Most California State employees and retirees have their retirement funds invested largely through two vehicles. By far the largest is CalPERS, the nations largest public pension with almost $300B in assets. However, many also have a smaller amount invested in CalHR’s Savings Plus program, which has assets of more than $10B. Those vehicles invest a large proportion of their funds in corporate stock, which carry voting power that can not only impact the value of the companies but also the quality of our environment and our political framework.
Over the course of several decades the Department Labor and the SEC have ruled that proxy voting rights are assets and fiduciaries of funds such as CalPERS and CalHR must ensure the underlying shares are voted for the benefit of the employees and retires whose funds they hold in trust.
CalPERS and CalHR’s Savings Plus offer different approaches to voting the proxies of shares they hold in trust, with radically different results. After reviewing both programs, I conclude that CalPERS is devoting considerable resources to ensure proxies are voted in a conscientious attempt to benefit employees and retirees. CalHR appears to make no such effort and should use its contracting process to improve proxy voting within the Savings Plus Program. I end with some suggested actions readers can take, especially those with investments held by Savings Plus. However, any reader who has money invested in a 401(k) or 457 plan can go through a similar exercise and contact their employer to ensure the proxies in your plan are being voted to your benefit.
CalPERS Administration
CalPERS, the California Public Employees Retirement System is administered by a 13-member Board of Administration who are elected, appointed, or ex officio:
Six elected members:
Two elected by and from all CalPERS members
One elected by and from all active State members
One elected by and from all active CalPERS school members
One elected by and from all active CalPERS public agency members (employed by contracting public agencies)
One elected by and from the retired members of CalPERS 
Three appointed members:
Two appointed by the Governor – an elected official of a local government and an official of a life insurer
One public representative appointed jointly by the Speaker of the Assembly and the Senate Rules Committee
Four ex officio members:
The State Treasurer
The State Controller
The Director of the California Department of Human Resources
A designee of the State Personnel Board
CalHR Administration
In contrast, the California Department of Human Resources (CalHR), which operates the Savings Plus program, provides no direct voice in electing or appointing those who administer its program. Currently, the sole administrator is Acting Director Richard Gillihan, who contracts almost all, if not all, responsibilities to the private sector. Gillihan reports to Marybel Batjer, California Government Operations Agency, who reports in turn to Governor Edmund G. Brown Jr.
Proxy Voting at CalPERS
CalPERS has extensive information on its website concerning how proxies are voted. It includes several documents on proxy voting policies, the findings of commissioned research, a video report from Anne Simpson, many quick links, and encourages members to vote along with CalPERS when voting stock they may hold in their own individual portfolios.
As just one example of many, CalPERS calls upon all the public companies it invests in to disclose charitable and political expenditures, which allows it and other shareholders to assess if such spending aligns with the interests of shareholders.
ProxyDemocracy.org is a nonprofit, nonpartisan project supported by foundations and individuals interested in being responsible investors. Their website provides tools to help investors use their voting power to produce positive changes in the companies they own. ProxyDemocracy publicizes the intended votes of institutional investors with a track record of shareholder engagement, such as a limited number of votes by CalPERS. Additionally, they help investors understand the voting records of leading funds, making it possible for them to purchase funds that represent their interests and pressure those that don’t.
Using ProxyDemocracy, I pulled up the Voting Profile of CalPERS, pasted below
Detailed Vote Record of CalPERS
Activism Score 
Activism Plot
Votes
Directors
Against mgmt
With mgmt
Abstain
Director Election
7.5
731
9,066
0
Executive compensation
Management Proposals
6.3
40
593
0
Shareholder Proposals
78.3
303
84
0
Corporate governance
Board Independence and Performance
86.5
115
18
0
Voting Rules
98.3
284
5
0
Takeover Defenses
100.0
73
0
0
Corporate impact
Employment and Working Conditions
76.9
70
21
0
Environmental and Social
78.7
155
42
0
Political Influence and Charitable Contributions
83.1
162
33
0
As you can see, CalPERS voted against corporate directors 7.5% of the time and voted in favor of 78.3% of shareholder proposals. CaPERS also voted for most proposals aimed at improving employment and working conditions as well as the natural and social environment and also voting to curb or report on money spent by corporations for political influence or charitable contributions.
Proxy Voting at Savings Plus Under CalHR
In contrast to CalPERS, I could find no information on proxy voting posted on the Savings Plus site. Back in June of 2012, I asked CalHR where I could find how funds in the plan voted their proxies. I was hoping for at least a few tables that compare voting records, such as those at ProxyDemocracy.org or FundVotes.com. This was their response:
The funds offered by Savings Plus operate like mutual funds in that they are invested in a whole bunch of different types of stocks already. Therefore, there are no proxy votes associated with our investment options.
