Mutual-fund behemoth Vanguard Group Inc. typically used to rubber-stamp 9 out of every 10 slates of directors put up for election by companies in which it held stakes. But this year it decided there was no sense in supporting directors it disagreed with. So it ratified only 29% of the slates, withholding votes from at least one nominee in an eye-popping 71% of the cases.
Thanks to new Securities & Exchange Commission rules, many other fund families may soon be following Vanguard's lead. Since Aug. 6, they have had to disclose their policies for voting proxies; most are posting them on their Web sites. In one case, Davis Selected Advisers L.P. posted 21 pages detailing how it would vote on 75 different issues. And, starting next year, funds must reveal exactly how they voted in the preceding proxy season by Aug. 31 each year. Says Vanguard founder John C. Bogle: "Disclosure is the first step in bringing mutual funds back to acting like responsible corporate citizens and behaving like owners."
FAILING AS FIDUCIARIES
A big reason for the SEC's move: fears that money managers are failing as fiduciaries. Instead of voting in the best interests of the shareholders they represent, they're backing company managements that could reward them with new business such as handling billions of 401(k) retirement money, the SEC believes.
The trend towards more activism by mutual funds promises major repercussions for company boards. Money managers using their voting power more aggressively would add clout to a corporate-accountability movement that has been led by labor-union and state-employee pension funds. This could make boards more receptive to shareholder proposals, which they have traditionally blown off. Ultimately, executives may find it harder to win outlandish pay packages, resist calls for more independent directors, and insulate their companies from takeovers. "Institutions are really taking this stuff seriously," says Gregory P. Taxin, chief executive of proxy voting consultant Glass, Lewis & Co. "The outcome will be more votes against management."
Next spring, in fact, many companies might avoid even calling for votes on issues they may not win. Already, some companies are instead starting to sue for peace on investors' terms. Glenn Booraem, a Vanguard principal in charge of proxy voting, says that each week at least one company asks him in advance exactly what proposals he will accept before they print their proxies. "I would love to look at results in 2004 and say we voted for more directors, more auditors, and more compensation plans because companies got the message," he says.
Shareholder votes against management are usually non-binding, but they can be as damaging as a no-confidence vote to a political leader. And an SEC proposal last month would make negative shareholder votes even more of a problem for management. Under the rule, a large "no" vote against a company director would pave the way for shareholders to nominate their own directors at the next annual meeting. Dissident nominees would get equal treatment with the company's nominees on the official ballot. That change is expected to be approved by the end of the year, in time for the next proxy season.
State governments also are pushing for for more activist voting by the money managers they hire. North Carolina Treasurer Richard Moore is drawing up specific orders on how the $32 billion of shares it owns must be voted on compensation and governance issues. "We're going to arm our managers with the ability to say 'No' to corporate practices when they don't want to upset a [business] relationship" with a company, says Moore, referring to the potential conflicts of interest on 401(k)s and other business.
In Vermont, Treasurer Jeb Spaulding says that after taking office early this year, he was dismayed when he checked to see how his money managers were voting shares they held for the state retirement systems. Fidelity Investments had voted with management at Intel Corp. (INTC) against a shareholder resolution urging the company to count the cost of stock options as an expense, he says. At the same time, Delaware Investments (LNC) voted other Vermont shares for the resolution. "We've come to realize that we had not been paying attention," says Spaulding. Now he, too, is drafting specific proxy voting orders for Vermont's outside managers.
The added pressure for greater boardroom accountability builds on momentum from last spring. During the 2003 proxy season, resolutions in favor of expensing stock options -- usually opposed by management -- obtained an unprecedented 45% of the votes, says John C. Wilcox, vice-chairman of proxy solicitor Georgeson Shareholder Communications. Some 150 proposals made by shareholders -- and mostly opposed by management -- won majority votes. That's double the number of two years earlier, according to the Washington-based Investor Responsibility Research Center.
Of course, many money managers long have given little thought to how they vote their proxies, except in takeover battles -- and that won't change overnight. Companies don't disclose how their individual directors vote at board meetings, so it's tough for the managers to identify whom to target. Some fund managers are in and out of stocks too quickly to care. Others argue that they can always unload a stock if corporate officers and directors are taking advantage of shareholders. There's no doubt, however, that more shareholders and their money managers are rapidly discovering the power of the ballot box. By David Henry in New York