Tag Archives: Proxy Voting - Page 2

Mutual Funds and Proxy Voting: A Rough Road Ahead?

Posted by on March 2, 2010 No comments
The challenges of proxy voting

The challenges of proxy voting

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.

MSCI to Acquire Risk Metrics

Posted by on March 1, 2010 No comments

In a press release issued today, MSCI Inc. (NYSE: MXB), a leading global provider of investment decision support tools, and RiskMetrics Group, Inc. (NYSE: RISK), a leading provider of risk management and corporate governance products and services to the global financial community, jointly announced today that they have entered into a definitive merger agreement whereby MSCI will acquire RiskMetrics in a cash and stock transaction valued at $21.75 per share based on MSCI’s closing price of $29.98 per share on Friday, February 26, 2010, or approximately $1.55 billion.

Okay, so not the stuff of exciting news for individual investors but for those of us involved in proxy voting and governance matters, this is somewhat interesting.

A little background is probably in order. Risk Metrics acquired a company called Institutional Shareholder Services, usually referred to as ISS. Started some 20 odd years ago by Robert A.G. Monks and Nell Minow, ISS rapidly became a major influence in all things corporate governance-wise. The company made its business by analyzing all issues coming to a shareholder vote globally.

The company was a bit of a hot potato, exchanging hands a number of times: Monks/Minow et al to Jamie Hurd; Hurd to Thomson Publishing; Thomson to the Proxy Monitor and a private equity consortium; Proxy Monitor to Risk Metrics. Over the last several years, Risk Metrics has been on an acquisition tear, picking up a number of research firms for handsome sums. Along the way, Risk Metrics went public and then put itself on the auction block.  At each step, the valuations of this proxy advisory company jumped dramatically. All of this bring us to the events of today.

MSCI, the company that brings us the EAFE Index as well as any number of other analytic tools will hopefully bring some stability to this industry. More importantly, questions about Risk Metrics independent judgment on its proxy voting recommendations where the company also had other business ties with those same companies will hopefully be put to rest. We will see.

6 Reasons to Vote Against Your Mutual Fund

Posted by on February 23, 2010 No comments

sixthumbsdownAs the editor of ProxyAnalyst, I am a big advocate for proxy voting. I proselytize on the subject and often bore my friends to tears when I wax on about it. However, even I – The ProxyAnalyst – shudder when I think about voting mutual fund proxies. Today, I propose to change that thinking.

For those of you brave souls who have even glanced at a mutual fund proxy, your fears are justified. If you are lucky, there is an item on the ballot for electing the fund’s directors. Not so bad even if you haven’t a clue who these guys are. Unfortunately, things are not so simple.

More often than not, the only item on a mutual fund ballot is some variation on a sub-advisor agreement or perhaps an investment management services agreement. While these types of proposals can have a direct bearing on the cost of owning a mutual fund, the language and supporting statement of these proposals are steeped in legal prose guaranteed to induce a coma.

This is the moment when the proxy meets the trashcan.

But wait. There is an alternative.

I happened upon an interesting post on BetterInvesting.org’s website entitled “Six Questions for Your Fund Company.” While it’s focus was on evaluating the performance of readers’ mutual funds, it has some value when evaluating the performance of the funds when it’s time to vote. Here are the six factors, slightly modified, that can help mutual fund owners vote their proxies:

1. Have the fund family’s expense ratios fallen in the last five years?

If expense ratios have actually fallen over the past five years then good for you. However, this is unlikely. In fact, just the opposite is more likely to occur. Has the fund’s performance plummeted while its fees rise? This is probably the more likely scenario that most mutual fund investors are experiencing today.

Sure, managers can blame market conditions for the decline of the fund. But shouldn’t the managers share in some of the downside risk just like its investors? If you find that your fees are rising while the value of your fund is declining, consider voting against any and all proposals put forth by management on the proxy. Harsh? Yes, but it’s a wake up call you are after here.

2. How many new funds has the family launched in the last five years?

This is an interesting issue that Better Investing raises about fund families. Is the fund flittering around looking for the next big idea rather than buckling down and focusing on what it said it would do with its existing funds? Combined with poor fund performance, fund drift reflects poorly on the management of your assets. A vote against the fund’s directors is an appropriate response in such cases.

3. Do managers comment on their successes and failures in fund company literature?

Being honest and open about your failures as well as your successes is a seemingly rare commodity on Wall Street. To the fund managers who are capable of accepting responsibility for their failures rather than blaming the market, “Huzzah!” But for those managers who blame the market or other external factors when their fund performance trails its peers, it’s time for you, Dear Investor, to cut off their allowances and send them packing. My suggestion? Vote against all management agreement changes (these probably include fee hikes) and vote against all non-independent directors.

