Stung by media and union criticism that their proxy votes are in the pockets of corporate management, the mutual fund industry is fighting back.
Stung by media and union criticism that their proxy votes are in the pockets of corporate management, the mutual fund industry is fighting back.
"Funds are not approaching these issues monolithically," Investment Company Institute president and chief executive Paul Schott Stevens said in an exclusive interview. "Funds attempt to wrestle with them on their merits. They may come to different conclusions ... from perhaps other shareholders in the corporation. That's what a democratic process is about."
On July 10, the Washington-based ICI released results of what it called the largest study ever of mutual fund proxy votes. It examined 3.5 million proxy votes cast by 160 of the largest fund groups during the 12-month period ended June 30, 2007. The findings of the study, "Proxy Voting by Registered Investment Companies: Promoting the Interests of Fund Shareholders," were released at a conference sponsored by the American Enterprise Institute for Public Policy Research in Washington.
The study found that funds did not always line up behind corporate management on issues such as executive compensation and takeovers.
But a union that has attacked the fund industry's voting record on executive compensation dismissed ICI's study.
"The report is an excuse for the poor voting record of mutual funds that we've seen over the past four years," said Richard Ferlauto, director of corporate governance and pension investment at the 1.5-million-member American Federation of State, County and Municipal Employees in Washington.
"Many funds aren't voting in an aggressive way to protect share value," he charged. "That's reflected in their failure to support many common-sense shareholder resolutions on the proxy ballots."
At the AEI conference, Mr. Stevens didn't pull any punches in his assessment of groups such as AFSCME and The Corporate Library of Portland, Maine, which jointly issued reports on mutual fund votes on executive compensation, as well as The New York Times, which has published stories critical of mutual fund proxy votes.
These critics, he said, "promote the notions that [fund] companies care little about their shareholders."
The ICI study found that the 160 fund families voted in favor of management proposals more than 90% of the time, primarily because the issues were largely non-controversial. By contrast, when shareholders submitted proposals, funds supported the moves just 38% of the time.
But the numbers do not signify that the fund industry blindly follows company management proposals, Mr. Stevens said. The fund industry's votes on non-controversial matters were similar to votes recommended by proxy voting services such as the ISS Governance Services Unit of RiskMetrics Group Inc. in New York and Glass-Lewis & Co. LLC of San Francisco, he noted.
WHAT FUNDS SUPPORT
While the picture is more varied on shareholder proposals, funds are more likely than other shareholders to support measures that dismantle corporate takeover defenses, and they are less likely to support management on compensation and stock option proposals, he said.
Funds are shying away from voting for social and environmental proposals made by activist groups, the study showed.
"You might think it odd that hundreds of different fund complexes serving 90 million investors should be taken to task for often having views of proxy voting that differ from those of a concentrated group of shareholder advocates," Mr. Stevens said sarcastically at the AEI conference.
"Equally odd is that the special interests of the advocates go largely unquestioned, while the pages of The New York Times level charges without evidence that fund advisers vote proxies on the basis not of shareholder interests but of their own business interests," he said.
The ICI report cites a New York Times article from 2004 that criticized large fund companies for voting against expensing stock options.
"I find it interesting that they would cite an article that is critical of fund managers who voted against the idea of expensing stock options, since most intelligent investors understand that stock options are a cost of doing business," said New York Times reporter Gretchen Morgenson, the author of the article.
ICI is primarily "trying to get more accurate information out to the public about how, in fact, we are using the corporate franchise," Mr. Stevens said.
While ICI strongly opposed a Securities and Exchange Commission rule in 2004 that required funds to disclose their proxy votes, the industry has since come to grips with the SEC mandate, and now wants other institutional investors and pension funds to disclose their proxy votes, too, he said.
"There's an irony in the fact that ... some of those who are critical of our voting practices don't disclose their own votes," Mr. Stevens said.
REPORT PRAISED
Industry analysts, including some who are often critical of fund companies, praised the ICI report.
"The data reflects a healthy critical evaluation by mutual fund managers of the proxies that they vote," said Mercer Bullard, president and founder of Fund Democracy Inc. in Oxford, Miss., who often takes issue with industry positions on regulation.
Fund companies should be ex-pected to vote as company managements recommend most of the time, Mr. Bullard said. "If fund management didn't generally support them, you'd have to wonder why they were still invested in the company."
"What the ICI has done is a valuable step," said Don Phillips, managing director of fund research company Morningstar Inc. of Chicago. "It shows fund companies are not necessarily blindly following company management."
But some proxy vote analysts say that the size of the ICI study distorts the findings.
"There are other factors investors have to look at when considering to invest in individual funds, if they want to consider proxy voting at all," said Patrick McGurn, special counsel for ISS, which is headquartered in Rockville, Md.
For example, he said that the largest fund complexes are less likely to support socially oriented shareholder proposals, while funds of all types are more likely to vote against dilutive or costly compensation programs than are state and local pension funds.
"To the extent you include smaller funds with more aggressive voting and larger funds that are less aggressive, it's going to distort the results a little bit," Mr. McGurn said.
E-mail Sara Hansard at shansard@investmentnews.com.
