Tuesday, May 24, 2005

Green Mountain Summit: Bob Monks speaks out on SEC re XON

I had the pleasure of watching corporate governance legend Robert "Bob" Monks speak over lunch on Tues at the Summit. He is a good reason to visit Maine! Bill Baue The Ghost of a Shareholder Resolution Haunts ExxonMobil Annual Meeting does a good job of covering Bob's major issue covered, his dissatisfcation with SEC's "capricious" dispatching of his resolution, even though it was an exact replica of the one from 2004 that received votes.

Good news at XON annual general meeting ( AGM) was an unprecedented 28.4 percent vote for a first-year climate change resolution and support for seven others. The first year resolution by ICCR + Ceres asked for disclosure of plans for complying with greenhouse gas (GHG--the primary culprit behind global warming) reductions targets in countries participating in the Kyoto Protocol.

In conversation with Bob afterwards we explored the role of pensions consultants and their complicity in enhancing the status quo without really adding value. The coverage of SRI issues and global climate change risks have been weak, with exceptions by Jane Ambachtsheer of Mercer. I pointed to the recent SEC investigation media reports covering SEC finds bias in pension consultants: An SEC survey of 24 pension consulting firms finds significant conflicts of interest on May 14. The SEC found that a majority of the pension consultants have affiliations with money managers, the major issue SEI Investments identified in their business model, and what I faced in the employee benefits industry in South Africa through 2002.

The SEC concluded that some of the relationships may exist as a way for money managers to "curry favor with the pension consultant" and thus get business from the pension plans that the consultants are advising. The pension plans were frequently unaware of such relationships. ANother situation where Brandeis's "daylight as best antiseptic" would be useful.

The SEC study surveyed 24 of the nation's 1,700 pension fund consultants and found:
• More than half of the consultants surveyed provided services to pension funds and money management firms, raising the potential for conflicts of interest. For example, 10 sold software to money management companies to analyze clients' portfolios. The software cost as much as $70,000 a year.
More than half of the consultants offered investment conferences free for clients, but charged money managers a fee. Money managers weren't required to go but might have felt pressured to do so.
• Many consultants required money managers to direct a portion of their stock and bond trades to a broker affiliated with the consultant. By doing so, the consultant's fees were buried in the cost of brokerage. Also, the fund might pay more for trades than they would elsewhere, which means lower returns for investors.
• Many consultants provided services, such as investment management, to pension plans through affiliates. That's not wrong, but the consultant has to disclose potential conflicts.
• Many pension consultants don't consider themselves to be fiduciaries. Fiduciaries have a legal obligation to act in their clients' best interests.

This makes me angry: selling fear andgreed. It also reminds me of a role I could play as an unconflicted professional trustee. Matthew Hutcheson had approached me to the advisory board of erisa-fiduciary.com, an indpendent institutional investor serivce, now building out to a Fiduciary Guild. I am also surprised Eliot Spitzer did not hone in on this one as he has in othe rindustry with known but never confessed poor practices.

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