4. Does the fund family appoint and support independent directors on fund boards?

As I have noted elsewhere at ProxyAnalyst, board independence is a critical issue. Independent directors help create balance on a board so that the fund’s shareholders get some consideration instead of just the fund’s managers. At the very least, there should be a majority of independent directors on the fund’s board, preferably 2/3 of the board should be independent. If not, vote against all non-independent or inside directors.

5. On average, how long do managers remain at the helm of the family’s funds?

To put it another way, is there relatively high turnover at the helm of the fund? This might suggest management problems at the fund family level. It also might suggest that the fund board is not paying attention to what is going on. Combined with other factors such as poor fund performance, fund drift and so on, a no confidence vote against all of the directors might be in order.

6. Does the fund family disclose its proxy voting record?

Last but not least my favorite, the fund’s own voting record. Today, mutual funds are obligated to disclose their proxy voting records. The SEC’s NP-X rule requires this disclosure. But as with many rules, the devil is in the details. Take a look at the web site for your mutual fund. Is the proxy voting record easy to find? What about the fund’s voting policies? Perhaps the most troubling thing about fund voting policies I have observed is the general vagueness of voting policies. I have found that many voting policies give managers significant discretion in voting any way they choose. This means that fund managers can let their portfolio companies get away with gross bonus payouts, poor corporate governance practices and other actions that are not in the interest of investors. A quick reference tool for understanding how many mutual funds vote, visit ProxyDemocracy.org, where you can analyze voting trends at many of the major mutual fund families.

Barclays Needs to Detox

Posted by on February 17, 2010 No comments

On Tuesday, I noted that Barclay’s top executives chose not to take bonuses for their work in 2009. While I remain skeptical about how this will play out in terms of total compensation received by these fellows, I am downright cynical about how this also-ran strategy of handing back bags of cash after being caught in the till, so to speak. Regardless of what these top executives ultimately do, the exercise is symptomatic of a bigger problem: Barclay’s is a compensation enabler. As one of the largest institutional investors in the world, Barclay’s has the responsibility for voting a vast array of proxies for companies they are invested in. What is troubling is that they seem as committed to allowing executives of companies held in their portfolios to e equally overpaid.

Are Barclays officials like alcoholics running a rehab center?

A study done in 2009 suggests this is the case. Titled, Compensation Accomplices: Mutual Funds and the Overpaid American CEO, the study chronicles a number of large mutual fund companies and how they voted their proxies on a set of key compensation proposals. Not surprisingly, many mutual funds tended to support management when it came to executive pay practices.

What I found interesting as I revisited this report was the list of the “Pay Enablers.” What was no surprise to me was that Barclay’s consistently held its place as one of the top 5 Pay Enablers in all categories of the study. They supported management proposals on executive pay  98% of the time. Conversely, they opposed shareholder proposals seeking to rein in executive pay 90% of the time.

This of course, is done in the “best interests of Barclays’ mutual fund investors. Sort of a “just have another drink tonight and we’ll talk about your problem tomorrow” solution to a problem that can’t be ignored.

Lions and Christians and Proxies

Posted by on February 15, 2010 No comments

If you have spent any time looking at the ProxyAnalyst, you know that our focus is on proxy voting. A potentially deadly-dull subject for the uninitiated, in reality having a proxy is like having a ticket to the Coliseum when the Christians and the lions do battle. While the lions usually have the edge, it’s not always certain who will win.

In the corporate arena, watching shareholder meetings play out can be fascinating if you know what to look for. Does an undeserving director get reelected? Will that CEO really get that gargantuan bonus? The trick is having a play book to follow what is going on. The play book when voting for directors and deciding which way to go on proposals are the Proxy Voting Guidelines. Here at the ProxyAnalyst, we refer to guidelines as Proxy Voting Strategies.

For those of you who don’t have the time or the inclination to understand the nuances of corporate governance but just want to make an informed vote, our Proxy Voting Strategies will do the trick. Our Strategies are designed to help you make voting decisions, pure and simple. However, if you are interested in digging a bit deeper into the subject, a great number of institutional investors have developed proxy voting guidelines that they have published on their web sites. In addition, shareholder groups have developed model guidelines, which they have shared.

Today I came across some really excellent guidelines produced by the Council of Institutional Investors (CII).Their Corporate Governance Policies cover the topic succinctly and in a readily understandable format. While they do not provide tactical advice to individual shareholders about voting, the Policies give readers a good understanding of the issues.

Give the CII Corporate Governance Policies a read.