There is little dispute that investor confidence is currently at a low, particularly as the corporate practices of many leading firms have been called into question in the past six months.
Mutual fund complexes have been responding to those concerns by throwing their weight around through shareholder resolutions and proxy votes. Industry observers say this is a positive trend for the investment management industry, that by becoming more involved in the firms in which they are invested, mutual fund firms may be able to restore some investor confidence.
Up to this point, the only thing fund managers have done when companies in which they have invested have displeased them has been to send a report to the board or sell shares, a method known as "proxy by feet," said Geoffrey Bobroff, a consultant in East Greenwich, R.I. Fund firms held the premise that they did not invest to control or change how companies operated, Bobroff said.
"Now fund boards are taking more of an active role in determining how management will vote proxies," he said. And by becoming "more visible and more involved, the power of their vote will carry more weight than it has in the past," he said
Fidelity Investments of Boston, for example, is considering whether to withhold votes for directors at companies that excessively compensate executives.
"We were asked by the board of trustees of the funds to gather information for them so they could look into changing proxy voting guidelines with respect to grossly excessive compensation packages," said Anne Crowley, a spokeswoman for Fidelity. "There have been many reports [of that] in recent months, so the board thought it was something they should look into."
Fidelity's current proxy voting guidelines outline three scenarios in which votes for incumbent directors could be withheld. The first two are excessive severance pay and the introduction of a "poison pill" anti-takeover measure put into place without shareholder approval. Both of these have been Fidelity stipulations for years. In 1999, Fidelity added to the list the re-pricing of outstanding options held by officers without shareholder approval.
Citizens Funds, a family of socially responsible funds in Portsmouth, N.H., earlier this month filed shareholder resolutions at Microsoft Corp. of Redmond, Wash., and Cisco Systems of San Jose, Calif. The resolutions ask management to limit the consulting fees paid to auditors to 25% of the total fees paid to their auditors. In 2001, Microsoft paid Deloitte & Touche of New York $4.7 million for audit services and $14.7 million for additional non-audit services, according to Citizens Funds. Cisco paid PricewaterhouseCoopers of New York $1.8 million for audit services and $16.8 million for non-audit services.
"Given that our mandate is to provide competitive returns and support good corporate citizenship, shareholder activism is one of our priorities and part of our mission," said John Shields, president of Citizens. "We continually monitor companies in our portfolios to make sure they stick to ethical behavior and act in shareholders' best interests."
Because Citizens is a socially responsible fund family, shareholder activism is nothing new for the firm, according to Diane South, manager of social research for the firm. Citizens has been active in filing shareholder resolutions since 1997. Since then, Citizens has filed 30 resolutions, although the last two resolutions are the first time Citizens has taken issue with auditors.
"I think investors today know that issues like auditor conflict are important," South said. "We've all learned a lot of lessons in the last six months."
Bill Miller, a fund manager at Legg Mason of Baltimore's asset management arm, has withheld his votes for directors at six companies that have engaged in corporate governance practices with which he disagreed.
John Bogle, founder of The Vanguard Group of Malvern, Pa., recently suggested that index fund firms form a federation to pressure corporations to act in the best interests of shareholders [see MFMN 2/25/02].
A Matter of Trust
Whether investors will react positively to this sort of activism will not become clear in the short term, Bobroff said. However, Ric Edelman, chairman of Ric Edelman Financial Services, a financial advisory firm in Fairfax, Va., said that not only is shareholder activism a responsibility of fund firms, it has the potential to bring in assets from investors who are looking for trust.
"Shareholder activism is very important, and mutual funds, which represent millions of investors, have an obligation to monitor companies. Otherwise the industry will lose confidence, not only in those corporations, but in the mutual fund companies as well," Edelman said. Also, if fund companies develop a reputation as "consumer advocates," the goodwill earned could have residual marketing benefits, he added.
While shareholder activism is generally seen as a good thing, there is the potential for fund firms to go overboard, Bobroff said. Funds have to remember that they are not in a position to make business decisions and should make sure they do not interfere with the general operation of corporations, he said.
"My hope is that the industry takes on very narrow issues and [focuses only on] those fundamental issues," Bobroff said. "It's so hard to judge what's right and wrong."
While Edelman agrees that funds should not go after the day-to-day business decisions of corporations, he does not believe that is where the investment management industry is headed.
"Certainly, there is a line they should not cross," Edelman said, "but we're really far away from that line. We have a long way to go before that becomes a problem."
