Mutual Fund Trustees’ Role in Voting Proxies - June 2012 Print E-mail
Written by C. Meyrick Payne, Management Practice Inc. (MPI)   

Several years ago MPI wrote a Bulletin on this subject with Edward “Ned” Regan, the former Comptroller of New York State and an independent Trustee of the Oppenheimer Funds, where he served as Chair of the Proxy Voting Committee. This Bulletin is an updated version.

     One of a mutual fund board’s primary responsibilities is to ensure that fund shareholders receive value from their investment manager. This role includes assuring that the proxy vote, termed an “asset” of the fund by federal regulators, is cast in a manner that optimizes the long-term value of the fund.

     For many years mutual funds played down their proxy voting rights. In effect they abstained from participation in issues that, in the opinion of the investment adviser, were best left to corporate executives. The logic went: if the portfolio manager does not believe in the proposals of corporate management, then sell the stock. An exception was always fund complexes with social agendas, such as Calvert or Domini. However starting about 10 years ago mutual funds became much more active in exercising their corporate governance rights.

    As the fund industry grew and the number and variety of funds within a complex multiplied, the issue of actually voting proxies became ever more difficult.  Most complexes now participate in the process. Just selling a position is no longer practical because the investment is too large and the market impact too severe. Furthermore many funds are invested in indexes that, by definition, make an individual stock impossible to sell.  The equity holdings of major fund complexes have become more akin to those of CALpers or TIAA-CREF. The managers of these major pension funds believe that they have a fiduciary responsibility to vote their proxies. They believe they can create stockholder wealth by judiciously exercising proxy rights. The question for fund trustees is whether the same logic holds for them.

Mechanics of Proxies are Complicated

     The mechanics of tracking, voting on a timely basis and justifying proxy positions are difficult. CALpers and TIAA-CREF are reputed to vote between 1,000 and 2,000 proxies annually. A large mutual fund complex may hold 2,000 to 3,000 equity positions in multiple funds and portfolios. Many of these positions may be overseas. The mechanics of handling such a large number of potential proxy votes is time consuming and management intensive.  As a result specialist proxy voting service providers have proven an effective way to handle the mechanics. Similarly some large fund complexes, and the custodians which support them, have developed computer programs to support the process.

Role of the Independent Trustees

     As with everything else, independent trustees should restrict their involvement in proxy voting to oversight only. Proxy voting represents one of those fascinating topics that can easily distract from the trustees’ primary role of fund governance.  This has come to mean that the independent trustees should be involved in selecting a service provider, setting the proxy voting policy, periodically checking to see it is followed, and only becoming involved in substantive exceptions.

     Sometimes fund trustees can fulfill their responsibilities by appointing a special committee. This happens less frequently than designating proxy-voting responsibilities to another committee, such as the Brokerage, Audit, Compliance, or the Investment Committee. In every case the responsibility is to adopt a proxy voting process and then to see it is followed, with material exceptions brought to its attention.

     Several years ago MPI conducted a survey of proxy voting polices among mutual fund boards.  These were the most frequent positions on proxies voted:

  • In favor of election of directors and auditors as recommended by corporate management.
  • In favor of governance resolutions proposed by management, including the classification of Boards so that Directors serve on rotation, usually for three years.
  • Against special interest groups and antagonistic resolutions, such as controversial positions on social issues.
  • Against issues of managerial enrichment, with the exception of modest stock options.
  • Extraordinary resolutions, such as anti-takeover defenses, receive explicit consideration.

     Exceptions to the established voting policy, or that adopted by the specialized service provider, were often brought to the attention of the independent fund trustees, albeit after the vote has been cast. When the management company believes a vote should be cast differently than called for by the guidelines, the exception should be brought to the mutual fund board committee responsible.

     One concern expressed in confidence by a senior executive of a large fund management company was that an inherent conflict of interest can occur when an investment advisor is faced with voting against corporate management. Such an aggressive act may impair, or be perceived to impair, the possibility of serving that corporation in some other capacity, such as pension fund management or underwriting a stock offering or advising on a merger.

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The role of independent trustees of mutual fund boards in overseeing the voting of corporate proxies is likely to become more important as the assets of mutual funds grow and the practicality of selling the funds’ holdings becomes ever more difficult. The assignment of responsibility for oversight of proxy votes will go a long way to ensuring that fund directors are abreast of the changes taking place in the governance of America’s corporations.

 
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