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Rating:Papers Give Little Scrutiny to Fund Proxy Study Not Rated 2.3 Email Routing List Email & Route  Print Print
Tuesday, March 28, 2006

Papers Give Little Scrutiny to Fund Proxy Study

Reported by Marie Glancy

Fund firms that opposed the SEC's turning their proxy disclosures made into an open book are seeing their fears realized. With some fanfare, two groups critical of high executive salaries have published a study accusing mutual fund companies of "enabling" the trend to continue.

On Tuesday, the American Federation of State, County and Municipal Employees, a Washington-based union of government employees, and the Corporate Library, a corporate governance research group based in Portland, Maine, officially released Enablers of Excess: Mutual Funds & the Overpaid American CEO, their joint report on the voting practices of large mutual fund firms with regard to executive pay decisions in annual meetings of companies whose shares they own.

"This report brings to light the role mutual funds play in enabling excessive compensation and helps investors determine which ones are committed to shareholder value and merit their business," Nell Minow, editor and founder of the Corporate Library, said in a statement.

The study looked at 37,966 votes cast by mutual funds on compensation questions at 1,603 companies in the year ended June 30. Seven of the largest fund groups were left out of the data, because these companies' proxy statements could not be read by the Corporate Library's database, said the authors.

As reported by the Wall Street Journal and the LA Times, fund companies reviewed by the study voted in favor of executive pay packages 75.6 percent of the time, and voted to curb pay increases only 27.6 percent of the time. The fund companies are "enabling executive-compensation excesses," charges the report, and exhibit a "systematic unwillingness" to ensure pay and performance are aligned.

The report suggests, in other words, that large mutual fund companies have something other than their own shareholders' best interests at heart. But do these alleged motives bear scrutiny?

AFSCME and the Corporate Library say that fund companies want to protect the interests of their affiliates, who are looking to sell corporate services -- primarily retirement plans -- to the companies holding the votes. Opposing high pay for the decision-makers in these companies, they say, could jeopardize the affiliates' business prospects, so fund companies won't rock the boat.

However, neither the Journal nor the Times examine whether this hypothesis is flawed. Morgan Stanley -- which, having voted in favor of executive pay proposals 95 percent of the time, comes in for the greatest scorn in the report -- has relatively little in the way of a 401(k) business with public companies to protect. It does, of course, have an interest in attracting clients for its investment banking services, but two other big offenders, AIM and Mellon, have neither corporate finance interests, nor, any longer, 401(k) businesses (having sold them). Also implicated was OppenheimerFunds, whose retirement services arm plays only in the small and mid plan market, and thus targets few publicly owned companies as clients.

Meanwhile, several companies singled out as exceptions to the anti-shareholder voting trend are major 401(k) providers. Vanguard and American Century, for example, rank among the top providers of 401(k) services nationwide, and both were cited for their relative resistance to management pay proposals, with American Century supporting reining in salaries 43.1 percent of the time.

Given the above, it appears another explanation is needed if AFSCME and the Corporate Library are to claim fund companies and their shareholders have a conflict of interest on their hands.

Another pertinent question may be this: what concern have the report's authors for shareholders' best interests? When the SEC ruled that proxy votes be made public in 2004, fund firms balked -- in part because of costs and paperwork, and in part because a public voting record lays fund advisors open to criticism from activist groups unconcerned with the welfare of the fund's own shareholders.

AFSCME and the Corporate Library say this was the first study to focus on compensation proposals since the SEC disclosure mandate. But by failing to build a solid argument out of their data, the sponsors have left themselves vulnerable to the charge that they are exploiting public proxies to further their own aims. Indeed, the study, and the generally unquestioning coverage it has received, highlight the validity of at least one argument against disclosure: that it lets voting records serve not shareholders' interests, but the biases of outside groups.  

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