New Report Examines Mutual Fund Proxy Voting & Excessive CEO Pay
As the pitchfork populists gather and the skies darken over public companies in the U.S and elsewhere, investors are increasingly fuming about the large pay packages granted CEOs as their own fortunes evaporate. Complaints about executive pay are not a new phenomenon: people have been complaining loudly about this excessive greed for some time now. What’s changed is the fact that corporate leaders bear a large portion of the responsibility for the global financial crisis but have seemingly avoided the personal risk that has been inflicted on the rest of us. Millions of Americans have lost their jobs but they get raises.
Really big raises.
While Congress constipates and the President voices the feeling of many Americans about this economic injustice, scant attention has been paid to who allowed this sort of unseemly reward system to become so commonplace. Today, a report was released by a group of researchers that points the finger at a passive participant in the compensation mess, namely the mutual fund industry.
In a report entitled, “Compensation Accomplices: Mutual Funds and the Overpaid American CEO,” the American Federation of State, County and Municipal Employees (AFSCME), The Corporate Library and the Shareowner Education Network (SEN) analyzed mutual fund voting patterns on compensation issues in 2007 and 2008. The report found that mutual funds are increasingly supportive, as a group, of management positions on proposals dealing with executive pay.
The report found that the average level of support for management proposals on compensation issues was 82 percent in 2007 and 84 percent in 2008, a steady increase from 75.8 percent in 2006. The average level of support for the categories of compensation-related shareholder proposals was 42 percent in 2007 and 40 percent in 2008, a significant decrease from the 46.5 percent in 2006. Mutual funds did show they were more willing to withhold votes from directors over compensation issues, increasing the average level of withheld support for certain directors from 42 percent in 2007 to 52 percent in 2008.
“It was surprising to see mutual funds becoming more supportive of management positions, given the uproar over outsized executive pay and distorted incentives,” noted Beth Young, Senior Research Associate at The Corporate Library, “though one bright spot was the willingness of mutual funds to withhold votes from directors associated with irresponsible compensation practices.”
Undoubtedly, this provides little comfort to the millions of us staring at our mutual fund statements wondering how our investments could do so badly so quickly. Equally troubling is the fact that the professionals we hired to add value to our hard earned investments, retirement accounts and children’s college funds can’t seem to connect the dots between executive pay and corporate performance. If this report is any indicator, not only didn’t mutual fund managers get it years ago, when hit between the eyes by the current economic crisis, they seem truly dazed by the executive pay morass that ordinary investors see with great clarity.
“Why might this be?” one could ask.
One possible answer lies in the too cozy relationship between mutual fund companies and the corporations in which they invest our money. This conflict of interest arises when a mutual fund company manages a public company’s corporate retirement plan or also provides investment banking or custodian banking services to the companies it invests in for its mutual fund investors. The conflict plays out when the mutual fund – often one of the largest investors in many public companies – goes easy on its proxy voting for those very same companies.
So what can be done here?
The report offers several recommendations:
1. Mutual funds that are the “pay enablers” should revise their proxy voting policies to ensure that they promote responsible compensation programs.
2. Mutual funds should have clear mechanisms for establishing and communicating their view of pay to compensation committee directors.
3. Retail investors in mutual funds should evaluate how their mutual funds vote on pay issues and hold those funds accountable for votes that enable pay abuses.
4. The SEC should require funds to distribute a Plain English report on proxy voting to their investors and revise and improve the N-PX data disclosure.
The timing of this report is critical for the mutual fund industry. As the 2009 proxy season rapidly approaches, the industry has a real opportunity to serve its customers – that would be you and me. However, as the report recommends, the task of holding both public companies and their major institutional investors – mutual funds – falls on us.
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