Proxy Voting: The Movie
A short film by the folks at MoxyVote
Once in a blue moon (actually even longer than that) someone does something that informs AND entertains us about proxy voting. Perhaps my favorite example is the first 10 minutes of the 1951 classic, “The Solid Gold Cadillac,” starring Judy Holiday. The opening scene is a timeless depiction of a shareholder meeting and the power of a single shareholder.
More than 50 years later, we are presented with another film short that does a bang up job showing us a “special” view of corporate governance. Our friends at MoxyVote have put together this infomercial that explains why proxy voting is so important. Give it a look . . .
[youtube p1S0_ggNgkU]
6 Reasons to Vote Against Your Mutual Fund
As 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.
WSJ Comments on Proxy Access and Commie Plots
The Journal Editorial Board at work
So I was lining my birdcage this weekend and happened upon an op-ed in Saturday’s Wall Street Journal. Entitled, “Mary Shapiro’s Say on Pay,” the editorial was classic WSJ character assassination-as-editorial commentary. Basically, the piece boiled down to the fact that the Journal took great umbrage with the SEC Chair’s attempt to force Bank of America to adopt compensation disclosure rules that no other company currently must adhere to.
Basically, the company is now required to have a non-binding say on pay proposal, which shareholders can now vote on. (Yawn) A tragedy for managers no doubt.
Of course, the Journal apparently missed the fact that quite a few of these say on pay proposals are currently in place at a number of public companies not to mention that under TARP regulations, such say on pay advisory votes are required. No worries. This didn’t stop the Journal editors from launching into a tirade about another sore subject for company executives: Proxy access.
So what is proxy access anyway? As the Council of Institutional Investors (CII) notes on this subject “[it] allows share owners to place their nominees for director on the company’s proxy card. In the United States, unlike most of Europe, public companies are not required to provide share owners with access to the proxy to nominate directors. The only way that share owners can present alternative director candidates at a U.S. public company is by waging a full-blown election contest. For most investors, that is onerous and prohibitively expensive.”
This isn’t the stuff of a Bolshevik Revolution by any means but the Journal and its management allies are understandably threatened but such prospects.
As the CII notes further on in describing why proxy access is important, they make a simple but important point about why this shareholder right is important: “Permitting share owners to nominate candidates for director on the company’s proxy card would invigorate board elections and would make boards more responsive to share owners, more thoughtful about whom they nominate to serve as directors and more vigilant in their oversight of companies.”
Getting back to the WSJ tirade, they spent the balance of the article building conspiracies by organized labor and calling Ms. Shapiro a hypocrite for not disclosing executive compensation at FINRA when she served at the helm of that organization. Deflecting the question at hand, should shareholders (that’s holders of 2% or more of a company’s stock) be entitled to put forth a candidate for the board of directors that all shareholders can then vote on an unreasonable proposition?
There is considerable consensus that some form of proxy access should be allowed. Giving shareholders a right to vote on a choice of directors is a good idea. As citizens, we would find it abhorrent if we were only allowed to vote on the presidential candidate selected by the political party in power in Washington. Yet that is what we as shareholders do every time we vote our proxies since we have no real choices today.
For a more complete discussion on proxy access, take a look at the N.Y. Times Dealbook article “The Proxy Access Debate” by Steven Davidoff.
Director Accountability: The 5 Worst Mutual Funds
As I noted earlier this week, I have dusted off my copy of a study done by the Corporate Library, AFSCME and the Shareowner Education Network called Compensation Accomplices: Mutual Funds and the Overpaid American CEO. Filled with charts and tables, the study makes a couple of interesting findings. One that caught my attention as I reread the report was a table on page 20.
In 2007, the study found that certain mutual fund companies voted to support directors standing for election or reelection more than an astounding 90% of the time. This compares with the average rate of voting for directors by the mutual funds studies of 58%. What this means in real terms is this: Regardless of how well or how poorly companies performed, regardless of how directors performed in overseeing companies on behalf of shareholders, the worst offending mutual fund companies voted to reelect them.
So who are these mutual funds?
Here’s the list of the funds and their percentage votes in favor of directors:
- Fidelity - 92%
- Columbia – 97%
- Federated – 97%
- American Funds – 100%
- Scudder – 100%
Until mutual funds begin to take responsibility for their investments and demand that companies take the issue of director accountability, excessive compensation and related governance issues seriously, examples such as this will likely continue. But what can an ordinary investor do?
Simple. Vote down all proposals on their mutual fund proxies. A bit of overkill? Perhaps but it raises the discussion level on this serious problem. Clearly mutual funds don’t hear what individual shareholders are saying right now on this issue.