Investor activists say they are finally getting some support from the $12 trillion mutual fund industry, huge shareholders long scorned as rubber stamps for the management of companies whose shares they own. Sensitive to the issue, mutual fund executives say they have begun to demand more details and to vote more aggressively in corporate elections.
Staying and fighting is a change from the past, when fund managers simply pulled out of companies they perceived to be badly run. Activists hope to see the new approach reflected when the results of this season's shareholder proxy votes are released, especially in the aftermath of the financial crisis that plunged the world economy into recession.
"There's no question the mutual fund industry is making measurable progress," said Michael Garland, director of CtW Investment Group, which advises union pension funds on corporate shareholder votes.
In particular, funds seem more likely to favour changes such as allowing shareholders to vote on executive pay, or making it easier to call special elections, said Tim Smith, senior vice president at Walden Asset Management, which promotes social causes.
For instance, on April 29 shareholders of data-storage giant EMC Corp passed those measures over management wishes. Large holders of EMC include American Funds affiliate Capital World Investors, Vanguard Group Inc and AllianceBernstein Holding LP. None would discuss their votes and will not file details until August. In theory, mutual fund firms and their millions of retail share owners wield decisive power over the companies in which they invest. Mutual funds dominate the lists of the largest shareholders of companies such as Exxon Mobil Corp and Microsoft Corp. All told, mutual funds control about a quarter of US corporate equity.
In the recent past, fund firms typically voted against management wishes just 10 percent of the time or less, according to nonprofit site proxydemocracy.org.
Some analysts say mutual fund companies also face inherent conflicts because they often provide services such as retirement plans to the companies in which they own stock and would not want to alienate their customers. The industry denies this has been a problem, but fund companies have been more in the spotlight recently as large shareholders in some of the companies at the center of the financial industry's turmoil. This past year, some companies, including banking power Goldman Sachs Group Inc, made a point of meeting certain fund companies and other big shareholders in an effort to drum up support over issues such as pay.
Goldman's annual meeting was on May 7, where a controversial measure was whether to split the role of chief executive and chairman, both now held by Lloyd Blankfein. The idea was supported by several big labour and retirement funds, but lost decisively: 74 million to 313 million. None of the fund firms would comment on their votes. But as Goldman Sachs' meeting was under way in New York, Vanguard Chief Executive Bill McNabb said: "It's not clear to me that Goldman Sachs is not doing everything just right." McNabb spoke at the annual meeting in Washington of the fund industry's trade group, The Investment Company Institute.
Reflecting a more involved role, McNabb said that, since taking the helm at Vanguard in 2008, he had sent letters to 900 big companies in which it owns stock seeking more details about their operations. But simply voting against management proposals and director nominees is not always the best course, McNabb said.
"There is a belief out there that, if shareholders just throw out a board, everything will get better and I'm not sure that's right. It's possible to do all that and still not execute properly," he added. Voting and governance issues were hot topics at the ICI's meeting. Fearing their industry could be swept up in tougher financial regulations now under debate, mutual fund executives argued they have kept shareholders' interests above those of the companies they own.
Fund companies have long argued it is better for mutual fund portfolio managers to simply sell the shares of companies whose policies they disagree with, rather than stick around and push for change. This view still has backers such as Mercer Bullard, a University of Mississippi law professor who often represents shareholders. Yet a new mood had already surfaced last year.