new pressures over information admission discourage an increase in
corporate ethics? Jon Entine investigates
The answer apparently
is “yes” if you happen to be a bigwig in the US mutual fund business.
That’s hardly earthshaking news. Few expected the industry to applaud
when the Securities and Exchange Commission proposed last autumn that
funds might soon have to disclose how they cast votes in corporate
proxy contests. But almost no one anticipated such fierce opposition
from leading voices of corporate reform. That includes the nation’s
largest pension system, the Teachers Insurance and Annuity Association-College
Retirement Equities Fund (TIAA-CREF), and Vanguard, the efficiently
run, low-expense and admirably transparent fund giant.
A first reaction – certainly mine – was to assume that industry opposition
reflected nothing more than brazen self-interest. You have to laugh,
sadly, when the industry’s lobbying arm, the Investment Company Institute,
reflexively dismisses disclosure, saying that it does not help investors
to choose between funds, a dubious conclusion presented without any
But such bumbling defensiveness threatens to obscure a genuine debate
over the wisdom of this measure. A dispassionate examination of the
facts and a nod to the law of unintended consequences suggests that
some caution is in order here. Although proxy disclosure is a good
thing in principle, the devil is in the detail. That’s why the arguments
of TIAA-CREF and other critics merit a fair hearing.
US stock funds, representing 93 million investors, manage over $3
trillion in assets, nearly one third of all outstanding shares in
the marketplace. When companies put questions to shareholders, it’s
the managers of the funds who decide how to vote those shares, not
investors. As of now, funds are not required to reveal their votes.
Under the SEC proposal, funds and investment advisers would have to
disclose how they vote, including on issues where shareholders and
fund managers might disagree, and to flag any votes that don't follow
their publicised guidelines. Mutual funds would supply information
on proxy voting to the SEC twice a year, including it with certified
Based on letters posted to the SEC website, public reaction is running
100 to one in favour. The most vocal support comes from powerful labour
unions, some of which bring a fundamental cynicism about the investing
business. For example, the AFL-CIO contends (with no evidence presented)
that funds regularly cosy up to corporations, putting the interests
of executives or the funds themselves ahead of shareholders’.
Social investors are more recent passengers on the disclosure bandwagon.
For example, born-again transparency convert Amy Domini, founder of
the Domini Social Index Fund, argues, “disclosure is the greatest
protection investors have and that no area of disclosure is irrelevant.”
Who could argue against that?
Well, pretty much everyone in the mutual fund industry. John Biggs,
who recently stepped down as chairman of TIAA-CREF, notes the proposal
pits two treasured ethical principles – transparency and confidentiality
– against each other. A long-time good-governance advocate who regularly
criticised other fund companies for not using their proxy votes to
minimize corporate abuses, Biggs said that confidentiality in voting
allows firms to vote in shareholders' best interest without worrying
about outside pressure.
"Big institutional investors believe anonymity is important,” says
Barry Barbash, a former SEC attorney now with the Washington law firm
Shearman & Sterling.
Biggs is hardly an apologist. It was widely assumed that he was passed
over as a choice to head the accounting industry standards board for
fear he would be too tough. TIAA-CREF has long endorsed unpopular
views within its industry, such as expensing executive options and
strengthening the independence of auditors. But Biggs, like executives
at other fund giants like Vanguard, Fidelity and Schwab, fear that
corporate proxy statements could become a political battlefield for
extremist groups pushing pet social projects.
"This would be a complete invitation to politicise the mutual- fund
process," says an industry insider with a mutual-fund trade group,
who asked that his name be withheld fearing retaliation. "It would
exert pressures on fund groups by people who wouldn't necessarily
have the interests of shareholders at stake. A mutual fund is designed
to make money for its investors. But managers would be looking over
their shoulders at political issues instead."
Proxy votes for social issues
In fact, some social investing activists use proxy votes as public
relations weapons on contested social issues, such as global warming,
genetically modified organisms or animal testing. They often have
little interest in seeing that the companies at which they are raising
proxy fights prosper or even change.
Moreover, labour unions and activists face their own potential conflicts
of interest. If a union is pressing funds to disclose proxies, it
is reasonable to assume the same union might pressure the fund to
abandon stocks that the union has contract issues with. Funds might
find themselves targets of unions, religious groups or activists who
represent a tiny minority of shareholders but would wield outsized
PR clout – the ability to embarrass. Disclosure could devolve into
a political tool, a tyranny of the minority.
Domini, for one, dismisses this concern as overblown. ''I am willing
to take the risk that there will be the occasional time when a fund
manager has to push back against shareholders -- or outsiders who
are speaking their mind -- and say: `I hear your concern, but I'm
not addressing it.' Hopefully, funds will vote for what they believe
in, and we'll all benefit from seeing exactly what that is.''
Last November, TIAA-CREF's shareholders, long considered among the
most liberal in the United States, strongly backed their leadership’s
cautious approach on this issue. Shareholders voted 76.5% against
a measure that would have urged annual disclosure of how it voted
proxies on social and environmental issues. “Disclosing our votes
might be misleading because there are cases when we agree with the
basic issues that are the subject of a proposal, but find the details
would be impractical to enact,” argued Herbert Allison, who succeeded
Biggs as chairman. Allison says that TIAA-CREF has demonstrated that
if can more effectively bring changes in corporate behaviour by working
behind-the-scenes – a less confrontational approach than that advocated
by labour unions and social activists.
The reality is that the line between political action and seeking
better corporate governance is a lot blurrier than Domini and others
are willing to grant. "If we were to publicly announce that we have
voted against management on some proxy issues, it could have a negative
effect on the company's share price, which would negatively affect
our own shareholders," notes Vincent Loporchio, a Fidelity spokesman.
For all the talk about addressing broad stakeholder issues including
social and environmental concerns – the target interest of most social
investors – the most critical stakeholder at mutual fund companies
are its shareholders.
Still, and despite all the potholes going forward, more public disclosure
of governance activities including proxy voting is a healthy and inevitable
trend. The issue now is managing the movement in such a way that respects
the rights of all stakeholders, including and especially investors.
is scholar-in-residence at Miami University (Ohio) and adjunct fellow
with the American Enterprise Institute in Washington, DC. Jon is also
an award-winning freelance journalist.