The Role of Public Pension Funds in Governance

Public pension funds have great influence over corporate governance because of the size and nature of their portfolios: They manage more than $3 trillion in assets and often invest in a large number of companies. Besides largely unobservable private negotiations, voting at annual or special shareholder meetings is one of the most direct ways for investors to affect corporate decisions. CalPERS, the largest public pension fund in the U.S., states that proxy voting is “the primary way we can influence a company’s operations and corporate governance.” This view is shared by a number of other high profile-public pension funds. In a new paper, we examine the proxy voting records of 48 U.S. public pension funds to identify several important determinants of their proxy voting behavior. We highlight the influence of political ideology and comparisons with other institutional investors.

Compared with mutual funds, whose proxy voting behavior has been examined extensively, public pension funds are considerably more independent from the management of the companies they invest in. A stream of literature has shown that mutual funds often vote in favor of a company’s management in hopes of gaining the company’s existing and potential pension business. Public pension funds, by contrast, tend to support shareholder proposals and vote against management proposals: public pension funds are 36.2 percent more likely than mutual funds to vote in favor of shareholder proposals and 7.1 percent less likely to vote in favor of management proposals.

Although proxy advisers are routinely retained, most public pension funds use their own research and rely on proxy advisers merely to supplement it. Only two of the 48 funds in our sample consistently follow the recommendations of proxy advisers. All other funds emphasize independent voting decisions. Thirty-one funds deviate from ISS voting recommendations more often than does CalPERS, which is known for its independence.

A group of activist public pension funds frequently file shareholder proposals and often collaborate with other proposal sponsors. We find that proposal-funds that collaborate with other sponsors are more likely to vote for (against) shareholder (management) proposals than are other funds. In addition to the 48 funds in our original sample that determine themselves how to vote, we obtained the voting records of 11 public pension funds that delegate proxy voting to institutions managing assets for them. The external managers, which are typically mutual funds and asset management companies, often follow their own voting policies and rarely consult with public pension funds. We find that funds that determine themselves how to vote are more likely to favor shareholder proposals than are funds that delegate voting to external managers.

We next classify shareholder proposal sponsors into eight categories: individual investors, investment companies, labor unions, public pension funds, religious groups, social groups, SRI funds, and other shareholders. We find that public pension funds are most supportive of shareholder proposals submitted by other public pension funds, followed by those submitted by labor unions. This evidence is consistent with the notion that labor unions and public pension funds are the most prolific investors employing low-cost activism strategies, including proxy voting, and their interests are often aligned.

Compared with other institutional investors such as mutual funds, public pension funds are more heavily influenced by the political cultures of their home states. Some researchers argue that yielding to politically popular views harm the performance of funds’ portfolios. To the extent that socially responsible proposals can be costly to implement and that politicians pressure funds to favor local companies, this argument suggests that public pension funds would strongly support socially responsible proposals and be less willing to vote against the management of local firms. Our findings cast doubt on this argument. Among all shareholder proposals, public pension funds support environmental and social proposals the least. Moreover, public pension funds are more likely to vote against management proposals of local firms than of non-local firms, and are equally likely to support shareholder proposals of local and non-local firms.

Although a large body of literature has examined how political values affect portfolio and corporate decisions, these studies have few direct implications for fund or corporate performance. Thus, the influence of politics may be primarily ideological, without direct implications for fund performance. We find that public pension funds that are influenced to some degree by Democratic state legislators and public unions are more active in proxy voting. Funds based in states with the greatest proportion of Democratic representatives (top 25 percent) are more likely to vote for (against) shareholder (management) proposals than other funds, as are funds from states with the greatest proportion of public employees represented by unions (top 10 percent).

Public pension funds’ votes are critical to the success of a proposal. The support of public pension funds raises the likelihood that shareholder proposals will pass by 5.9 percent and that management proposals will pass by 1 percent. For proposals that narrowly pass or fail, we find that with the support of public pension funds, shareholder proposals are 8.7 percent more likely to pass and management proposals are 7.2 percent more likely to pass. In other words, the determinants discussed above for public pension funds’ proxy voting behavior can significantly affect proxy voting outcomes.

Overall, our evidence shows public pension funds play an active and independent role in proxy voting and have strong influence on voting outcomes. For these funds, political ideologies and (lack of) business ties with portfolio companies strongly affect how they vote, whereas they do not appear to pursue political interests at the cost of investor value in proxy voting.

This post comes to us from professors Ying Duan at Simon Fraser University, Yawen Jiao at the University of California, Riverside, and Kinsun Tam at the State University of New York at Albany. It is based on their recent paper, “The Role of Public Pension Funds in Corporate Governance: Evidence from Proxy Voting,” available here.