How Funds Vote Shouldn't Be a Secret
Doug Hay, proprietor of a bed-and-breakfast in Mill Rift, Pa., owns mutual funds. After the funds cast proxy votes for or against directors of companies they own stock in, he wants to know how they voted. "There has to be accountability," he told me. On the other side of the globe, in Kathmandu, Nepal, photographer Susan Stebbins, another mutual fund investor, agrees. "As we have more and more corporate power, as corporations become larger than nations, it becomes more important to have democratic institutions," she says. Hay and Stebbins are among hundreds of fund owners who have written the Securities & Exchange Commission this fall to support a proposed rule that would force mutual funds to disclose their proxy votes. Yet as the public comment period draws to a close on Dec. 6, the fund industry, which manages 20% of the nation's stock holdings, is coming down against the proposal. It argues that the rule may be too costly, will impose burdens of disclosure not suffered by other institutional investors, and will foil their ability to nudge companies privately toward better governance.
The SEC's proposal, which cleared the panel unanimously in September, has united even industry leader Fidelity Investments and archrival Vanguard Group, which often portrays itself as more investor-friendly. Disclosure would "politicize" proxy voting, David Weinstein, Fidelity's executive vice-president for public policy, told me: "Unions and special-interest groups really want to obtain this information to influence how we vote proxies, not for the benefit of all shareholders." Vanguard Chairman John Brennan said: "There are significant downsides to the proposal and no upsides....The millions of people who do trust [Vanguard] shouldn't bear the burden of the special-interest groups."
These are fair points. With Vanguard voting on some 250,000 proxy items last year, disclosure would doubtless add to costs. The flood of new information also would create all kinds of lobbying headaches or, depending on your perspective, opportunities. Yet to me, in looking after its own and asking investors simply to keep trusting them, the fund industry is missing a much graver problem. In 2002, more than two decades of implicit trust in Corporate America to look after the commonweal collapsed. To paraphrase Ronald Reagan: Trust demands verification.
Any complaints about the costs of disclosing the thousands of proxies cast by funds strike me as akin to worrying about how much it might have cost to ensure accurate balloting in Florida in the last Presidential election. If it costs X to get the system to count people's wishes, then X must be paid. To do otherwise is to concede that some people's wishes--in this case, those who own funds--don't matter.
It's also fair to wonder how terrible more open and contentious campaigning in corporate proxy contests would be. Most of the time, a loud argument is a good thing. Think back only to the debate early this year over Hewlett-Packard's (HPQ ) merger with Compaq. Is the republic worse off for it? Not the way I see it: If the merger winds up proving foolish, shareholders will have no one but themselves to blame.
Fidelity's Weinstein told me he fears disclosing funds' proxy votes would create a "tyranny of the minority," as special interests begin pressuring funds to support goals other than financial returns. That's a risk. Meantime, a growing risk to our economy is that individual investors, one by one, conclude they can't trust mutual funds to cry foul when they see bloated executive pay packages, incompetent audit committees, and other hallmarks of corporate cronyism.
Are fund managers the reason that 2002 gave investors so much grief? No. But in repairing the broken trust between America's private-sector leaders and the individuals whose work and savings support them, disclosure of funds' proxy votes is one small, but mandatory, step. Funds are, after all, the investment of the middle class. "If we don't make these kind of changes, then ultimately the whole stock market system is not going to work," Stebbins says. "It's needed for people to have faith in the system." Amen.