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Finally, your funds secret votes revealed
Now that the public can scrutinize proxy votes, funds may find themselves in the middle of big fights between shareholders and management teams. And you can try to influence their votes.
By Timothy Middleton
Welcome to the second proxy season. In the spring we saw the actual proxy battles waged. Today, for the first time, we learn how our mutual funds voted in each and every one of them.
A new Securities and Exchange Commission rule requires that funds disclose how they vote their proxies, which in turn implicitly compels them to vote, a revolution itself. It also puts them on the front lines of increasingly public battles over corporate governance.
Funds in their turn are wading into such battles. But theyre showing restraint, limiting themselves mainly to purely economic issues like whether a chief executive is doing the best job or whether reported earnings fairly reflect a companys fortunes or are skewed by unreported expenses such as stock options. In the main, they are shunning the contentious world of shareholder resolutions, which social critics use to lever change.
These votes are now on public display in the SECs Edgar database. And despite the legal impediments to challenging these votes, shareholders can have a voice. This years crop of proxy fights, and how funds voted on them, can be a guide to how future issues of corporate governance will be decided.
A more active role
Three front-page proxy battles illuminate the sea change in how governance is perceived, and how funds are contributing to change. As one of the largest blocs of investors, funds played a major role as Walt Disney (DIS, news, msgs) CEO Michael Eisner was stripped of his chairmanship, Warren Buffett suffered public embarrassment over his role on Coca-Cola's (KO, news, msgs) board and Intel (INTC, news, msgs) was chastised for refusing to expense stock options.
Mutual funds are taking their fiduciary responsibility more seriously, says Michael Garland of the AFL-CIOs Office of Investments. In the vote at Disney, 43% (of shareholders) withheld their vote from Michael Eisner. A few years ago, youd be hard-pressed to see any mutual fund withholding their vote for a CEO on a board.
Tom Westle, a securities attorney at Blank Rome in New York, has been an adviser to fund boards for more than two decades, and he says, In general, mutual funds, as well as other entities (such as pension funds), were not voting their shares in the past. Now, he says, they are.
The SECs new rule imposes a deadline of today for mutual funds to file a form, called N-PX, reporting how they cast their proxy votes. Proxies are corporate ballots, with each share in most instances having one vote on matters of policy, such as electing directors, hiring outside auditors, approving executive compensation and a host of other issues.
As of Thursday, some 927 filings had been entered in the Edgar database, representing a host of fund complexes, from Merrill Lynch (MER, news, msgs) to T. Rowe Price (TROW, news, msgs). The three largest complexes, Fidelity Investments, Vanguard Group and Capital Research & Management (American Funds) put off filing until the last minute.
Mixed support for shareholder proposals
A number of companies, including Fidelity and Vanguard, have already published guidelines their proxy committees follow. These guidelines generally stress purely economic issues, such as fostering good corporate management and fiscal policies, such as independent audits.
They generally shun so-called shareholder proposals, which usually oppose management on controversial issues. In the case of T. Rowe Price, those guidelines include this observation about shareholder proposals: T. Rowe Price generally votes with a companys management on social issues unless they have substantial economic implications for the companys business and operations that have not been adequately addressed by management.
Fidelity Investments, in the proxy guidelines it publishes at its Web site, says it generally abstains from such votes.
T. Rowe Price is a customer of Institutional Investors Service, a firm created more than 15 years ago specifically to research proxy issues and advise institutional shareholders how to vote on them. ISS opposed Buffett serving on Cokes audit committee, asserting that his Berkshire Hathaway (BRK.A, news, msgs) has numerous relationships with the soft-drink maker through affiliates like International Dairy Queen.
But T. Rowe Price disregarded that advice and voted with management in favor of Buffett, according to its SEC filing. Buffett ended up with 84% of shareholder votes, possibly because Berkshires vast holdings of Coke stock demonstrate Buffetts interests are aligned with those of other shareholders.
T. Rowe Price did join the dissidents at Disney, withholding votes for Eisner. But it then voted with management at Intel against a shareholder proposal that stock options be expensed. This hot-button issue pits critics who say the cost of issuing options isnt adequately recognized against companies that complain expensing on quarterly earnings statements will add to market volatility.
Expensing stock options is controversial even within the professional investment community. Merrill voted against management at Intel and in favor of the shareholder proposal.
Intel lost that vote, but like many Silicon Valley companies, it has dug in its heels against options expensing, which could have the effect of reducing quarterly earnings. The Financial Accounting Standards Board has proposed such a rule, however, and it is expected to take effect in December.
Socially responsible funds speak up
One sub-set of funds does take a more activist posture, so-called socially responsible funds. In its filing, Calvert Funds, one of the oldest and largest families of SR funds, disclosed that it withheld votes for directors at a host of companies, on the basis that their boards didnt include enough women and minorities.
The granddaddy of SR investing, Pax World Management, whose Pax World Balanced Fund (PAXWX) was forged amid the Vietnam War resistance and environmental activism of 1971, held a press conference last week to urge fund shareholders who disagree with how their funds voted to join the SR camp.
We have already seen this happen, asserted Anita Green, vice president of social research for Pax World Funds. Socially responsible funds have certainly seen an inflow of money.
According to Morningstar, Pax World Balanced Funds assets have grown 3% this year, to $1.27 billion, exactly twice its performance gain this year, as of July 31.
SR funds are anxious to appeal to disgruntled fund shareholders because those shareholders have almost nowhere else to turn. If you dont like how Fidelity votes its proxies, about the only option you have is to take your money and leave Fidelity, says Westle, the securities lawyer.
Fund boards have the final say on voting, although they routinely delegate it to portfolio managers or outside firms such as ISS. Westle says there is no justification in the law for fund shareholders to sue over how proxies are voted.
As the votes at Disney, Coke and Intel showed, however, SR wasn't an alternative because it wasnt represented in the vote by its most important fund families. Neither Calvert nor Pax World reported voting at those companies, presumably because they didnt own shares.
The best way to get heard
The surest alternative for shareholders who seek to influence their funds' votes is to appeal directly to the fund boards. This isn't as quixotic as it sounds. Westle explains that one reason many funds didnt vote over the years is that key decision-makers didnt receive proxy materials until after the voting was over. They kicked around for months in the mailrooms of brokerage houses, fund custodial firms and the boards own back office.
Now that the public spotlight is on such mail, it must be forwarded to the appropriate office immediately. And just like you, corporations address their proxy mail to the board at its official address, routinely disclosed in fund prospectuses and on Web sites.
So if you write a letter to the fund, and include ATTN: PROXY VOTING in the address, you can be confident your envelope will be opened in the office where these decisions are made. You can also be confident that if a proxy issue has aroused significant interest among fund shareholders, those views will be considered because they have become part of the funds official deliberations, and kept on file for possible review by such regulators as the SEC.
This years proxy contests, and funds participation in them, have been a clear victory for corporate transparency, providing critics of corporate governance with a lever to force reform. One technical point: Ferreting out fund companies proxy votes can be maddening for two reasons. First, many fund complexes report fund by fund, or by their corporate rather than fund-family name, or under some self-created entity like Master Large Cap Series Trust, a creature of Merrill Lynch.
Second, the Edgar database only makes available 800 filings. It doesn't list alphabetically, which means Pax World and Vanguard dont appear. To find them, search the database in this fashion: n-px AND (fund name).
At the time of publication, Timothy Middleton didnt own any securities mentioned in this article.
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