I knew the law requires that CalHR be more diligent than that, so I persisted, citing federal requirements under 29 CFR Part 2509, Interpretive Bulletin Relating to Exercise of Shareholder Rights:
Proxy voting issues must be examined to determine the positions that are in the best interest of plan participants and beneficiaries. Proxies shall be voted on all issues that affect the value of the shares;
A system to verify and track receipt and accuracy of proxies must be in place, with reasonable steps taken to secure any missing proxies and to correct discrepancies in shares on proxies when so indicated;
Trustees who assign voting authority to fiduciaries must periodically monitor their activities to verify that tracking procedures are utilized and that proxy voting records are kept in order that trustees can review the actions taken in individual proxy voting situations;
Eventually, I was able to obtain what amounts to an unorganized dump of voting files from contractors and confirmed CalHR has no voting policies, does not track funds to ensure funds vote in the interest of fund holders and maintains little documentation, if any, with regard to monitoring or verifying proxy records. A July 27, 2012 email from Hannah K. Yu, Labor Relations Counsel, included the following:
CalHR has determined it has no documents responsive to this request. Please note that the investment contracts with the separate funds contain general language regarding proxy voting, but CalHR provides no explicit guidance or policy to the separate funds regarding their voting…
you requested written examples of actions CalHR takes to verify, track receipt and accuracy of proxies and correct discrepancies. CalHR has determined it has no documents responsive to this request. In addition, please note that pursuant to Government Code section 6253, CalHR is obligated to provide identifiable record or records prepared, owned, used or retained by CalHR; it is not obligated to create a new document…
you requested minutes or other evidence of meetings held where CalHR trustees reviewed, monitored and verified and/or corrected actions taken in individual proxy voting situations. CalHR has determined it has no documents responsive to this request.
By looking at my own current investment options on the Savings Plus site after logging in, it appears the current S&P 500 fund and other passively managed funds are invested by Northern Trust, based on the following sentence:
Performance, Fees, Risk, and Inception Date information are specific to Savings Plus. All other information is specific to the Northern Trust Index fund.
I could not find a similar disclosure on a publicly available portion of the Savings Plus website. Although the site available to participants makes various disclosures, such as the fund’s top holdings as of Jun 30, 2014 (Apple 3.18% of fund, Exxon Mobil 2.45%, Microsoft 1.78%, etc.), there is no indication provided as to how proxies have been or will be voted for the underlying shares.
However, I was able to find the voting profile for Northern Trust on ProxyDemocracy.
Detailed Vote Record of Northern Trust
Activism Score
Activism Plot
Votes
Directors
Against mgmt
With mgmt
Abstain
Director Election
0.9
35
3,815
0
Executive compensation
Management Proposals
2.3
7
298
0
Shareholder Proposals
29.3
36
87
0
Corporate governance
Board Independence and Performance
6.1
2
31
0
Voting Rules
21.9
25
89
0
Takeover Defenses
72.7
24
9
0
Corporate impact
Employment and Working Conditions
0.0
0
26
0
Environmental and Social
0.0
0
61
0
Political Influence and Charitable Contributions
3.3
1
29
0
From that information available, we can see that Northern Trust does not vote very often in comparison with CalPERS, and when they do, they vote overwhelmingly with management. For example, Northern Trust voted against directors less than 1% of the time, whereas CalPERS voted against 7.5% of directors. Additionally, Northern Trust voted in favor of only 29.3% of shareholder proposals, which are typically aimed at holding management more accountable to shareholders, improving financial performance and improving environmental sustainability. CalPERS voted in favor of 78.3% of shareholder proposals.
An even greater contrast can be seen when we compare Northern Trust’s votes in favor of proposals aimed at improving working conditions, environmental and social, as well as improving reporting of funds used for political influent and charitable contributions. Northern Trust voted in favor of only one such resolution, whereas CalPERS voted in favor of 387 such resolutions. State employees, who often spend their days regulating working conditions, environmental and political activities might be disappointed to learn their investments are sometimes working at cross purposes.
Why the Difference in the Proxy Voting of CalPERS and Savings Plus?
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In 1994 there was a 3rd Restatement of Trust Law drafted by the National Conference of Commissioners on Uniform State Laws. This is basically the current standard fiduciaries should be following. Section 2 is the heart of it, setting out the Standard of Care; Portfolio Strategy; Risk and Return Objectives. Subdivision (c) sets out a list of usual considerations, such as economic conditions, tax consequences, expected total return, needs for liquidity, etc. The interesting consideration is that in subdivision (c)(8):
an asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries
Sokol drew our attention to this provision and I think we need to draw it to the attention of our funds and their members. What “special value” does any specific investment have to one or more of the beneficiaries? We’re not just looking at money, not just the pension itself, but other benefits that fiduciaries are obligated to consider and to provide. Sokol argued these could be clean air, clean water, inexpensive living quarters, healthy food, efficient public transportation, convenient places to exercise, continuing education, a healthy local economy to grow old in, etc.
