Council of Institutional Investors

Policies on Other Issues

Best Disclosure Practices for Institutional Investors
Credit Rating Agencies
Effective and Efficient Proxy Voting
Financial Gatekeepers
Guiding Principles for Trading Practices, Commission Levels, Soft Dollars and Commission Recapture
Independence of Accounting and Auditing Standard Setters
Support of Defined Benefit Plans
Value of Corporate Governance

Best Disclosure Practices for Institutional Investors
In order to foster an environment of transparency and accountability, institutional investors—including pension funds, hedge funds, private equity firms and sovereign wealth funds, among others—should make publicly available in a timely manner:

  • Proxy voting guidelines;
  • Proxy votes cast;
  • Investment guidelines;
  • Names of governing-body members; and
  • An annual report on holdings and performance.
Adopted May 1, 2009

Credit Rating Agencies
CII supports a credit ratings environment that:
  • incentivizes long-term accuracy
  • provides transparency in methodology
  • applies consistent methodology to similar securities
  • minimizes, manages and discloses conflicts of interest
  • has strong, appropriately funded oversight mechanisms
  • holds agencies accountable for fraud and weak processes]
  • fosters competition and innovation
  • involves diligence from both agencies and investors 
Discussion
Credit rating agencies play an integral part in the safety and soundness of the financial system. They reduce informational asymmetry among investors, help mitigate duplicative research costs and have a key role in facilitating capital formation.  Yet all of these benefits hinge upon the long-term accuracy of ratings, which the above principles aim to promote. These principles, which build upon ideas expressed in broader CII policies, including the Statement on Financial Gatekeepers and the final report of the CII-CFA Investors’Working Group, will help underscore the value that CII members place on reliably accurate credit ratings.

The Credit Rating Agency Reform Act of 2006 paved the way for registration and improved oversight of credit rating agencies deemed Nationally Recognized Statistical Rating Organizations (NRSROs). While the ratings industry has made strides in addressing weaknesses revealed since the adoption of the act and the financial crisis of 2008, significant concerns persist. A Securities and Exchange Commission study released in September 2011  exposed cases in which NRSROs failed to follow their own methodology and allowed months to pass before disclosing changes to their methodology. The same report pointed to weaknesses in the oversight of conflicts of interest and compromises in internal supervisory controls, including limited involvement and high turnover among compliance officers. 
 
These findings drive home the importance of accountability, which strengthens credit rating agencies’ability to focus on objectives beyond increasing revenue and market share. Credit rating agencies have a responsibility to be diligent in the analysis upon which investors rely; investors in turn should be diligent in monitoring the quality of the analysis and in determining whether the level of quality makes references to ratings worthwhile in investment guidelines.
 
The predominant business model for credit ratings, in which the issuer pays for analysis, has come under intense scrutiny since 2008. Breakdowns in diligence due to fundamental principal-agent challenges, exacerbated by the practice of “ratings shopping”that chipped away at the quality of analysis, has prompted some observers to call for eliminating this model altogether.  A model in which the investor pays for ratings would promote alignment between the service provider and the end-user.  But the free-rider problem that likely would result—investors sharing ratings without paying for them—could make this model unsustainable.  Publicly-funded ratings, another alternative model, could potentially politicize the selection and compensation of rating agencies.  As no single model ensures robust analysis, policymakers should consider ways to help multiple models flourish in the marketplace.
 
Adopted April 3, 2012

Effective and Efficient Proxy Voting
The Council of Institutional Investors believes the public equity market and its stakeholders are best served by a proxy voting system characterized by:
 
  • Timeliness—Voting related communications should reach eligible voters in sufficient time to allow for careful review of the materials and to facilitate voter participation.
  • Accessibility—Technology should be used to improve the proxy voting process.  However, mechanisms should be in place to ensure that shareowners receive proxy materials and can vote even if they do not use electronic voting and communications methods.
  • Accuracy—All votes properly cast should be correctly tallied.
  • Certainty—The proxy voting system should provide for end-to-end confirmation enabling both companies and shareowners to confirm that votes properly cast were included in the final tally as directed.
  • Cost-effectiveness—The costs of transmitting proxy materials and votes should be reasonable.
Adopted April 13, 2010

Financial Gatekeepers
The Council of Institutional Investors believes financial gatekeepers should be transparent in their methodology and avoid or tightly manage conflicts of interest.  Robust oversight and genuine accountability to investors are also imperative.  Regulators should remain vigilant and work to close gaps in oversight.  Continued reforms are needed to ensure that the pillars of transparency, independence, oversight and accountability are solidly in place.
 
