Ready or Not, Fund Proxy Disclosure Afoot
August 2, 2004
The days of cloak-and-dagger proxy ballots are over.
Beginning Aug. 31, mutual fund companies will be required to reveal how their funds cast proxy votes on behalf of their shareholders. The new rule, put forth by the Securities and Exchange Commission last December, was designed to encourage funds to vote proxies in shareholders' best interests.
The rule has been a hotly contested issue among the nation's biggest fund companies, which have argued that the rule would enable special interest groups such as labor unions to wield undue influence on the voting process and that fund investors actually have little interest in knowing that information, thereby making it an unnecessary form of disclosure. Making the record public would dilute their influence, some have further argued.
Then, of course, there is the familiar complaint that enhanced disclosure is too costly. In an effort to express its dissent, the Investment Company Institute sent bundles of documents the size of telephone books to reporters to show how onerous a task it would be to tell shareholders how they vote on thousands of proxies each year.
Perhaps the trade group's most practical argument is that fund shareholders are not exactly clamoring for greater disclosure on proxies. It's true. Most investors could care less. However, that does not mean they are not entitled to receive that information. Fund managers owe a fiduciary duty to those who have entrusted them with their money, much like an elected official who is tasked with representing the taxpayers.
18% Equity Power
Burton Rothberg, an assistant professor at the Zicklin School of Business at Baruch College in New York, examined proxy-voting policies at the 10 biggest mutual fund firms. Rothberg's study took a look at fund giants Fidelity Investments, The Vanguard Group, American Funds, Putnam Investments, Janus Capital, Franklin Templeton, AIM/Invesco, T. Rowe Price, Morgan Stanley Dean Witter and Oppenheimer Funds.
The big fund complexes tend to carry plenty of clout on certain issues, particularly when their views are contrary to those of corporate management. "Mutual funds own 18% of the equity in the country, and they have not practiced good governance in the past," Rothberg said, although he tempered his comment by saying that "the quality of oversight has improved substantially" in recent months. He believes the new rule will help "revolutionize" corporate governance and that it is generally a good thing for American business. "It will probably lead to more hostile takeovers," he added.
His study revealed that the big fund houses intend to vote with management on social and ethical issues. It also showed none of the funds want to put a cap on executive compensation, but, rather, they opposed certain types of compensation such as the repricing of stock options. Many of them were very opposed to anti-takeover issues. "Now that mutual funds have a seat at the corporate governance table, they're going to take a real interest in this," Rothberg said. He plans to unveil a database of proxy-voting results for mutual funds this Fall. "It would be interesting to see who voted for Michael Eisner," he said.
Some industry professionals are concerned that the disclosure of proxy voting records may not have the desired effect. John Wilcox, vice chairman of Georgeson Shareholder Communications, questions whether this disclosure would have any impact on the quality of the voting decisions being made by mutual funds.
"When votes are made public and collected by special interest groups, there may be negative publicity if a mutual fund varies its policy for particular companies and probably not a great deal of attention given to the reasons [behind them], that is, whether there were substantive reasons why those exceptions were made," Wilcox said.
But in his own conversations with mutual fund executives, Wilcox has learned that their intentions are to vote based on the merits of the issue at hand and not to adhere to rigid voting policies out of fear of repercussions or negative publicity. He noted that the guidelines for voting proxies are not entirely clear and there are still many unanswered questions as to the mechanics of the process and how information will be collected and analyzed. He's quite certain, however, that shareholder activists are going to make use of the data.
In order to comply, funds must fill out a new form known as the N-PX. Entering the 11th hour of the transition period, many fund companies have outsourced a bulk of the workload to service providers such as Institutional Shareholder Services. In June, the company held a Webcast to provide funds with actionable advice on the process, and even went back to the SEC for further clarification on some of the issues.
The trend of increased disclosure may spread outside U.S. borders, as well. Canadian-based socially responsible fund group The Ethical Funds Co. has urged Canadian regulators to adopt mandatory proxy disclosure for mutual funds. "With proxy voting disclosure, mutual funds will be less likely to rubber stamp corporate management's proposals and more likely to take an independent view of what is in the best interests of shareholders," said Robert Walker, the group's vice president of socially responsible investments research and policy.