Proxy Bout Enters the Final Round
March 10, 2003
The clock is ticking for the Investment Company Institute (ICI), the fund industry's largest and most influential trade group, as 11th-hour lobbying efforts to stave off proxy-voting disclosure may not cut the mustard.
With the Office of Management and Budget's (OMB) comment period coming to a close this Friday, the combined efforts of socially responsible funds, labor unions and investor advocacy groups are likely to come to fruition. The end result of their sweat and toil will be the implementation of an SEC rule requiring mutual funds to explain proxy procedures and reveal how board directors are casting their votes. The foundation of the new rule is built around the hope of restoring investor confidence and creating greater transparency for the proxy-voting process.
Despite their seemingly singular determination, those who support the revision to the existing proxy rules have very different ideology and history. "The supporters of the reform are an interesting cross-section," said Tim Smith, president of the Social Investment Forum and senior vice president at Walden Asset Management in Boston.
Indeed, the demographics range from religious groups to organized labor unions to the average Joe investor.
For example, the Nathan Cummings Foundation, a group with strong ties to the Jewish community, points to its "mission" of achieving a "socially and economically just society" as the underlying motivation for supporting proxy disclosure. On the other hand, the Treasurer of the state of Connecticut would speak to the issue of her "fiduciary responsibility" as the sole trustee and so forth.
The California Public Employees' Retirement System (CalPERS), a coalition of public pension funds, looks to level the playing field for its investors by scrutinizing corporate practices, such as shifting home offices to Bermuda (Tyco) and other offshore locales to avoid paying income tax. The AFL-CIO, the nation's most powerful labor union, claims that mutual funds are ignoring workers' resolutions and have systematically voted to downsize, outsource or privatize them.
Proxy as an Asset
"The common theme is that they're all concerned investors who believe that proxy is an asset and has value, and therefore it should be used conscientiously and disclosed," Smith said.
But while the chips appear to be heavily stacked against the ICI, the possibility of late-game heroics has not been entirely ruled out. That is because the ICI has petitioned the OMB, saying the cost of complying with the new rule, in terms of devoting human work hours and paperwork, would be an unnecessary diversion from management's fiduciary responsibilities.
Both camps believe that corporate governance reform is warranted, but they are at odds when it comes to the methodology. The ICI believes that removing the confidentiality of proxy votes will open up a Pandora's box for the fund community. The biggest concern is that special interest groups will use that information to strong-arm company boards and impose their agenda. "Making mutual funds the only investment entities required to report all of their individual proxy votes will undoubtedly embolden outside special interests," said ICI President Matthew P. Fink in a prepared statement.
"The industry wants to create the image of club-wielding union members beating Fidelity managers over the head until they vote the way they want them to," said Mercer Bullard, founder of investor advocacy group Fund Democracy and an assistant law professor at the University Of Mississippi. "But in fact, it will politicize the process in a very healthy way, which is to let shareholders know how proxies are being voted so that they can decide whether they want to continue to invest with that complex."
The role of the OMB, which has often been viewed as being sort of perfunctory in nature, is to ensure that the paperwork burden imposed on the public is minimized as outlined under the Paperwork Reduction Act of 1995. More importantly, it is responsible for guaranteeing that "the greatest possible public benefit comes from the collection, use and dissemination of information collected from the public."
Supporters of the new rule believe the fund industry is using the OMB as a smokescreen to obscure the issue and undermine the authority of the Securities and Exchange Commission. Technically, the OMB doesn't have full regulatory oversight. Normally, this would simply be a formality, but in this case, the ICI has decided to plead its case against disclosure one last time. It is almost unheard of that a regulatory matter would be taken to the OMB for appeal. While the move is far from being an ace in the hole, it was enough to make the social investment movement blink.
"I think it's a toss-up," Bullard said. "OMB is part of the executive branch so it is subject to political issues, which the SEC can normally rise above. There is no less expensive way to disclose proxy votes than that proposed by the SEC," he said.
Given the ICI's refusal to concede defeat, the most likely outcome, according to Bullard, is this: The OMB will send a letter to the SEC recommending that it revisit the issue in 18 months, following the first round of disclosures, to assess the impact of the new rule.
Vigilance the Real Test
With the rule scheduled to take effect in July, it remains uncertain whether the OMB will support the ICI's proposal or not. In either case, the SEC can act on its own since the OMB has no official jurisdiction over regulatory actions. The real question is, will the disclosure of proxy votes trigger investors to become more vigilant of executive decisions? Currently, there is no statistical evidence to support that notion, but it is something that will be at the forefront of nearly every discussion on the new voting practice.
"I think it will have a significant impact on votes on corporate governance issues such as staggered boards, poison pills and separating the chairman and CEO positions," Bullard said.
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