Mutual Fund Voting

RankFund FamilyScore
1 (tie)Templeton7
1 (tie)Oppenheimer7
3 (tie)T. Rowe Price7.67
3 (tie)AIM7.67
5 (tie)Schwab8
5 (tie)JP Morgan8
7Janus9
8American Century10.67
9Legg Mason11
10Federated11.33
11Franklin11.67
12Morgan Stanley13
13Van Kampen13.33
14 (tie)TIAA-CREF13.67
14 (tie)BlackRock13.67
16 (tie)Putnam15
16 (tie)Scudder15
16 (tie)American Funds15
19Vanguard15.33
20 (tie)Fidelity16
20 (tie)Lord Abbett16
22Columbia17.33
23Ameriprise18.33
24Barclays20
25MFS21.67
26AllianceBernstein23.33

FT says mutual funds are expected to spend more time evaluating proposals, especially compensation-related resolutions. (Pay proposals to dominate proxy season, 4/5/09) They also note that “mutual funds have contributed to corporate America’s excessive pay by voting in favour of companies’ compensation plans, research by corporate governance experts will reveal on Monday. (Mutual fund votes helped to boost pay, 4/5/09) Better to start giving a damn in 2009 than never.

The Corporate Library, Shareowners Education Network and AFSCME analyzed 2008 votes in Compensation Accomplices: Mutual Funds and the Overpaid American CEO and found “AllianceBernstein, Barclays Global Investors, Ameriprise and Bank of America’s Columbia Management were the most consistent backers of management proposals to increase executive pay.” In 2008, the 26 mutual fund groups studied voted in favor of management compensation proposals 84%, 82% in 2007 and 76% of the time in 2006. “T Rowe Price, Templeton (part of Franklin Resources) and Charles Schwab were at the top of the rankings of those voting to constrain pay, the study found.”See table to right.

My analysis: It looks like funds got a little bit of fiduciary responsibility religion when the SEC required mutual funds to start disclosing their votes in 2004 but grew complacent… probably since few people use voting behavior as a factor when considering where to invest. Now, since almost all funds are losing a ton of money for their customers, they are probably worried blame may spread to them… as it should. Voting rights are assets and must be treated as such. Always voting with management and simply saying that is “in the best interests of its shareholders” won’t cut it anymore.

What should an investor do? The report came out with four recommendations (my additions):

  1. Mutual fund families that have been consistently
    categorized as “Pay Enablers” should revise their
    proxy voting policies to ensure that they promote
    responsible compensation programs that encourage
    the creation of long-term shareholder values and do
    not promote excessive risk-taking. (Contact funds in your portfolio and let them know of your concerns.)
  2. Mutual fund companies should have a uniform
    mechanism in their corporate governance and proxy
    voting policies for establishing and communicating
    their view of pay to boards, especially compensation. (If you can’t identify this in your funds policy, contact them and ask them what it is.)
  3. Retail investors in mutual funds, whom the
    Shareowner Education Network calls “citizen
    investors,” have a responsibility to critically evaluate
    how their mutual funds vote on pay issues and hold
    those funds accountable for votes that enable pay
    abuses. (Of course, you’ll want to view performance as well. However, if they are relatively the same and your “enabler” funds refuses to budge, dump them.)
  4. The Securities and Exchange Commission (SEC)
    should require funds to distribute a Plain English report
    on proxy voting to their investors and should revise
    and improve the N-PX data disclosure. (The SEC should also urge funds to announce their votes in advance of annual meetings. If votes are an asset and they put a lot of effort into voting, shouldn’t they want retail shareowners to copy their voting behavior?)

Another good source of information (although the funds reviewed are limited) is ProxyDemocracy.org. Here’s their highest rated ten funds on executive compensation issues and their activism scores.

  1. Green Century Equity Fund 79.7
  2. AFSCME Employees Pension Plan 74.0
  3. Florida SBA 70.8
  4. Sentinel Sustainable Core Opportunities Fund (formerly Citizens Core Growth) 65.5
  5. Trillium Asset Management 61.4
  6. Domini Social Equity Fund 60.6
  7. CBIS 56.4
  8. Calvert Social Index Fund 51.4
  9. Calvert Social Investment Fund 48.6
  10. Parnassus Fund 48.5

The ten least activist funds and their scores are as follows:

  1. Dodge & Cox Stock Fund 0.0
  2. Dodge & Cox Balanced Fund 0.0
  3. Barclays Global Investors S&P 500 4.6
  4. AllianceBernstein Large Cap Growth Fund 5.3
  5. AllianceBernstein Value Fund 5.5
  6. Vanguard Wellington 7.6
  7. Vanguard Windsor II 8.2
  8. Growth Fund of America 9.4
  9. Northern Institutional Balanced Fund 9.4
  10. Northern Institutional Mid Cap Growth Fund 9.5

Look up yours here. ProxyDemocracy also rates funds for their activism on corporate director elections, corporate governance and corporate impact (social and environmental issues). Other more comprehensive analysis can be found at Fund Votes and The Corporate Library. In a related article, Amgen’s proxy directed shareholders to a 10-question online survey written by pension-fund manager TIAA-CREF to help it evaluate pay plans of companies in which it invests. (Companies Seek Shareholder Input on Pay Practices, WSJ, 4/6/09) And, of course, there’s plenty of blame to go around. (Executives Took, but the Directors Gave and Who Moved My Bonus? Executive Pay Makes a U-Turn, NYTimes, 4/4/09)

Two good observations from Dave Lynn: “The study does note a contrary trend that I think everyone has probably noticed in the past couple of years – mutual funds seem to be increasingly willing to withhold support or vote against directors serving on compensation committees of companies where pay practices are perceived as subpar. One limiting aspect of the study is that the data only goes through June 2008, so the full impact of the recent “torches and pitchforks” attitude toward compensation is not fully reflected.” (The SEC’s Corporate Governance Agenda Comes into Focus, TheCorporateCounsel.net Blog, 4/7/09)

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