Auditors, financial analysts, credit rating agencies and other financial “gatekeepers” play a vital role in ensuring the integrity and stability of the capital markets.  They provide investors with timely, critical information they need, but often cannot verify, to make informed investment decisions.  With vast access to management and material non-public information, financial gatekeepers have an inordinate impact on public confidence in the markets.  They also exert great influence over the ability of corporations to raise capital and the investment options of many institutional investors.
 
In recent years, the global financial crisis and financial scandals on Wall Street and at operating companies from Enron to Tyco have cast a harsh light on flawed structures and practices of gatekeepers.  In many cases, poor disclosure, conflicts of interest, minimal oversight and lack of accountability helped mislead many market participants into making investment decisions that ultimately yielded huge losses.  The crisis of confidence in the markets that followed spurred regulators and lawmakers to scrutinize and rein in gatekeepers.
 
The Sarbanes-Oxley Act of 2002 and the “global settlement”with Wall Street firms in 2003 bolstered the transparency, independence, oversight and accountability of accounting firms and equity analysts, respectively.  For example, accounting firms now are barred from providing many consulting services to companies whose books they audit.  And banks are not allowed to include analysts in investment banking “roadshows”and must make analysts’historical ratings and price target forecasts publicly available.
 
Credit rating agencies largely escaped meaningful oversight until the passage of the Credit Rating Agency Reform Act of 2006.  While the act has improved disclosure and competition in the rating industry, more transparency, stronger regulation and genuine accountability are still needed.  Investigations by Congress and the Securities and Exchange Commission (SEC) have uncovered repeated instances where credit raters inflated ratings on structured financial products to win business from firms that issued the debt.  And rating agencies continue to face minimal accountability for the fairness or quality of their ratings.  CII welcomes further examination of financial gatekeepers by regulators, lawmakers, academics and others, to determine what changes, including new rules and stronger oversight, are needed.
 
Adopted April 13, 2010

Guiding Principles for Trading Practices, Commission Levels, Soft Dollars and Commission Recapture
The most important voice in discussions of soft dollars, commission levels and directed brokerage belongs to us, as institutional investors. Commissions are an asset of the plan, and as plan sponsors and trustees it is our right and responsibility to decide how they are managed. We have the power to assert our authority in these matters through our contractual arrangements with money managers and brokers. We also have the broader duty to communicate the interests and desires of the institutional investor community to regulators, to the public and to the industry regarding trading practices and commissions.
 
Like any other expense of the plan, trading costs need to be managed to minimize the cost and ensure that maximum value is received. But current brokerage industry practices of bundled pricing for services make it difficult to break out the exact costs of services (for trade execution, research or other things), may be antithetical to the fiduciary obligation of obtaining best execution, and hold too much potential for conflicts of interest and abuses. 
 
We support and urge full unbundling of pricing for investment management, brokerage and research services, so that institutional investors can purchase and budget for these services as they do any other expense of the plan.
 
Clarity and transparency of disclosure of all money management and brokerage arrangements is essential, and it is up to plan sponsors to require it. Simple reliance on brokers, money managers and consultants for volunteered information is insufficient to discharge the obligations of plan fiduciaries. Plan sponsors should require regular reports and affirmative representations that fiduciaries are pursuing best execution in their trading practices.
 
To the extent that any money manager or plan sponsor is engaged in using soft dollars or directing brokerage to obtain commission recapture, it is the duty of fiduciaries to ensure that all such practices are engaged in for the exclusive benefit of the plan and its members.

