ICI Study of Mutual Fund Votes

The mutual fund industry group, the Investment Company Institute, released a report a few weeks ago entitled “Proxy Voting by Registered Investment Companies: Promoting the Interests of Fund Shareholders.” I got a chance to read the report this morning and wanted to convey some of my impressions.

First, the report does little to advance the debate about conflicts of interest in the mutual fund industry. Shareholder activists have alleged for a long time that some mutual fund companies have business ties that prevent them from voting against management. (More specifically, the allegation is that mutual fund companies that manage retirement accounts for corporate clients are wary of opposing management in their proxy voting, for fear of damaging their lucrative retirement account administration business.) I expected the ICI study to focus on refuting those claims, but it doesn’t seriously address the issue. The study does include a box addressing the issue, but it just describes two academic studies and discounts evidence of the 401(k) bias in an unconvincing way. (I give them credit for mentioning Davis and Kim’s finding that mutual fund companies involved in the retirement account business support shareholder proposals less often, but they follow this point with a very unconvincing counter-argument that these companies can’t be conflicted because they support some shareholder proposals a lot. Weak.)

Second, and related to the previous point, the report glosses over major differences among mutual funds’ voting records. As you might expect from an industry group, the report speaks on behalf of all mutual funds and minimizes comparisons among funds that might upset ICI members. It repeatedly makes a distinction between SRI funds and the rest of the industry, but otherwise it talks about “how funds voted” as if it were by consensus. What I’ve found in analyzing mutual fund data for ProxyDemocracy, and what Jackie Cook has found at fundvotes.com, is that there are significant differences among mainstream funds. For example, the voting profile of Schwab’s S&P 500 fund on ProxyDemocracy is very different from Vanguard’s. That particular difference probably doesn’t have much to do with conflicts of interest (both companies manage retirement accounts), but it’s relevant to investors choosing a fund: the funds own the same portfolios and have very low management fees, so the voting difference is about the only difference you’ll find between the two. I don’t expect ICI to highlight these differences, but they are worth keeping in mind as you read ICI’s account of “how funds voted.”

Third, and I think most important, the report shows clearly that mutual funds are more opposed to shareholder proposals than are the proxy advisers they hire. The bottom of Figure 11 (page 19) indicates that ISS and Glass Lewis were much more likely to endorse shareholder proposals on takeover defenses and board elections than were funds. (ISS was also much more favorable toward social/environmental proposals and compensation proposals than were mutual funds, although Glass Lewis was less favorable than funds were on these proposals.) The text does little to account for this discrepancy: it explains some reasons why a shareholder would sometimes vote against a majority vote standard for directors, for example, but does not explain why funds voted against such a standard even when ISS and Glass Lewis recommended a vote for it. In shareholder activism circles you hear a fair amount of grumbling about proxy advisers being conflicted or not progressive enough, but in this case it seems that the tactic should be to question why mutual funds failed to follow the proxy advisors’ recommendations.

A few more points of note:

• The analysis of proposal sponsors (pp 6-7) shows that individuals are the most common sponsor of shareholder proposals (34% of proposals in 2007), and that about one in six shareholder proposals (17%) in the 2007 season were filed by one of just five individuals. I know about one or two of those individuals but I want to follow up and find out more about who is submitting so many proposals.
• The report includes what looks like a very good explanation of what’s on the ballot (“What are some common proxy proposals?” pp. 10-11). I’d like to have more material like this on the PD site.
• They include a useful survey of fund family voting guidelines on selected proposal types (Figure 8, pg. 14). However, the table is not as useful as it appears at first. The table shows that, for example, 24 of the 35 major fund families state that they would oppose a proposal to adopt supermajority vote provisions. (The remainder vote case-by-case or do not state a policy.) But the more relevant issue is whether they would support a shareholder proposal to remove supermajority vote provisions; this is the issue that comes up much more often.

I’ve been critical of the report, clearly, but overall I think it’s a good thing that ICI devoted resources to the report and attention to these issues. There’s lots of useful stuff in here that I will return to, and I recommend taking a look if you’re interested in a profile of the proxy voting scene.

