Managers' Proxy Votes Gave Some Fund Executives Big Paydays
Sunday, June 25, 2006
If you're an attentive investor, you know how your mutual funds did last quarter. If you're very, very attentive, you know how the funds' managers voted in proxy contests.
Those are your shares the management is voting. Investment companies registered in the United States manage about $9.49 trillion, or 25 percent of all U.S. stocks, according to the Investment Company Institute, the fund industry's trade group. Individual investors held 90 percent of all mutual funds.
That doesn't mean mutual funds consult their investors before voting on proxy proposals. Would you have voted against a 2005 proposal at Verizon Communications Inc. requiring a majority vote for the election of directors? If you owned shares of American Century Investments Equity Growth fund, that's how your shares were voted.
In 2004, the Securities and Exchange Commission began requiring funds to disclose their proxy votes. Mutual funds must file their votes with the SEC.
Some mutual fund companies, such as American Century, go a step further by putting their voting records on their Web sites. American Century's proxy voting record can be accessed from the bottom of its home page ( http:/
Shareholder activists have just begun to dig through the filings; one early study indicates that mutual fund companies' voting records are mixed.
The American Federation of State, County and Municipal Employees, the AFL-CIO and the Corporate Library examined mutual fund proxy votes from 18 of the 25 largest fund families. Their study, which focused on executive compensation issues, looked at 2,393 management compensation proposals and 362 shareholder compensation proposals at 1,603 companies.
It found that "with a few exceptions, the largest mutual fund families are complicit in runaway executive compensation for failing to vote in the best interests of the shareholders."
The mutual funds in the study voted for management's recommendations on compensation issues 73.9 percent of the time. Mutual funds voted for shareholder-sponsored compensation proposals, including chief executive compensation, compensation disclosure, option expensing and pay disparity, 27.6 percent of the time. The funds supported shareholder proposals tying stock options to executives' performance 37.6 percent of the time.
The funds' voting records sometimes diverged widely. Consider "golden parachutes," provisions in company bylaws that give executives big payouts if they are pushed out after a merger. If Capital One Financial Corp.'s $14.6 billion purchase of North Fork Bancorp is completed, North Fork's chief executive could get nearly $200 million.
Most governance experts agree that such provisions serve little purpose other than to enrich executives, and some of the largest fund families would seem to agree. Dreyfus Corp. and TIAA-CREF voted against golden parachutes 100 percent of the time, according to the study. Vanguard Group Inc., AllianceBernstein LP, Janus Capital Group Inc., T. Rowe Price Group Inc. and Federated Investors Inc. voted against them at least 90 percent of the time.
But fund managers from AIM Management Group Inc., Oppenheimer Funds Inc., Morgan Stanley, Merrill Lynch & Co., Fidelity Investments and Putnam LLC voted against the parachutes less than 20 percent of the time.
Mutual fund companies file a report with the SEC called a Statement of Additional Information, and some helpful companies also put it on their Web sites. The statements should include the company's proxy voting policies. Some of those policies are wishy-washy, with most proxy matters considered case by case. Others are more stringent.
Check out the Statement of Additional Information from Geode Capital Management LLC, a sub-adviser on a number of Fidelity funds, including the Spartan U.S. Equity Index Fund.
Geode says its proxy voting policies are meant to further investors' interests through "1) accountability of a company's management and directors to its shareholders, 2) alignment of the interests of management with those of shareholders (including through compensation, benefit and equity ownership programs), and 3) increased disclosure of a company's business and operations."
Geode says it will vote against any anti-takeover proposals. In most circumstances, it will vote against any directors or anyone on the management slate in a director election if the company's board or compensation committee repriced outstanding options.
Finding and reading these documents can be a lot of work. Geode's statement, however, is easily accessible -- it's on Fidelity's Web site ( http:/