Adopted March 31, 1998

Independence of Accounting and Auditing Standard Setters
Audited financial statements including related disclosures are a critical source of information to institutional investors making investment decisions.  The efficiency of global markets—and the well-being of the investors who entrust their financial present and future to those markets—depends, in significant part, on the quality, comparability and reliability of the information provided by audited financial statements and disclosures.  The quality, comparability and reliability of that information, in turn, depends directly on the quality of the financial reporting standards that:  (1) enterprises use to recognize, measure and report their economic activities and events; and (2) auditors use in providing  assurance that the preparers’ recognition, measurement and disclosures are free of material misstatements or omissions.  The result should be timely, transparent and understandable financial reports.
 
The Council of Institutional Investors has consistently supported the view that the responsibility to promulgate accounting and auditing standards should reside with independent organizations. 
 
CII supports U.S. accounting and auditing standard setters cooperatively working with their international counterparts toward a common goal of high quality standards.  This means maintaining a high degree of on-going communication among domestic and international standard setters to produce standards that first and foremost result in high quality financial reports, and secondarily result in consistent financial reporting outcomes. CII continues to be open to a transition to a single global set of high quality standards designed to produce comparable, reliable, timely, transparent and understandable financial information that will meet the needs of institutional investors and other consumers of audited financial reports.  However, at this time CII does not support replacing U.S. accounting or auditing standards or standard setters with international standards or standard setters. Notwithstanding CII’s current opposition to replacing U.S. standards or standard setters, in light of the globalization of the financial markets and the fact that U.S investors invest trillions of dollars in securities of enterprises that report their financial results in some form of international standards, we generally support high quality international accounting and auditing standards.
 
In order to be high quality, accounting and auditing standards must be seen as meeting the needs of the investing public, and the standard setting process must be independent and free from undue influence. Attributes that underpin an effective accounting or auditing standard setter include:
  • Recognition of the Role of Reporting – A recognition that financial accounting and reporting and the quality of auditing thereof is a public good, necessary to investor confidence in individual enterprises and the global capital markets as a whole;
  • Sufficient Funding – Resources sufficient to support the standard setting process, including a secure, stable, source of funding that is not dependent on voluntary contributions of those subject to the standards (for international standard setters, such funding may depend on governmental and stakeholder cooperation from multiple jurisdictions, including the United States);
  • Independence and Technical Expertise – A full-time standard-setting board and staff that are independent from prior employers or similar conflicts and possess the technical expertise necessary to fulfill their important roles;
  • Accountability to Investors – A clear recognition that investors are the key customer of audited financial reports and, therefore, the primary role of audited financial reports should be to satisfy in a timely manner investors’ information needs (this includes having significant, prominent and adequately balanced representation from qualified investors on the standard setter’s staff, standard-setting board, oversight board and outside monitoring or advisory groups);
  • Due Process – A thorough public due process that includes solicitation of investor input on proposals and careful consideration of investor views before issuing proposals or final standards;
  • Adequate Protections – A structure and process that adequately protects the standard setter’s technical decisions and judgments (including the timing of the implementation of standards) from being overridden by government officials or bodies; and
  • Enforcement – A clear, rigorous and consistent mechanism for enforcement by regulators of the accounting and auditing standards.
Updated, March 1, 2017

Support of Defined Benefit Plans 
The Council of Institutional Investors supports defined benefit plans as a critical component of the nation’s retirement system and advocates the retention of defined benefit plans as the central element of retirement programs offered to workers.

Ensuring that workers have the ability to retire with dignity is one of the most complex issues facing public and private sector entities in the United States. The challenges in structuring retirement programs are considerable. One size does not fit all, and considerations such as an employer’s size and resources, the size and structure of employee pay packages, employee preferences and demographics influence what type of retirement benefits are most appropriate for an employer and its employees.
 
Today a broad variety of retirement programs is available for consideration by private and public sector entities. Different plan structures offer unique pros and cons for employees and employers.
 
Only one structure—the defined benefit plan—offers retirees a secure and guaranteed benefit upon retirement.
 
