Researchers affiliated with the Stanford Graduate School of Business say that while mutual funds take proxy votes for boards of directors seriously, they also want to be in line with other funds they compete with.

Gregor Matvos, a Harvard doctoral candidate, and Michael Ostrovsky, an assistant professor of economics at Stanford, analyzed three million votes cast by 3,600 mutual funds between 2003 and 2005. Besides finding that certain fund families tend to be more critical of management than others—withholding votes for individual board members more frequently—the researchers said that funds also tend to vote in “clusters,” with a concentrated number withholding votes.

“If it were a simple matter of funds voting for those directors they think are good, or withholding votes for those they think are bad, we would see a more even distribution,” said Ostrovsky.

The researchers say that now that funds must disclose how they vote, some are worried that companies they vote against will retaliate by withholding important performance data, or other information that might affect trading.

As a result, funds try to determine how their peers might vote. 

“In fact, there is a whole industry of advisors devoted to guiding funds about their voting choices,” said Ostrovsky. “So word gets around.”

As a result, the pair say that changing the current rules—through which directors can be elected with a single vote—to ensure directors must be voted by majority, would result in little change. “Under the current system, directors who are elected in fact nearly always receive much more than 50 percent of the vote.”

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