Archive for July, 2008
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.