ProxyDemocracy in BusinessWeek

Heather Green of BusinessWeek wrote a nice little piece about ProxyDemocracy last week. Nell Minow of the Corporate Library is quoted as saying, “I just about stood up and cheered when I saw the site.” Given her experience in this area, I myself was moved to stand up and cheer when I read that.

Introducing FocusLists

As part of the relaunch we’re doing next week (more about that soon), we’re unveiling new ways of assessing the proxy voting records of mutual funds. In the past few weeks I’ve been developing an activism rating that is designed to be a simple summary of a fund’s voting record; I’ll blog more about that tomorrow. The other approach that Roop and I have been developing is more collaborative. We call it a FocusList, and I wanted to explain a little about the concept even before we launch the feature because I’d like to get some input before we launch — not just suggestions/feedback, but also some FocusLists from users.

Let me back up and explain the concept a little. The basic problem that we’re trying to solve here is, “How do you describe a ton of votes?” This problem is of course not limited to proxy voting. Political advocacy groups routinely face the same problem in communicating with their audiences about the legislative records of political candidates. (How often have we heard the term “most liberal Senator” in the past few months?) The advocacy groups’ approach has generally been to choose, from the huge list of roll call votes in the legislature, a set of votes that they think are important to their agendas; they then score legislators based on whether they took the liberal or conservative position. (For prominent examples, see the liberal Americans for Democratic Action’s legislative scores and the American Conservative Union’s Congressional Ratings.)

As analysts have started to examine mutual fund proxy voting records, the same kind of analysis has emerged for mutual funds. The best-known report is the AFL-CIO’s key votes survey, which since 1997 has examined how institutional investors vote on resolutions relating to labor issues. In the past six months the Center for Political Accountability released a study examining mutual funds’ voting on political disclosure resolutions; the Investor Environmental Health Network released a report scoring mutual funds on their support for 15 shareholder resolutions on toxic chemicals; and Ceres released a report looking at climate change resolutions.

Our FocusLists are an attempt to make it easier for these and other groups (as well as individual investors) to do their own analysis of mutual fund voting. Our database has over 85,000 proposals, and since last December we’ve been quietly providing an interface to help you search and browse those proposals and see how mutual funds voted on them. Our FocusLists will take this a step further — you will be able to add proposals to your own list (like shopping at Amazon, except free! and no shipping!) and then see how different funds score on your list. And then, perhaps best of all, you can share the list and scores with other ProxyDemocracy users. Our hope is that this will provide a new way for people who know proxy voting pretty well to share their expertise and viewpoints with other users; the flip side of course is that it will help investors new to this area to understand their mutual funds’ voting records as seen by a respected and opinionated insider.

The functionality is completed and has been tested by a few users; Roop and I are working on site layout and graphic design this week in anticipation of our relaunch next week. So why am I blogging about it now rather than waiting until you can try it out? Because I’d like to ask you to start thinking about FocusLists that you would like to create. I’d love to have some great FocusLists published by the time we launch, and in order to get a head start I’m offering to help put it together. If you provide me with a list of proposals you want to include in your FocusList (ie company, meeting date, proposals text/number, like this or this) I will assemble the list for you and transfer it to your account in time for our launch. Contact me at andy [at sign] proxydemocracy [dot] org, and we can get it going!

Even if you don’t have a focus list in mind, I’d love to get your feedback in the comments. This is an experiment and I’m curious what you think.

Alpha version of our mutual fund vote database

We’re happy to be unveiling an alpha version of our mutual fund vote database, which you can use to see how several dozen funds voted their shares in corporate meetings from 2003 to 2006. We’re already busy working on the next set of features — data from more funds, information about upcoming votes, new search options, and more user content — but we hope this rough draft conveys what we’re trying to do, and perhaps inspires some thoughts about what new features we should be working on.

What we really need at this point is feedback. What do you want to do with this data, and how can we help? Our goal is to provide the information necessary for a viable shareholder democracy, and we’d love to hear your ideas about how to make that happen.