SRI, Mainstream Funds Agree: Corporate Governance Reforms Are Key
February 6, 2006
When it comes to protecting shareholders' interests, mainstream and socially responsible investing (SRI) mutual fund managers agree: supporting corporate reforms is key; but when it comes to voting their proxies on other SRI issues, the two types of funds drift further apart, according to a recent study of mutual fund voting records published by The Corporate Library, an independent investment ratings company based in Portland, Maine.
Some experts say that the similarities point to the core ethics about which their underlying shareholders care most: corporate accountability, transparency, responsibility to shareholders and an independent board.
"All of these things are apparently missing in certain parts of corporate America," said Mark Rowe, senior research associate at the Center for Business Ethics at Bentley College in Waltham, Mass. "Investors show they expect these things," Rowe said, but recent market drops suggest that they don't feel they're getting them. "We need a resurgence of values to bring back the confidence and trust," he said.
Indeed, in comparing the 2004 and 2005 voting records of mainstream and SRI funds among 45 different mutual fund families, Corporate Library researchers found that while the two types of fund families differ vastly in their stances on SRI issues from environmental issues to workplace equality, when it comes to corporate governance, the message was the same: Mutual fund managers demand more democratic boardrooms and less exorbitant executive pay.
That SRI and mainstream funds agree on corporate governance issues is no surprise, said Lloyd Kurtz, the portfolio manager for socially responsible investing at Nelson Capital Management in Palo Alto, Calif. "It's not just that corporate governance is perceived as fundamental to the functioning of a business," Kurtz said. "There's good evidence that funds with good corporate governance outperform," he added.
Investors have learned the hard way, through companies such as WorldComm and Enron, that with enigmatic prospectuses, hard-to-follow financial statements, and too-good-to-be true returns probably signify bad bets. "Somewhere down the line, corporate management began running their companies for themselves, not for the shareholders, and certainly not for the employees," said Carl Birkelbach, a financial planner with Birkelbach Management, a Chicago company with an SRI focus. Mutual fund companies, reeling from questions about their own credibility after the scandals of 2003, have responded not only by shoring up their own practices, but by proving that they are looking out for their shareholders.
Resolutions calling for majority vote standards to be applied to director elections, for example, represent one area where both socially responsible and mainstream funds show strong support. In 2004, mutual funds had the opportunity to vote on 12 resolutions related to this issue, but not one fund family, SRI or mainstream, supported any.
But in 2005, funds faced 57 such resolutions. One hundred percent of the SRI funds and 60% of mainstream funds supported it. "The increase," according to the Corporate Library report, "is tied to a renewed wave of shareholder dissatisfaction with the way in which board elections are run and the lack of opportunities for input by shareholders on the slate of nominees put forward by the board."
Another corporate governance issue about which mainstream and SRI funds seem to somewhat agree is that companies should expense stock options against their earnings. In 2004, mutual funds faced 66 resolutions dealing with this issue. SRI funds supported the proposals 98% of the time, while mainstream funds supported 80% of such resolutions. In 2005, there were fewer proposals dealing with stock options, perhaps due to pending Securities and Exchange Commission regulations pertaining to executive compensation and Financial Accounting Standards Board guidelines requiring such expensing starting June 15. Of the 23 resolutions, 94% of SRI funds and 79% of mainstream funds supported them.
Again, the issue is related to investor confidence, not conscience. "As we move forward and as companies are exposed for bad practices or misstated earnings, I think we find companies that are less transparent are going to lose credibility in the marketplace," Rowe said. And mutual fund companies do not want to suffer with them.
When it comes to other SRI issues, however, what shareholders want and how their fund managers invest don't always match.
Ceres, an environmentally minded network of investment funds based in Boston, recently released a report calling mainstream mutual funds "completely at odds" with their investors. Ceres asked 845 mutual fund investors whether they would like their fund managers, acting as their fiduciary proxies, to support shareholder resolutions "requesting that company management pay closer attention to global warming concerns and problems." More than 70% said yes.
Yet none of the 100 largest mutual funds analyzed supported any of 33 different shareholder resolutions pertaining to global warming.