Advisers shrug off proxy season in favor of cost, performance data

Proxy season is in full swing, but financial advisers aren't paying much attention to how some of the largest shareholders are voting. Mutual and exchange-traded funds, which have a combined $14.7 trillion in assets, held 28% of all outstanding stock as of the end of last year, according to the Investment Company Institute, making them one of the largest collective shareholders of public companies. How those funds are voting this season — on everything from executive compensation to electing directors — isn't likely to cause much of a difference for the average adviser, despite some outside observers saying that they could do more to get their voices heard. “Proxy voting probably isn't very high on your list of items to look at when choosing a fund,” said Gregg Wolper, a mutual fund analyst at Morningstar Inc. Instead, such factors as costs, manager performance and delivering the expected exposure are likely to weigh most heavily, he said. Melissa Joy, director of investments at the Center for Financial Planning Inc., is agnostic about how the funds she invests in vote, as long as they are consistent and there aren't any surprises. “We want to know during our research process if they're active or passive investors,” she said. “We don't want a firm that's pretty passive to all of a sudden dip its toe into being an activist. There isn't room for many of those types in a portfolio,” Ms. Joy said. As an investor in the Longleaf Investor Funds, she has had a front-row seat to activist investing this year. For instance, Southeastern Asset Management Inc., the parent company of the Longleaf funds, has taken the lead role against computer manufacturer Dell Inc.'s (DELL) plan to go private. This type of activist shareholder move can take up a lot of time and effort, which is why it is a rarity to see a mutual fund take such action, Mr. Wolper said. “Funds own a lot of companies,” he said. “They have to weigh if it's worth it to get to the level where you're engaging in a battle with management that goes on for months and months.” The more common type of mutual fund interaction with public companies is through regular proxy voting, where some contend that they aren't being strict enough with regard to executive pay. “On average, mutual funds have been more supportive of executive compensation than other institutional investors,” said Brandon Rees, director of the AFL-CIO's office of investment. “Mutual funds manage money on the behalf of individual investors who are unlikely to communicate their views on a subject,” he said. “It's simply not received as much attention by individual investors in mutual funds.” The median mutual fund company voted to constrain pay on say-on-pay votes 12% of the time last year, according to the AFL-CIO. The median fund company voted along with shareholder proposals to restrict pay 40.3% of the time. But voting records don't tell the whole story, said Glenn Booraem, principal and fund controller at The Vanguard Group Inc., the largest mutual fund company. “Many companies are being more proactive in their outreach to us,” he said. “Say on pay has been a significant driver of that.” Annual say-on-pay votes, which allow shareholders to vote on management's compensation, were made mandatory by the Dodd-Frank financial reform law. Working with companies behind the scenes allows Vanguard to better explain its position to companies than a simple yes-or-no vote, Mr. Booraem said. “We could be much more nuanced and precise in the feedback we're providing,” he said. “Companies are able to triage what they need to fix … if they understand what our concerns are.” Vanguard voted with management on 93% of say-on-pay votes last year, down from 98% in 2011. There wasn't an explicit objective to lower the approval rate, but after the first year of say-on-pay votes in 2011, Vanguard made steps to clarify its stances on such votes by publishing a set of compensation principals on its website, Mr. Booraem said. One of Vanguard's main tenets is “pay for relative performance,” which means it looks at the performance of the company versus its peers' rather than on an absolute basis. It also makes sure that pay is reasonable with regard to its peer group. Oliver Pursche, president of Gary Goldberg Financial Services, looks at proxy-voting records to check for red flags, such as a company always voting for or against management. “There could be good reason for voting with management,” he said. “We want to make sure we understand what they're doing and how they're doing it.”