CII is concerned that eliminating defined benefit plans, which currently cover about 35 million Americans and their families,1 could severely impact the ability of workers, particularly lower-income employees, to be financially secure at retirement. The end result could be even more pressure on already over-burdened federal, state and local government assistance programs.
 
CII believes that defined benefit plans have played an important role in stabilizing the U.S. financial markets. Due to their extended benefit horizons, pension funds are long-term investors, particularly in the U.S. markets. Today pension funds, including private insured, private trusteed and state and local plans, are estimated to hold more than $4 trillion in U.S. publicly traded equities representing more than 26 percent of the U.S. public equity market.
 
Given their heavy reliance on passive investment strategies, pension funds are a critical source of stable, “patient capital”for the U.S. economy. In sharp contrast, mutual funds have become increasingly short-term oriented, as evidenced by the sharp increase in mutual fund turnover from 17 percent between 1945 and 1965 (an average holding period of six years) to more than 100 percent since 2000 (an average holding period of 11 months).2
 
Not only do pension funds provide patient capital to publicly traded companies, they also increasingly invest in alternative and private equity vehicles and private real estate investments that provide funding for start-ups, buy-outs, and other arrangements that are vitally important to the U.S. and local economies but unable to access other forms of capital.3
 
CII believes the involvement of defined benefit plans, particularly state and local government and union pension systems, in corporate governance issues has benefited investors at large in the U.S. capital markets and contributed to the vitality of the U.S. economy and U.S. corporations. Pension fund advocacy has resulted in regulatory and legislative reforms to strengthen rights for shareowners, improved corporate governance standards for U.S. companies and boards, increased accountability of corporate directors and executives and enhanced transparency of governance activities and financial accounting. Weakening the voice of defined benefit plans in matters of corporate governance would be detrimental to U.S. investors and companies and the U.S. financial markets.
 
NOW THEREFORE BE IT RESOLVED, that the Council of Institutional Investors supports defined benefit plans as the central component of the nation's public and private retirement system and it opposes public and private efforts to limit employers' ability to provide these plans and employees' rights to participate in them."
 
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1The Committee on Investment of Employee Benefit Assets, “The U.S. Pension Crisis: Evaluation and Analysis of Emerging Defined Benefit Pension Issues,”March 2004
2John C. Bogle, “The Mutual Fund Industry 60 Years Later: For Better or Worse,”Financial Analysts Journal, Vol. 61, Number 1, January/February 2005.
3According to the National Venture Capital Association, companies receiving venture capital financing between 1970 and 2003 accounted for 10.1 million jobs and $1.8 trillion in revenue in 2003, representing about 9.4 percent of total U.S. jobs and revenues, and states where venture capital has been the strongest—such as California, Texas and Massachusetts—have produced the most jobs and revenues for the U.S.

Adopted April 12, 2005

Value of Corporate Governance
The Council of Institutional Investors has long held that good corporate governance—defined to include general issues affecting market transparency, integrity and accountability and specific relationships between boards, management and shareowners—is in the best long-term interests of shareowners. 
 
CII believes that shareowners, other investors and other stakeholders benefit when rules and regulations provide adequate protections to owners and ensure that important information is promptly and transparently provided to the marketplace. 
 
The value of good governance structures/practices within companies—such as substantially independent boards, all-independent key committees and other board accountability policies/practices—is backed by commonsense and experience.  Such structures/practices ensure that directors have the necessary independence to, among other things, monitor and assess corporate performance; select, monitor, evaluate and, when necessary, fire the chief executive and other senior managers; oversee management succession; and structure, monitor and approve compensation paid to the chief executive and other senior managers.  They also ensure that directors are accountable to shareowners. 
 
Shareowners may employ a variety of tools and tactics, including filing shareowner resolutions, litigating or running director candidates, to encourage companies to adopt good corporate governance practices.  While CII doesn’t take formal positions on company-specific campaigns, it fully endorses the rights of CII members and other shareowners to get involved, encourage companies to improve their governance practices and urge legislators and regulators to strengthen the rules and regulations addressing investor rights and protections.