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Mutual fund proxy votes tell all

Posted: Friday, September 10, 2004

NEW YORK (AP) We finally get to know some of the deep, dark secrets of the mutual fund business: Are funds really protecting shareholder rights or just rubber-stamping the agendas of corporate leaders?

The answer lies in the just-revealed proxy votes that fund companies now have to file with securities regulators. For the first time, they actually have to come clean on how they voted on everything from executive pay to reappointing auditors.

As it turns out, many fund companies in the last year went against management and pressed for better governance practices. That's the first bit of good news to come out of the scandal-plagued mutual fund business in a long while.

Every year, investors in public companies receive a voting proxy ahead of the annual shareholder meeting. Holders of individual stocks can themselves vote on the issues listed, while mutual funds handle the voting on behalf of those who buy their funds.

Up until last week, mutual funds never had to reveal how they voted. But pressures to enhance disclosure spurred new regulations that went into effect Aug. 31.

At issue has been the concern that mutual funds don't often stand up to corporate management, and therefore, aren't putting their investors' interests first as they have a fiduciary responsibility to do. This stems from the conflicts of interest that can arise when funds invest in corporations that can also be potential clients of the fund companies for such work as pensions or 401(k) services.

The fund industry fought back hard to keep its proxy votes secret. They said it would boost costs and that investors wouldn't care about this information. They said it would create baseless rumors in the marketplace about their views on certain stocks. They claimed it would expose fund managers to special-interest groups.

But it was a battle they couldn't win.

Now, each mutual fund is required to disclose its proxy votes cast for the 12 months ended June 30.

And while this year's data can't be compared with votes in the past which would really tell if the prospect of public disclosure influenced some funds to be more independent than before it looks at though many funds did right by their shareholders this go around.

The Vanguard Group Inc. said it withheld support for at least one director at 60 percent of the nearly 4,000 companies in which it owns shares. Among its reasons why: It didn't like when a nominee served on a committees that rewarded excessive compensation or nominated board candidates that were insufficiently independent.

The AFL-CIO, whose 60 member unions represent more than 13 million workers, did a quick analysis of proxy disclosures by just looking at how the nation's 10 largest fund families based on assets in stock funds voted on executive pay issues at a 12 companies with what it deems excessive CEO pay and poor performance. Among those included in its review were Delta Air Lines Inc., Kohl's Corp. and Lucent Technologies Inc.

By the union's gauge, American Century Investments and Vanguard were the toughest on executive pay issues, while others were more lax, including FMR Corp.'s Fidelity Investments, the largest U.S. mutual fund company.

Still, Fidelity's funds took a stance in the battle that broke out at the Walt Disney Co. last spring, when there was an aggressive shareholder campaign to oust chairman and CEO Michael Eisner because of the entertainment giant's declining stock price.

Fidelity's giant Magellan stock fund, which has more than $60 billion in assets, voted to withhold its vote for the entire Disney board including Eisner. Voting went the same way at some of Fidelity's other large funds, including Growth & Income and Equity Income.

Those powerful votes contributed to an unprecedented 45 percent shareholder vote against Eisner and several other board members. And while dissidents failed to oust the CEO, they did manage to persuade Disney's board to take away his title as chairman.

For the mutual fund business, the timing of these proxy disclosures comes as it tries to repair itself from a major marketing and trading scandal that rocked the industry over the last year.

Maybe that has taught fund managers an important lesson: accountability matters.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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