By law, managers of employer-sponsored pension plans must act in the best interests of investors. Unfortunately, many such fiduciaries are applying an unusually broad definition. That’s why the U.S. Department of Labor has clarified the issue. On April 23, the DOL released a guidance statement intended to discourage benefit managers from applying the principle known as Environmental, Social and Governance to investment decisions. Such a practice might seem worthy, noted the department, but it may place safety and soundness in harm’s way. The action is especially a rebuke to those who see issues advocacy as a top business priority.
Environmental, Social and Governance (ESG), alternately known as Corporate Social Responsibility, is a philosophy holding that a corporation is not only a business enterprise, but also a steward of the public good. A company, in this view, can and should be at once profitable and morally conscious. A company must answer to the larger society, or “stakeholders,” potentially affected by company decisions as well as to the persons connected to the company. Many companies are taking this “best of both worlds” approach. According to the Boston College Center for Corporate Citizenship, the number of corporations directing ESG campaigns has increased nearly 75 percent from five years ago. Forbes magazine, for one, approvingly has taken note of this trend.
Laurence Fink, CEO and chairman of the New York-based investment firm BlackRock Inc., is arguably the leader of this idea within the business community. This January he publicly urged dozens of CEOs to go beyond mere profit. “Society is demanding that companies, both public and private, serve a social purpose,” Fink wrote in a letter. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” With over $6 trillion in assets under management, BlackRock, directly and indirectly, can wield enough clout to dictate a wide range of business practices to the nation’s entire business community.
The idea of serving a higher social purpose sounds noble on the surface. But it ignores how easily corporate governance can and has become captive of outside interests. Such reformers are altruistic in their rhetoric yet self-interested in their organizational goals. And they mean to transform corporations from to bottom. This emerging “global salvationist consensus,” as economist David Henderson calls it, aims to refashion corporations into de facto adjuncts of government and nonprofit organizations. In this way, its opinion leaders can inject their own vision into such issues as racial/ethnic diversity, climate change and workplace sexual harassment. The effect would be to place investor funds at the mercy of easily manipulable political opinion.
The Labor Department’s regulatory guidance memo of April 23, known as Field Assistance Bulletin 2018-01, is an overdue acknowledgment of this problem. The DOL clarification reiterated its longstanding position that corporate fiduciaries subject to Employee Retirement Income Security Act of 1974 (ERISA) cannot sacrifice investor returns or take on excessive risks as a means of realizing ostensibly desirable societal goals. The clarification takes a sensible look-before-you-leap approach. “Fiduciaries must not too readily treat ESG factors as economically relevant,” said the department. “It does not ineluctably follow from the fact that an investment promotes ESG factors…that the investment promotes ESG factors…that the investment is a prudent choice for retirement or other factors. Rather, ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits.”
The guidance statement from DOL bars companies from incurring significant benefit plan expenses to initiate or sponsor proxy resolutions on social issues. Moreover, it instructs companies to justify such expenditures as producing more benefits than costs. This directive is a rebuke to BlackRock Inc. enterprises claiming to be building a better world by routing retirement plans to varied ‘social justice’ campaigns. Everyone wants to make the world a better place. But “better” is a highly subjective word. Radical activists such as Al Sharpton, Jesse Jackson and Linda Sarsour are sincere in their desire to build a better world. Yet these people arguably not only have not made things better, they have made them worse. Why should corporations feel compelled to take their advice or bankroll them?
Corporations are not philanthropies. The people who run them might or might not see a business purpose in backing a particular cause. But that’s a decision solely for them and not outside pressure groups to make. That much of the pressure now comes from within business enterprises should not inspire confidence among current and future pensioners. The Labor Department clarification is a welcome affirmation that investment fiduciaries exist to serve the best interests of investors.