CalPERS has about $156.4B in public equity investments, whereas the Savings Plus program has only about $10B.
What accounts for the differences?
The Department of Human Resources (CalHR) of the State of California recently released a Request for Proposal (RFP 700-14-01) seeking bids for investment management services for the Savings Plus Program (Savings Plus), the State of California’s $10 billion defined contribution plan. Unfortunately, the RFP demonstrates a total disregard for the wishes Savings Plus participants and the plan’s fiduciary obligations with regard to proxy votes in the underlying assets. This post explores what CalHR is doing in the current RFP and what they should be doing instead.
CalHR’s RFP for Passive Index Funds
CalHR solicited bids from qualified firms to provide five (5) Passive Index Funds benchmarked to the: S&P 500 Index, S&P 400 Index, Russell 2000 Index, MSCI ACWI ex-US or ACWI ex-US IMI, and Barclays US Aggregate Bond Index or Global Aggregate USD Hedged Index. As described in the RFP, CalHR does not permit these assets to be managed in a securities lending program. Market values at June 30, 2014 in the mandates were (in millions): S&P 500 $1,670; S&P 400 $432; Russell 2000 $200; MSCI ACWI ex-US $429; and Barclays US Aggregate $714.
Bid packages can be obtained by visiting bidsync.com. First time users must register with BidSync (no cost). Log on and search for bid number 700-14-01. Proposals are due by 4:00pm (PT) September 11, 2014 07-29-2014. You can find more particulars in the RPF, which I have uploaded as CALHR-BidDocumentsPassivelyManagedFunds for future reference.
ABOUT THIS RFP
Separate investment management contracts will be awarded to provide one or more of five (5) passively managed funds benchmarked to the:
S&P 500 Index
S&P 400 Index
Russell 2000 Index
MSCI ACWI ex-US or ACWI ex-US IMI
Barclays US Aggregate Bond Index or Global Aggregate USD Hedged Index
CalHR will select the investment managers through a competitive process. Potential firms must satisfy organizational and strategy-specific minimum qualifications and licensing, experience and business requirements. CalHR intends that the successful firm(s) will enter into an Agreement(s) for a five-year period beginning February 1, 2015.
“2. From the Scope of Work: “While the Plan is not subject to ERISA, the Department intends to operate as though it were. As such, the Contractor shall acknowledge its fiduciary role insofar as the advice and dealings with the Department, and the handling of the Plans’ assets for which it manages.”
“10. The Contractor must vote proxies and affect corporate actions in the best interest of Plan participants and their beneficiaries invested in the Account. The Contractor shall provide the Department with quarterly proxy reports within one month following the end of each calendar quarter and will provide to the Department its proxy voting policy at least annually. The Contractor shall provide the Department with these documents more frequently if requested by the Department.”
15. The Contractor shall provide to the Department or its designee copies of any notices of shareholders’ meetings, proxies and proxy soliciting materials, prospectuses, and the annual reports or other reports with respect to the Fund, as requested.
15. The Contractor shall make available in a format acceptable to the Department information and materials necessary to inform participants of the investment.
ADDENDUMS
As necessary we may make adjustments to the RFP, Such changes are made via addendums which will be posted on bidsync.com.
You may email this information to the Contract Management Unit or mail it to:
Terri Yee
by looking at the current investment options on the Savings Plus site, it appears the current S&P 500 fund is passively managed by Northern Trust with a net expense ratio of 0.02%. Although the site make various disclosures, such as the fund’s top holdings as of Jun 30, 2014 (Apple 3.18% of fund, Exxon Mobil 2.45%, Microsoft 1.78%, etc.), there is no indication provided as to how proxies have been or will be voted for the underlying shares valued at $1.375B as of 7/1/2014. Looking at their voting profile on ProxyDemocracy, we can see their activism score is clearly near the bottom.
DETAILED VOTE RECORD
Activism Score
Activism Plot
Votes
Directors
Against mgmt
With mgmt
Abstain
Director Election
0.9
35
3,815
0
Executive compensation
Management Proposals
2.3
7
298
0
Shareholder Proposals
29.3
36
87
0
Corporate governance
Board Independence and Performance
6.1
2
31
0
Voting Rules
21.9
25
89
0
Takeover Defenses
72.7
24
9
0
Corporate impact
Employment and Working Conditions
0.0
0
26
0
Environmental and Social
0.0
0
61
0
Political Influence and Charitable Contributions
3.3
1
29
0
Compare with the Voting Profile of CalPERS, based on a much more robust voting record.
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