5 Excuses About Mutual Fund Proxy Voting Disclosure

Why mutual funds say they can’t disclose, and what they’re hiding

Excuse #1: Disclosure is Unnecessary Given No Conflicts of Interest

What the mutual fund industry says: A Fidelity spokesman, Scott Beyerl, says Fidelity doesn’t discuss its client relationships. But he says the suggestion of a possible conflict between 401(k) management and proxy votes is “absurd.” (Investment News, May 20, 2002)

…And what they’re hiding: Mutual fund companies may have an economic interest in voting with management even if such votes may not be in the interest of fund investors. This conflict of interest stems from mutual fund companies’ desire to sell 401(k) management and other lucrative financial services to the same companies at which they vote proxies on behalf of investors. Fidelity, the world’s largest mutual fund firm, is a good example. Business Week Online reported that Fidelity earned more than half of its $9.8 billion in 2001 operating revenues by providing fee-based services to the same companies at which it voted proxies on behalf of its fund investors.

Regarding mutual funds’ assertions that conflicts of interest are not a concern, Business Week Online (8/8/02) stated that “Plenty of experts don't buy these arguments. They say the mutual funds routinely vote with management -- a point Fidelity's general counsel recently confirmed in testimony before a New York Stock Exchange committee.” John Bogle, founder and former chairman of The Vanguard Group, the nation’s second-largest fund company, recently acknowledged that mutual fund companies face an “extraordinary conflict” of interest. Bogle said “These corporations whose shares we’re voting are also the source of our 401(k) and pension business. We don’t want to offend the corporations we own.” (Investment News, May 13, 2002)

Excuse #2: Disclosing Proxy Votes is Too Expensive and Burdensome

What the mutual fund industry says: Costs of performing such disclosure, which fund shareholders would bear, also factor in, according to John Woerth, a spokesman for Vanguard Group. "We have 50 equity funds and own 5,000-plus stocks, and we are voting thousands of proxies each year," Mr. Woerth said. (Wall Street Journal, September 16, 2002)

Asked about vote disclosure, [Fidelity senior vice president and general counsel Eric D.] Roiter said such a move, which could influence legions of other investors, “may be a burdensome exercise” in light of Fidelity’s holdings of thousands of stocks. (New York Times, July 7, 2002)

…And what they’re hiding: Mutual funds already track their proxy votes, and the fact that a small number of mutual funds already disclose this information demonstrates that it can be done simply and inexpensively. Domini Social Investments, for example, manages about $1.6 billion in assets and is able to post its proxy voting decisions for its 400 portfolio companies on its web site. Since Domini started posting its proxy votes in 1999, at least seven other socially responsible mutual fund companies have also started disclosing their proxy voting decisions. Similarly, the California Public Employees' Retirement System (CalPERS), the nation’s largest public pension fund with $135 billion in assets, posts its proxy voting decision on its Web site.

Excuse #3: Investors Don’t Need to Know or Don’t Care

What the mutual fund industry says: [Chris Wloszczyna, a spokesman for the Investment Company Institute, the fund industry's lobbying arm] said the ICI has in the past deemed proxy voting to be part of the "investment process" and that shareholders don't need to know how their funds vote since it is already part of a fund's fiduciary duty to vote in the interest of its shareholders. …And many shareholders may not care, said the ICI's Mr. Wloszczyna.

(Wall Street Journal, September 16, 2002)

…And what they’re hiding: The AFL-CIO believes mutual funds regularly cast proxy votes that are inconsistent with the interests of their investors. Last April, for example, we believe that Fidelity cast votes on behalf of millions of Americans to re-elect an Enron director to the board of Lockheed Martin. We also believe that Fidelity voted in favor of management proposals to reincorporate in Bermuda at Nabors Industries, Tyco International and Ingersoll Rand, moves that significantly reduced shareholder rights. We are unable to confirm how Fidelity voted since it refuses to disclose this information, but if true, we think Fidelity’s fund investors would care.

Excuse #4: Funds Prefer “Candid” Conversations with Management

What the mutual fund industry says: [Fidelity’s Scott] Beyerl says the company keeps its proxy votes confidential because it “allows us to continue to have candid conversations with companies on important issues regarding company management.” (Investment News, May 20, 2002)

…And what they’re hiding: Proxy voting, not candid conversations, is the most direct means for shareholders to influence the behavior of the corporations they own. Moreover, given the potential for conflicts of interest, we are troubled that major mutual fund firms like Fidelity prefer to represent their investors through “candid conversations” behind closed doors, rather than by exercising their proxy voting rights in a responsible and transparent manner consistent with their fiduciary duty.

Excuse #5: Disclosing Proxy Votes Could Depress Stock Prices

What the mutual fund industry says: [Fidelity has] long been concerned that compelled disclosure of votes against a company’s management on particular proposals could well be misconstrued to signal disapproval of the overall stewardship of a company by its management, and could lead to a drop of the company’s stock price to the detriment of funds owning shares. (9/4/02 Letter from Janice Spillane, Assistant to the Chairman, Fidelity Investments, to Bruce Raynor, Trustee, Textile Workers Pension Fund)

…And what they’re hiding: All investors benefit from the availability of more information in the marketplace. Fidelity assumes that investors, especially large institutional holders with the ability to move markets, are unsophisticated. Fidelity also appears to believe that its vote is more influential than the total shareholder vote at a particular company, which is already a matter of public record. Notably, CalPERS, with $135 billion in assets, discloses its votes—including those against management—and believes that its active approach to corporate governance enhances long-term shareholder value. Finally, a vote against management on a particular proposal, while not an indictment of that management’s overall stewardship, likely reflects governance or other concerns that are legitimate factors in share price valuation.