The mystery of mutual fund proxy votes

Tue Nov 1, 2011 5:02pm EDT

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The author is a Reuters contributor. The opinions expressed are her own.

By Marla Brill

Nov 1 (Reuters) - The Occupy Wall Street movement has shown us that many people want their opinions to be heard on how companies conduct business. But if you own a mutual fund, chances are your fund manager is siding with corporations.

Voting with proxies on behalf of shareholders, mutual funds weigh in on a variety of issues such as how companies pay top executives, handle environmental practices, and elect board members. With over one-quarter of the country's stock market value under their control, they wield enormous power over corporate policies.

But Jackie Cook, founder ofa website that tracks proxy voting patterns of mutual funds in the U.S. and Canada, says money managers could do a better job of representing shareholder interests. Since 2004, Cook has been tracking the arcane -- yet increasingly important -- issue of how mutual funds cast votes. "Most of the time, they side with management," says the 41-year-old economist and research analyst. "They typically don't lead the way on voting issues."

That certainly holds true for the issue of executive pay, according to the most recent study of mutual fund proxy voting patterns from the American Federation of State, County, and Municipal Employees (AFSME), which used fundvotes.com data. It found that for votes cast from July 2009 through June 2010, the 26 largest mutual funds in the U.S. supported an average of 80 percent of the executive pay proposals initiated by management.

Most those proposals involved equity-based compensation plans aimed at raising pay, says the AFSME report. But the funds supported less than half of proposals initiated by shareholders to increase investor input on how much top managers pull in.

Executive pay isn't the only issue where funds usually side with management. Only 24 percent of climate-change resolutions to limit greenhouse gas emissions found voting support among the 46 mutual fund families, notes a 2010 survey from Ceres, a coalition of environmentalists and investors. That's down 3 percentage points from 2009.

"U.S. mutual funds' voting support for climate-related shareholder resolutions is not keeping pace with the escalating risks associated with climate change," the Ceres report concludes.

Cook cites a fear of signaling a lack of confidence in their holdings to the market and a desire to avoid ruffling the feathers of companies that use their 401(k) plans as two possible explanations for why funds often side with management.

Considering such business relationships would not be consistent with a fund's fiduciary obligation to vote in the best interests of shareholders. That's a mandate the funds take seriously, notes a study from the trade organization Investment Company Institute (ICI) on mutual fund proxy voting patterns between 2007 and 2009.

"Guided by a broad obligation to vote in the best interest of investors, funds considered a range of factors, including the details of individual proposals, the performance of the companies to which they applied, the quality and responsiveness of management of those companies, and the recommendations of proxy advisory firms," it states.

The ICI study found that funds approved some 90 percent of proposals on a variety of issues from management and about half of those put forth by shareholders, and that votes often fell along the lines of recommendations made by independent proxy vote advisory firms.

In addition to proxy voting, fund managers who wish to influence corporate policy often do it in other ways, such as engaging in discussions with management or board members or simply selling a company stock. Individual stockholders can also vote with their feet, or cast proxy votes themselves or through services such as

Fund shareholders have fewer options. They might examine their fund's proxy voting record, which is required to be posted on fund web sites, and consider it in choosing a fund. If they're investing through employer-sponsored plans, they could urge employers to consider proxy vote records as one of the criteria for selecting mutual fund investment options.

Realistically, that's unlikely to happen. Most people invest in mutual funds to pay for college or a comfortable retirement, not to influence corporate policy. What they want, first and foremost, is strong investment performance from their funds.

The problem is that many of them aren't getting it according to Rick Ferri, a Troy, Michigan financial adviser and author of "The Power of Passive Investing." In his study of long-term performance of actively managed funds over the last 20 years he found that only 20 percent of funds outperform their benchmarks, and even then most only do so by a small margin. Another 40 percent of funds underperform, while the rest either match their benchmarks or shut down.

For fund shareholders, having managers who vote in ways that encourage corporate practices that add value beyond the next quarter's earnings numbers might at least help ease the pain of that performance drag.

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