Big mutual funds split with management at Citigroup, JPMorgan

BOSTON Tue Aug 28, 2012 2:08pm EDT

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BOSTON (Reuters) - Several leading mutual funds disclosed voting against management in high profile proxy battles at companies like Citigroup Inc, JPMorgan Chase & Co and Chesapeake Energy Corp, showing for the first time that they were part of this year's wave of shareholder discontent.

Shareholders large and small turned up the pressure on corporations during the spring proxy season, fed up with high pay and a lack of accountability. Citi shareholders shocked management by rejecting Chief Executive Vikram Pandit's pay in April while a significant minority of JPMorgan owners voted in May to split the CEO and chairman titles held by Jamie Dimon.

Large mutual funds have generally acted as allies for management in the past, but the critical votes on some closely-watched 2012 votes helped explain the contentious proxy season and may be a sign of more change to come.

"Mutual funds are like the ocean," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. "They heat up slowly, but eventually, if the heat goes on long enough, they get pretty active."

At Citigroup, Fidelity's famed Contrafund switched sides and voted "against" the $15 million pay package of CEO Pandit, for instance, after backing his much lower compensation the year before, according to recent regulatory filings.

At JPMorgan, well-known American Funds Growth Fund of America and Investment Company of America sided with a proposal to split Dimon's roles of Chairman and Chief Executive, a switch from votes the funds cast on similar measures in past years, according to filings. The funds also voted "against" the pay of Pandit and other Citigroup executives, as they had in the past.

FILINGS STILL ARRIVING

Mutual funds have only begun disclosing their votes on a form called "N-PX" filed with the Securities and Exchange Commission. The forms were required by the SEC a decade ago as a way to show retail investors how money managers were voting assets in their name. Funds have until August 31 to file their votes and many big firms' votes are still to come.

Contrafund, Growth Fund of America and Investment Company of America submitted their filings ahead of the deadline, each detailing votes on hundreds of proxy contests. Spokespeople for Fidelity and American Funds declined to discuss the votes or to make executives available to be interviewed.

Overall at Fidelity and American, two of the largest U.S. fund families, funds still generally voted in favor of management on pay proposals, according to a tally by Jackie Cook, principal of research firm Fund Votes.

Fidelity funds supported management on pay at Russell 3000 companies just under 90 percent of the time this year, approximately the same as last year, Cook said. American Funds backed management on pay about 75 percent of the time this year versus 85 percent last year.

When funds dissent, "they have been selective," said Geoff Bobroff, a Rhode Island consultant to the funds industry. "Maybe it's viewed as a nudge," he said.

Last year was the first in which most public companies were required by financial reforms to hold advisory "Say on Pay" votes on their compensation. In all, 37 companies in the Russell 3000 Index failed to get at least 50 percent support for their pay from shareholders through mid-July, data from Los Angeles pay consulting firm Semler Brossy showed.

This year, through July 18, 51 companies failed to get a majority of support, Semler Brossy said.

DISSENT AT CITIGROUP

Contrafund voted its shares "against" the advisory vote to ratify the compensation of Citigroup's named executive officers on April 17, according to its filing. A year earlier, Contrafund had backed management and voted "for" Citigroup's advisory vote. Fidelity's Magellan fund also voted against the pay package, although it did not list a vote on the issue a year earlier, likely because it did not own the stock.

Citigroup had ramped up the pay of Chief Executive Vikram Pandit to about $15 million in 2011 from a symbolic $1 in 2010, even though the bank continued to face challenges after the financial crisis such as failing to win regulatory approval for a dividend increase or share buyback.

In all, just 45 percent of Citigroup shareholders backed the pay.

Fidelity also appeared to change its opinion in the case of Chesapeake Energy, the Oklahoma oil company under criticism for the pay and controversial governance practices of its Chief Executive and co-founder Aubrey McClendon.

Last year, Contrafund owned the stock and voted mainly with management at the company's annual meeting.

This year, of the two funds only Magellan listed owning Chesapeake. It withheld votes for two directors, voted "against" the company's pay, and did not back management on two other matters. Magellan's votes were part of a broader shareholder rebuke of Chesapeake: the two directors offered to quit afterward and only 20 percent supported the company's pay.

At JPMorgan Chase, a shareholder proposal to strip Dimon of the additional title of chairman won 40 percent support, up from 34 percent in 2010.

American Funds including Growth Fund of America and Investment Company of America voted in favor of separating the roles, filings from both dated August 24 show, a change from their support in 2010 for Dimon to keep both jobs. Last year, both funds voted with management to oppose a related resolution calling for the bank to appoint an independent lead director.

(Reporting By Ross Kerber; editing by Aaron Pressman, Bernard Orr)

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