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Impact Investing

IPE special report May 2018

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Funds lead reform calls

As Wall Street prepares to pay some of the fattest bonuses ever to its bankers and Congress remains some way from approving any substantial reform of the financial system, institutional investors such as pension funds are stepping forward to push for change - both at the political level as well as in practical terms during the upcoming AGM season and in the courts. US public opinion is in favour of financial reform, but matters are further complicated by the announced retirement of Christopher Dodd, chairman of the Senate committee on banking, and by problems of poor corporate governance among the very pension funds pushing for reform.

California Public Employees' Retirement System (CalPERS) is leading the charge. Its chief executive, Anne Stausboll, has called on California's representatives and senators to support the Wall Street Reform and Consumer Protection Act of 2009, approved last year by the House, but not yet discussed by the Senate. This legislation, says Stausboll, "advances critical reforms that will ensure transparency and accountability in corporate boardrooms and help to restore trust and stability".

Among the reforms, CalPERS stresses the importance of allowing shareholders to nominate their own candidates on proxy ballots for company board elections, letting shareholders cast non-binding votes of corporate executive compensation packages and vote on golden parachutes, creating a Financial Stability Council to identify and regulate firms whose failure can threaten market stability, creating the Consumer Financial Protection Agency to protect individual consumers of financial products, requiring hedge funds, private equity funds and other entities with pools of private capital to register with the SEC and be subject to its regulations, as well as introducing new regulation for over-the-counter derivatives.

But the future of the reform is no longer clear following the Senate's failure to discuss it and Dodd's retirement. Dodd was a key player in advancing reforms, although he was also criticised for being too cosy with Wall Street. Also, CalPERS has been the object of recent criticism and investigation. Charles Valdes, one of its board members-at-large - which are elected by all active and retired members - is leaving after being fined by California's political campaign watchdog agency for violating rules on contributions. Valdes received money from associates of Alfred Villalobos, a former CalPERS board member who became a placement agent and received more than $70m (€48.6m) in fees from private equity funds for helping them win business from CalPERS.

The fund is now putting its house in order, having just tightened policies on board member involvement in investment decisions, requiring them to channel communications on existing or potential investments to the fund's chief investment officer, and to refrain from advocating an investment with CalPERS staff outside board or committee meetings. New rules also impose full disclosure of placement agent remuneration.

A revamped ethical image will help CalPERS be a stronger advocate of a better corporate governance in the coming AGM season, which may be very interesting thanks to new proxy-voting rules introduced by the SEC. Effective from 1 January, financial brokers can no longer vote for directors on behalf of investors who do not vote themselves and do not give instructions. This may make a big difference as brokers usually vote with a company's management. But another long-awaited change - giving shareholders the right to place their own candidates on company proxy ballots, making it much easier to oust management's candidates - will not become a reality until 2011.

One of the hottest topics in the AGM season will be executive compensation, with some pension funds taking the fight to court. In January the Central Laborers' Pension Fund - a multi-employer fund in Illinois - filed a lawsuit in the New York State supreme court against Goldman Sachs, seeking to recover billions of dollars of bonuses and other compensation being awarded for 2009, saying the payouts harm shareholder value. The lawsuit also argues that Goldman Sachs' revenue was artificially inflated by the government's bailout of the banking sector last year, and alleges that the company's practice of continuing to pay out nearly 50% of net revenue as compensation is against shareholder interests. According to a Goldman Sachs spokesperson the lawsuit is "completely without merit". But it adds up to a great deal of bad publicity against a prominent Wall Street bank.


 

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