Funds' Proxy Votes in Public View Shareholders Gain Window to the Boardroom
September 6, 2004
The long-awaited and much maligned deadline for mutual funds to disclose how they vote their proxies came and went last week as investors for the first time were given a peek at decisions on such matters as executive compensation and boardroom elections.
The Securities and Exchange Commission directive is aimed at tightening corporate governance by empowering shareholders to make decisions based on how the caretakers of their retirement savings are voting on various issues. The industry largely opposed the rule, complaining that it would be too costly and that investors didn't really care about the information. But in the end, the SEC prevailed.
While it is difficult to measure its impact just days after its implementation, some of the biggest fund houses posted their voting results on their Web sites. For example, Vanguard revealed that it voted against at least one director last year at 60% of the companies within its portfolios. Overall, the firm withheld 30% of its votes on 19,000 board members in the proxies it submitted in the 12 months ended June 30. Comparatively, during the previous 12-month period, Vanguard withheld support from nearly 40% of individual directors.
The Valley Forge, Pa.-based company said that the reasons for withholding votes varied but were directly tied to increasing shareholder value. One key factor in refusing to support board members was if the nominee served on a committee whose actions were inconsistent with Vanguard guidelines.
Those actions included awarding excessive pay deals, nominating committees that recommended candidates who were not sufficiently independent or committee members who allowed excess spending on non-audit work by an independent auditor. Another strike against a potential board member was if the nominee did not attend at least 75% of board and committee meetings.
With respect to executive compensation, the nation's second-largest mutual fund complex approved more than 45% of the proposals that it reviewed. Last year, only about one in three earned a Vanguard seal of approval. In assessing these proposals, Vanguard said it is more likely to approve compensation packages that align employees' interests with those of the shareholders.
"We continue to see substantial numbers of plans that incorporate undesirable features or that provide unacceptable levels of dilution," the company said on its Web site. "Although there is still substantial room for improvement in this area, it's clear that positive change is occurring."
Fidelity Investments, the nation's largest fund complex, also posted proxy results on its Web site, albeit much less visible. The Boston-based firm's $61.9 billion Fidelity Magellan Fund withheld votes for the entire Walt Disney board, including longstanding CEO and Chairman Michael Eisner, the main figure in last year's heated proxy battle. Vanguard, on the other hand, voted for all 11 directors on the Disney board but abstained from voting on proposals related to labor standards in China and theme park safety reporting.
Magellan voted to approve the Bank of America-Fleet merger at a special meeting back in March but voted against BoA's amended stock plan. At Safeway's annual meeting, Magellan voted against a management proposal to reprice employee stock options and against two shareholder proposals to appoint an independent chairman and to expense options.
At a recent Genentech shareholder meeting, Magellan voted for a proposal that would amend the number of directors on the company's board. In the case of Gilead Sciences, the fund withheld its votes for all eight directors. At Halliburton, the fund voted against a stockholder proposal on operations in Iran but supported the nominations of all 11 trustees.
Among mutual fund companies tainted by the scandal, Putnam Investments proved to be particularly tough on corporate boards. In fact, Putnam aggressively voted against 275 boards, or 21% of the time, according to documents filed with regulators last week. Among the distinguished list of companies whose boards Putnam voted against were software giant Microsoft, Southwest Airlines and Fox Entertainment Group. Putnam also withheld votes for individual directors including Disney's Eisner. The Boston-based fund firm also voted in several instances against poison pill anti-takeover plans in favor of putting severance packages to a shareholder vote
Janus Capital, another fund company with a tarnished reputation, also weighed in on the boardroom fracas at Disney, but its position varied from fund to fund. The Janus Global Opportunities Fund withheld votes for all Disney directors, while the Janus Growth and Income Fund voted for all the directors. Still, managers of the Janus Risk Managed Stock Fund withheld votes for Eisner, but voted for all the other directors.
In the case of Boeing, the $8 billion Janus Worldwide fund withheld votes for four of its directors and abstained from shareholder proposals related to declassifying other board members and developing ethical criteria for military contracts. At Microsoft, Janus Worldwide voted for all the directors bar Jon Shirley, the company's former president and chief operating officer. Shirley has sat on the board since 1983. The fund also voted against a shareholder proposal to refrain from giving charitable contributions.
While fund shareholders presently may not be itching to view the scores of proxy materials now available to them, one can expect interest to build steam once they realize the interesting stories that information can tell.