Reprint permission from the January 6, 2003 issue of Crain's Chicago Business.
The SEC's common-sense initiative would require mutual funds to reveal both their proxy-voting policies and their actual votes on resolutions submitted to shareholders of the companies in which the funds own stock. How funds vote matters. Since mutual funds control about 19% of the nation's equity holdings, they might cast the deciding votes on executive pay packages, corporate environmental policies or labor practices and other important questions.
Yet, the biggest mutual fund companies are balking at the SEC's proposal. They insist that the costs of complying with the rule would be too steep to justify. They fear that proxy-voting transparency would subject funds to lobbying by special interest groups. And, amazingly, they contend that investors don't seem to care how funds vote.
The fund industry's arguments are entirely without merit. Based upon statistics cited by the SEC, the total cost to comply with the proposed rule would amount to only nine cents a year for each mutual fund account.
And the industry's assertion that disclosing proxy votes would invite special interest groups to influence how funds vote misses a key reason for the proxy-vote rule. Shareholders who happen to be aligned with one cause or another deserve to have their concerns heard.
As for the industry's cavalier contention that investors aren't demanding proxy-vote disclosure, public outcry needn't be a prerequisite for regulatory reform. Investor education will lead to more informed investment decisions, better mutual fund governance and, ultimately, stronger financial markets.
The disclosure of funds' votes will compel fund managers to act as stewards, treating proxies as fund assets that must be voted in the best interest of shareholders. It will subject fund managers to greater scrutiny by shareholders who won't tolerate votes uncritically cast in favor of corporate management. And it will allow investors to select mutual funds based on their voting records.
But, with only a few exceptions, mutual fund managers aren't eager to discharge their fiduciary obligations. Instead, they're out to protect their turf and their profits. And that's really what's behind the industry's take-no-prisoners opposition to the proposed rule.
Mutual funds own shares in corporations with which the funds' management companies have lucrative business relationships. And if fund managers don't stay cozy with corporate execs, they're liable to see those business relationships switched to friendlier providers.
Take, for, example, the case of Fidelity Investments, the world's largest mutual fund firm and a harsh critic of the SEC's proposed rule. Fidelity is reported to have earned more than half its $9.8 billion in 2001 operating revenue by administering retirement plans and providing other services to corporations, including the very companies at which it cast secret proxy votes.
The proposed rule seeks to mitigate fund managers' conflicts of interest by requiring a fund to disclose the procedures it uses to address conflicts and to identify votes that are at odds with the fund's published proxy-voting procedures.
Mutual funds need to take responsibility for their voting records and put investors first. So, the SEC's proposed rule must be adopted.
And once it's the law, the SEC should deal directly with fund managers' conflicts of interest by requiring funds to disclose the fees they earn from companies in which they invest and highlight the votes they cast in support of the management of those companies. Only then can mutual fund investments become a positive force for stronger corporate governance and more responsible corporate conduct.
Marc J. Lane is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University School of Law. He can be reached at firstname.lastname@example.org.
Copyright © 2002 by Crain Communications Inc.