Department of Shareholder Primacy?
This week, the Department of Labor (DOL), headed by Eugene Scalia, announced a proposed rule intending to “update and clarify” the DOL’s investment duty regulations relating to ERISA Plans. DOL intends to impose a ban on any fiduciary managing an ERISA plan if they have anything but pure profit as a primary investment goal.
The new DOL clarifications intend to put ESG in its place (down to the sub-basement) by proposing that ERISA plan fiduciaries, if following their “duties of prudence” may not consider “non-financial objectives” (e.g. ESG) if those goals “subordinate return or increase risk for the purpose of non-financial objectives.”
Clearly DOL seems to understand better than the growing surge of people now looking for impact investments. We are all now being schooled by DOL that those considerations are non-financial – meaning that they have no connection to any sort of financial bottom line.
DOL wants to make very clear that material economic risks like ESG considerations are not goals to be followed under “generally accepted investment theories.” And though DOL declines to cite what those generally accepted theories might be, we can easily assume they are referring to ‘Uncle Milty’ Friedman’s Capitalism and Freedom manifesto that gave prominence to the Shareholder Primacy campaign successfully waged on us since the late ‘70s.
No one should be too surprised by what DOL is trying to do here, especially with Mr. Scalia now firmly entrenched. As Senator Minority Leader Chuck Shumer stated during Scalia’s confirmation hearing process, “Mr. Scalia’s life work has been utterly opposed to the mission of the agency to which he’s nominated. He has sided repeatedly with the large corporate interest against the working people.”
But wait! Didn’t Senate HELP Chairman Lamar Alexander (R. Tenn.) say, during Scalia’s nomination hearing that “[i]t is important for the Department of Labor to create an environment to help employers and employees succeed in today’s rapidly changing workplace…”??
Perhaps the confusion is that Alexander is using Newspeak while we are still trying to make sense of things in English.
Indeed, offering rules to weaken attempts to allow retirement accounts to invest in companies that are focused more on the long term betterment of our planet, society (employees, stakeholders and better governance models) and our local communities certainly could be seen as contrary and anemic by those following Uncle Milty’s “generally accepted investment theories.” But those are raw, blatant and childish attempts at protecting the beloved Shareholder Primacy ideals. (Hey, if we can’t get enough judges to rule that Shareholder Primacy is the law of the land, let’s get it inserted in any rules we have power over).
These kinds of shrill attacks on any attempts to reign in our hyper-capitalist ways may still have some short term successes, but the trend is now turning away from that system that is destroying our ability to live decent healthy lives – and to see why ending injustices at all levels will actually preserve, not diminish, our future health. Even if this rule is imposed, savvy investment fiduciaries may understand that they will always keep as a priority the “financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action” and avoid any “subordination of the interests of plan participants and beneficiaries in retirement income and financial benefits,” while also looking hard at the ESG factors that they understand will meet those goals over the long term.
In announcing the proposed rule, Scalia says that “[p]rivate employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan, Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.” Oddly, he left out making America Great Again, but whatever.
As the DOL press release states at the end, “[t]he mission of the Department of Labor is to foster, promote and develop the welfare of the wage earners, job seekers and retirees of the United States; improve working conditions; advance opportunities for profitable employment; and assure work-related benefits and rights” (emphasis added). Might efforts to help employees succeed in their workplace create better long-term financial results? Wouldn’t giving employees a seat at the governance table give companies a better chance of long-term success by enriching the environments of the workplace, their health and safety? I wonder if Senator Alexander understands that those efforts might, at first blush, look like they are reducing short term profits, but instead, establishing long term success for a company.
And maybe, just maybe, regular folks with retirement accounts and their fiduciaries see that as well.
Clearly, Mr. Scalia feels that no other goal but Shareholder Primacy is important enough to consider. Not the fiduciary, nor the beneficiary with funds in a retirement account who may beg to differ. Scalia wants to make clear that only he and his DOL gang know what is best for retirees, and impacts caused by a warming planet, employees treated like serfs, and patriarchal rulers of boards obviously have no significant effect on those financial results.
Mr. Scalia and those that put him and his boss in power for now should pause to reflect on Martin Luther King, Jr.’s reminder that “the arc of the moral universe is long, but it bends toward justice.” Funding goals that bend toward justice for all seems like a good, material and sound financial objective to us, and is becoming a generally accepted investment theory.