Funds Continue to Support Management
March 12, 2007
The fact that fund companies are increasingly voting their proxies in favor of management proposals may be disappointing to shareholder advocates but it comes as no surprise to them.
Fund companies continued to vote their proxies overwhelmingly in support of management in 2006, supporting 92% of management-sponsored proposals but only 37% of shareholder-sponsored recommendations. Even the fund company that voted the least frequently in favor of management's proposals, Putnam Investments, voted with them 79% of the time. American Funds voted the most often with management-97% of the time.
This marks a growing trend for fund companies to support management, up from 90% in 2005 and 89% in 2004, according to The Corporate Library of Portland, Maine.
For 2006, The Corporate Library analyzed the voting records of 29 large mutual fund companies. The data includes voting records of 702 individual mutual funds, incorporating more than 1.2 million voting decisions.
The Securities and Exchange Commission began requiring mutual funds to disclose their proxy votes once a year, beginning in 2004. Since then, a number of studies have found that mutual funds overwhelmingly vote in line with companies' recommendations.
"One would expect fund managers to be voting fairly consistently with management boards," said Mercer Bullard, founder of Fund Democracy, a shareholder advocacy group based in Oxford, Miss. It's an attestation of their belief in the company and decision to buy the stock in the first place, Bullard said.
Funds do not often oppose management if they don't have to, said Jackie Cook, a senior analyst with The Corporate Library and author of the report.
"The issue that funds seem to be voting with management is a non-issue," said C. Meyrick Payne, a senior partner at Stamford, Conn.-based Management Practice, a fund governance consulting company.
Funds also agreed with management's director nominees 91% of the time. Six of the fund families backed management nominees over 95%, the study found.
Some shareholders are not keen on the idea of one person getting approved for one board, but voted off another one, Cook said. Not until shareholders voice to management that they want more consistency in nominees being voted in or out across boards will that change, she said.
On the other hand, shareholder-sponsored resolutions were voted in favor of by funds 37% of the time. Governance-related resolutions, which included the majority of shareholder-sponsored resolutions-with 76% published in proxies last year-received support from funds 44% of the time. Over the past three years, the support has increased for 14 of the largest fund families, from 37% in 2004.
Fund families least likely to support corporate governance shareholder resolutions were Fidelity Investments and Federated Investors, with respective tallies last year of 12% and 20%. Charles Schwab was the most likely to agree with shareholder resolutions, supporting 75% of them, followed by T. Rowe Price, with a voting record of 72%.
In terms of shareholder resolutions, those proposing board declassification, or one-year term limits for directors in an attempt to make them more accountable to shareholders, received the highest level of fund support, with funds supporting this measure an average of 87.7% of the time.
Another key category of shareholder resolutions, open director elections, received agreement from funds 60% of the time, a significant increase over the past three years.
In regard to compensation, funds voted in favor of management-proposed executive compensation recommendations 74% of the time. The greatest support came from Alliance, Barclays Global Investors and Dreyfus, which supported more than 90% of such proposals. The least support came from Federated, which opposed executive compensation proposals 61.8% of the time, and Putnam, which voted against them 51.2% of the time.
However, none of the fund families surveyed voted in full support of executive compensation plans.
"Executive compensation is very much a part of the system, and unless the package is egregious, it should be approved," Payne maintained. Compensation generally keeps management interest aligned with shareholders, he noted.
The voting patterns for director compensation plans mirrored those of executive compensation plans. Seventy-six percent of funds supported management's suggestions on director pay. Federated opposed them the most, voting against 67.4% of such proposals, followed by American Century, which voted for them 46.8 % of the time. AIM Investments, American Funds, Barclays, Merrill Lynch, OppenheimerFunds and Franklin Templeton Investments supported the plans over 90% of the time.
Fund families also approved companies' external auditors in 98.4% of management-sponsored proxy votes. Templeton supported auditor approvals least often, 92%, and JPMorgan voted in favor of them 100% of the time.
Typically, sensible proposals are put on the table, which is why the number of votes supporting management is so high, Payne commented. Proposals that are voted against usually involve issues that heavily dilute current shareholder value, such as egregious stock options, he said.
However, not all agree that fund families should be voting with management as much as they do. The area could definitely use some improvement, said Laura Lutton, senior mutual fund analyst at Chicago-based Morningstar.
It can be beneficial to separate proxy voting from the fund management board because of conflicts of interest, Lutton said.
To date, few fund companies display their voting records, and shareholder activists have only begun to dig through these filings. Some believe that once investors come to realize that mutual funds own 25% of all of the publicly traded stock in this country, or $9.5 trillion worth of stock-and wield the corresponding proxy voting power-they might pay closer attention to funds' poor voting records.
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