demanded greater disclosure of the company’s climate-related lobbying activities. For example, a CalPERS letter to Phillips 66 shareholders in April 2021 included the following: 

We believe that shareowners would benefit from improved disclosure of the company’s climate lobbying objectives. The requested disclosure would help ensure that the company is transparent in its policy objectives, mitigate against reputational risks, and affirm that company funds were spent in a manner that is consistent with stated objectives. 

Specifically, proposal #6 is requesting the Board of Directors conduct an evaluation and issue a report within the next year describing if, and how, Phillips 66’s lobbying activities (direct and through trade associations) align with the goal of limiting average global warming to well below 2 degrees Celsius (the Paris Climate Agreement’s goal). The report should also address the risks presented by any misaligned lobbying and the company’s plans, if any, to mitigate these risks. 

Consistent with CalPERS Governance & Sustainability Principles, we will also be voting FOR Proposal #5 asking the company to set and publish emissions reduction targets covering the greenhouse gas (GHG) emissions of the company’s operations and energy products. 

Both of the CalPERS-supported shareholder proposals were approved by wide margins.  But the public pension system was less successful in its efforts to sway Berkshire Hathaway shareholders. In a letter dated April 19, 2022, CalPERS wrote: 

We are co-sponsoring Proposal #3 at the Berkshire Hathaway Inc. 2022 Annual Meeting, along with Federated Hermes, Caisse de Dépôt et Placement du Québec and State of New Jersey Common Pension Fund D. 

We believe it is necessary that Berkshire Hathaway provide shareowners with an annual assessment on how it manages physical and transitional climate-related risks and opportunities. This is especially true for companies in carbon-intensive industries or those that have the potential to be significantly impacted by climate change such as utilities and insurance companies – both of which are contained in the company’s portfolio. In our view, the company’s existing disclosures are insufficient for investors to adequately assess the company’s physical and transitional climate-related risks and opportunities. We are asking shareowners to vote FOR Proposal #3. 

CalPERS will also vote FOR Proposals #2, #4 and #5. 

All four CalPERS-supported proposals lost, with 73% of shares voting in opposition to Proposal #3, which called for greater climate reporting. While announcing the defeat of this resolution, Berkshire Hathaway Chair Warren Buffett discussed the role of pension funds at some length (this can be viewed starting at 5:30:40 of this video). 

Positing that pension funds will always pay all their obligations, Buffett concluded that the true stakeholders of these funds are future taxpayers, who will be expected to cover these promised payments. He went on to assert that if pension funds failed to represent these stakeholders, they could face a declining tax base as people move away to avoid paying pension obligations. 

Implied but left unsaid in Buffett’s remarks was the suggestion that CalPERS and its peer pension funds were not serving future taxpayers by advocating for their climate change reporting proposal. In retrospect, this effort could be seen as a waste of CalPERS’ time and resources because the proposal failed by such a wide margin. Further, the proposal could be redundant due to proposed SEC regulations that would require all public companies, including Berkshire Hathaway, to report on their climate impacts. 

Proxy activism may be appropriate for pension funds in certain circumstances. If a fund can work with other shareholders to remove ineffective management or change corporate policies that are reducing shareholder value, the effort to change board composition or company policies may be worthwhile. But, if a public pension fund has a small stake in a company, is unlikely to prevail, or is advancing policies that do not clearly enhance shareholder value, proxy battles are an inefficient use of a public pension system’s resources. Funds should prioritize maximizing risk-adjusted returns with as little wasted effort (and thus management costs) as possible.