At least five large mutual fund groups are being cited for too often voting in favor of excessive pay packages for America's chief executive officers.

That's according to a report released last week studying the corporate proxy voting practices of 18 of the largest mutual fund groups between July 1, 2004 and June 30, 2005. That was the first year in which mutual funds were required by the Securities and Exchange Commission to publicly report how they voted on provisions of corporate proxies for the companies their mutual funds own. Fund companies have until Aug. 31 of each year to report their last 12 months' proxy votes.

This report is touted as the first to comprehensively analyze the voting practices of funds.

The report analyzed close to 38,000 individual fund company votes across more than 1,600 companies based upon five criteria: management recommendations, management proposals, shareholder proposals, expensing of stock options and performance-based stock options and severance.

The report was co-sponsored by independent research firm The Corporate Library, the AFL-CIO and the American Federation of State, County and Municipal Employees (AFSCME), which is the AFL-CIO's largest union representing 1.4 million state and local government workers, as well as healthcare and childcare workers. These groups were instrumental in convincing the SEC to require funds to make their proxy voting records public.

The report found that in aggregate, fund companies, which collectively own about 24% of all publicly traded stock in the U.S., voted with corporate management on compensation proposals almost 76% of the time. Moreover, funds approved shareholder proposals related to compensation only 28% of the time.

While headlines have highlighted the unjustly lucrative pay packages of many of this country's CEOs, there has been little attention paid to "the worst enablers of this trend - the largest institutional investors who possess a unique opportunity to exert influence over a board's executive pay decisions through their formidable voting power," the report said.

The goal of this report is to "put the burden of proof on mutual funds and humiliate them on how they vote," said Nell Minow, editor and co-founder of The Corporate Library, which hopes to annually publish a "naughty and nice list."

"It's important for me to shine a spotlight on these enablers," she added. "There is something of an addiction to excessive pay. There's a need for a Betty Ford intervention on this." Of great concern is that a fund group would be unwilling to challenge corporate management where the fund advisor is trying to win that corporation's 401(k) business or an investment advisory deal, she added.

Those funds cited as being the worst pay enablers included AIM Investments of Houston, Alliance Bernstein, Dreyfus, Morgan Stanley and OppenheimerFunds, all of which are based in New York. Morgan Stanley was individually cited as having the worst pay-enabling proxy voting record by virtue of voting in favor of management-proposed pay packages nearly 95% of the time.

"In accordance with its proxy voting policies, Morgan Stanley Investment Management votes all proxies solely based on its fiduciary obligation to its clients," said Chad Peterson, a company spokesman.

AIM spokesman Ivy McLemore said, "AIM has the fiduciary obligation to, at all times, make the economic best interest of advisory clients the sole consideration when voting proxies of companies held in client accounts with the objective of maximizing long-term returns."

While Fidelity Investments of Boston fell in the middle of the survey's ranking based on its proxies overall, the firm won the dubious distinction as the "least supportive of shareholder efforts to control pay." The report noted that Fidelity voted in favor of such shareholder-led proposals just 2.2% of the time.

"Our funds are managed with one overriding goal: To provide the best possible return to mutual fund shareholders," said Vin Loporchio, a Fidelity spokesman.

Boston neighbor Putnam Investments wasn't far behind Fidelity, voting in favor of shareholder-based compensation proposals only 2.6% of the time. But both Fidelity and Putnam were lauded for being the two most aggressive companies when voting against management-led compensation proposals.

That voting record landed Putnam on the report's short list of "pay constrainers," although Putnam was tied at eighth place overall alongside Franklin Templeton of San Mateo, Calif., out of the 18 companies studied.

"Responsible compensation practice is a core element of corporate governance," said Dan Gallagher, Putnam senior vice president. "When we invest in a company, we expect the proper correlation" of executive pay to shareholder value, he said.

But overall, Putnam isn't a big fan of shareholder-led proposals. "We think most shareholder proposals are best addressed by an independent board," he said. However, Putnam has clear numeric thresholds, depending upon annual dilution percentages, for voting for or against executive stock options, he added.

The average CEO now earns $11.8 million annually between salary, bonus and long-term equity incentives, said Rich Ferlauto, director of pension and benefit policy with AFSCME. "Institutional investors have been highly concerned about the transfer of wealth from shareholders to CEO pockets," he said. Moreover, that transfer of wealth to CEOs has doubled over the past 10 years from roughly 5% of their firm's total aggregate earnings in the 1990s to 9.8% today, he commented.

Based upon their overall proxy voting record, the four highest-ranked fund companies were: American Century Investments of Kansas City, Mo., followed by TIAA-CREF of New York, Federated Investors of Pittsburgh and Vanguard Group of Valley Forge, Pa.

"We take our proxy votes very seriously and tend to vote in a manner that we believe will do the most to maximize shareholder value," said Chris Doyle, a spokesman with American Century.

An executive compensation policy is a window to a company's operation, said John Wilcox, VP of corporate governance at TIAA-CREF. "We're not about enabling bad behavior. If a company's executive compensation policies appear to be out of line, we'll actively pursue ways to change the way a company acts."

However, the report has pitfalls, said industry insiders, in that certain presumptions were made.

For one, a mutual fund's investment in a company typically signals confidence in management and a propensity to vote with competent management on issues, said one source, who spoke on condition of anonymity. A company whose CEO pay is judged to be excessive will already be excluded from investment, the source added.

In addition, the report's sponsors acknowledged that tabulations revealed how often a company voted approval of executive pay increases, but not necessarily whether specific increases were reasonable or excessive. The report also noted that all shareholder-led compensation proposals were assumed to be those that reined in executive pay.

The real question is, do fund investors really care how their mutual funds vote?

"I don't think most investors know what their funds hold, let alone how they vote," said Adam Bold, founder of The Mutual Fund Store, a franchise of financial planning offices. If investors won't change funds when faced with sub-par performance, they definitely won't change because of their funds' proxy voting policies, he added.

(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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