Funds still too eager to appease management

Mutual fund companies seem to be willing to challenge corporate management on some governance issues, but there still is a way to go before they will be seen as pulling their weight. And some companies still vote with management far too often, appearing to be more concerned with appeasing it than exercising independent judgment about what’s best for shareholders in the long term. A study co-sponsored by the Washington-based American Federation of State, County and Municipal Employees, The Corporate Library LLC in Portland, Maine, and the newly formed Shareowner Education Group showed there has been progress in proxy voting by mutual fund families, even in the contentious executive-compensation area. But although a number of funds are willing to vote often against management compensation plans, far too many still hew the corporate line. The study showed that on average, mutual fund companies supported management’s executive-compensation proposals 75.8% of the time, up slightly from 75.6% last year. This support increased even though the median compensation among chief executives of companies in the Standard & Poor’s 500 stock index increased by 23.6% in 2006, compared with the 2005 level. It increased even though the compensation of the five highest-paid executives at public companies climbed to 9.8% of the companies’ aggregate earnings in the 2001-03 period, from 5% of their aggregate earnings in the 1993-95 period. It increased even though 75% of major institutional investors in another survey said that CEO compensation at large companies was excessive. It increased even though, as Delaware Chancery Court Judge William Chandler noted, executive compensation seems “in some cases to have come spectacularly unhinged from the market for corporate talent.” In some cases, the mutual fund companies appear to be trying to have it both ways, appeasing shareholders by voting for shareholder-compensation-related proposals while also voting in support of managements’ compensation proposals. They can vote yes on what they perceive to be harmless shareholder proposals — or proposals unlikely to win, thus not threatening management — and then vote in support of management. New York-based AllianceBernstein Investments Inc., for example, voted for shareholder proposals 31.1% of the time, while supporting management’s proposals 94.8% of the time. San Francisco’s Barclays Global Investors was close behind, supporting shareholder proposals 33.8% of the time, while supporting management 94.7% of the time. On the other hand, Fidelity Investments of Boston didn’t support a single shareholder proposal but voted against management’s compensation proposals 52.9% of the time. New York‘s TIAA-CREF, T. Rowe Price Group Inc. of Baltimore and Columbia Management Group Inc. of Boston, on the other hand, all voted for shareholder proposals dealing with executive compensation more than 70% of the time. However, T. Rowe Price and Columbia both supported management proposals more than 80% of the time. The fund companies supporting management proposals least often were Pittsburgh’s Federated Investors Inc., 40.4% of the time, and Boston-based Putnam Investments, 47.1% of the time. At times, it seems mutual fund companies believe that their loyalty is to corporate management — not to their own shareholders. It is past time for them to put their shareholders first and support such reasonable shareholder demands as a non-binding or advisory vote on executive compensation plans and compensation plans that truly are tied to long-term performance. Many mutual fund holdings now are so large that simply selling the stock of companies paying their top managements too much is not a viable option. Therefore, mutual fund companies must use their proxy votes to help bring about change, for the benefit of their own shareholders and all shareholders of the companies in which they invest.