As pressure mounts on mutual fund companies to improve their oversight of companies they invest in, several fund managers are taking notice if not taking action. The mutual fund industry, which controls about 27% of the market capitalization of all US companies has been largely complacent with regard to holding companies accountable. But will this change?
While there are some exceptions, many mutual fund companies have historically failed to disclose their proxy voting records to mutual fund investors. In 2003, the SEC altered the rules with regard to proxy voting disclosure. Now mutual funds are required to disclose both their policies and their voting records. This transparency is the first step but not the last one.
Many fund voting policies grant managers wide discretion in how they vote on specific corporate governance issues. This “case-by-case” approach allows fund voters wide discretion in voting and undoubtedly allows them to assess every situation on its merits rather than holding to what some might consider a doctrinaire approach to proxy voting.
However, the flip side to this argument is that it leaves mutual fund owners largely in the dark on why their mutual funds vote one way or another at particular companies. Why does a mutual fund vote for separating the chairman and CEO positions at one company but not at another? So far, mutual funds have not been called to task on this question.
The good news for mutual fund investors seeking to maximize their investment returns is that mutual fund managers are feeling increased pressure since the 2003 voting disclosure rule went into effect. Stephen Davis of Yale’s Millstein Center for Corporate Governance says that “a sea change” could prompt funds to reach new standards of accountability. Financial Times (March 1, 2010),
Let’s hope so.
Mr. Davis goes on to note that at the very least, fund managers are looking at proxy voting not so much as a compliance exercise and more as a “decision linked to value.”
ProxyDemocracy, a mutual fund analyst, tracks a number of the larger fund companies proxy voting records. Overall, the industry’s record for holding companies accountable is a mixed bag. Still, as voting disclosure by mutual funds continues, it is likely that their records, like the companies they invest in, will be subject to greater scrutiny by investors.