AFSCME, the larges union for public service workers has turned the heat up under mutual funds with the publication of its fifth annual analysis of voting on compensation-related resolutions.
“Tipping the Balance? Large Mutual Funds’ Influence upon Executive Compensation,” takes a look at 26 of the largest US mutual fund families’ voting patterns. This year’s report takes a slightly different slant by looking at the votes weighted by assets under management which AFSCME contends illustrates the funds overall ability to influence pay practices at US companies.
Mutual funds are classified as either “pay enablers” or “pay constrainer” depending on their levels of support for management proposals.
The underlying data for the analysis is provided by Fund Votes of Canada. Commenting on the report, Jackie Cook, founder of Fund Votes said: “The additional analysis of fund influence weighted by assets under management invested in securities shows that the potential for the mutual fund sector to reform executive compensation practices remains limited as long as the largest fund families passively vote with management. Drilling down to individual votes on controversial pay items allows us to identify the worst of the mutual fund pay-enablers.”
One of the issues which can frustrate dialogue between investors and companies is “Cross-voting” when funds within the same fund family vote differently on the same agenda item thereby negating the vote of other funds in the same management group. For the report’s authors this raises questions about proxy policy, internal controls and communication between managers. “Mutual fund proxy voting guidelines invariably state that proxies are voted in a way to maximize fund-holders’ value,” say the authors. “If different funds in a family repeatedly vote for and against the same proposal, there appears to be inconsistency in determining the vote that is value-maximizing.”
Three recommendations come out of the report which are likely to chime with European regulators evaluations of emerging “Stewardship” initiatives:
- Investors should periodically evaluate the proxy voting performance of the mutual funds in which they own shares;
- Investors who invest in mutual funds through employer-sponsored benefit plans should lobby their employers to consider funds’ proxy voting records when selecting funds for inclusion in emplyees’ investment choices; and
- Institutional investors should incorporate accountability for proxy voting, including the voting of mutual funds managed by institutional investment managers in their RFP evaluation process.
While the report may make for uncomfortable reading for some of the funds analysed, they might draw comfort from one of the less prominent conclusions in the report. Compulsory mutual fund vote disclosures have not lead to a herd mentality with funds voting in lockstep with proxy advisors, as had been originally argued by critics of the regulations: “Fund families’ voting records are sufficiently diverse to dispel any notion that uniformity has become the norm, as evidenced by Table 10 Critical Compensation Votes (page18)”.
Last Updated: 18 May 2011