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August 25, 2004
As Mutual Funds Prepare to Reveal Proxy Votes, Guideline Disclosure Acts as Acid Test
    by William Baue

Investor-friendly website accessibility to mutual funds' proxy voting guidelines may signal proxy voting record accessibility and investor-friendly proxy voting.

Concealment is the key to the power of secrets; the revelation of secrets turns this key, opening the door that had dammed this power behind it. This Tuesday, August 31, 2004, is the deadline for mutual funds to file form N-PX with the US Securities and Exchange Commission (SEC), disclosing how they voted the proxy ballots of the companies held in their portfolios. For all but a handful of progressive mutual funds, this will be the first time they are revealing their proxy voting records, allowing investors to assess for themselves whether the votes seem in the best interest of shareholders or not.

The SEC passed this new rule in January 2003, requiring disclosure not only of proxy voting records but also of guidelines that steer mutual fund proxy voting. The rule change resulted from rulemaking petitions filed in 2001 by socially responsible investment (SRI) firm Domini Social Investments as well as two unions. Domini published its proxy voting guidelines in 1992 and its proxy voting record in 1999, when such practice was unheard-of in the mutual fund industry.

While the SEC does not require mutual funds to post their guidelines and voting records on their websites (they must be made available by shareowner request and through the SEC Edgar website), the rule explicitly suggests this option. Such transparency can serve as a litmus test of how responsible and responsive mutual funds are to their current and prospective shareowners, according Nahla Durrani, managing director for social investment research at Institutional Shareholder Services (ISS).

"As far as ISS is concerned, we do reward transparency, and having the disclosure on the fund's actual website would act as a sign of engagement on the issue," Ms. Durrani told

While waiting for the disclosure of proxy voting records next week, Peter Kinder, founding president of SRI research firm KLD Research & Analytics, informally administered a litmus test on web-based proxy voting guideline disclosure. As his sample, he surveyed the Pensions & Investments (P&I) list of the top 50 performing funds, since these are widely held by retirement plans that scrutinize them closely. The 50 funds came from 20 different complexes, most from Fidelity (10) and Vanguard (8), whose CEOs railed against the rule on the eve of its passing in a prominent Wall Street Journal op-ed piece.

As he was acting as an ordinary Joe considering investing in these mutual funds, Mr. Kinder did not register to gain access to restricted parts of the sites.

"I was surprised to find that the 20 websites divided themselves into two very distinct camps," Mr. Kinder told "One camp--the Fidelity camp--had a query function on the home page which quickly took you to the proxy guidelines, and were generally much more open to poking and prying."

"The other camp--the Vanguard camp--had no query function and, if the guidelines were on the site, offered no easy way for an unregistered visitor to find it," he added. "There seems to be no middle ground; sites either invite exploration or they march you through what they chose for you."

Mr. Kinder could not find guidelines for more than half (27) of the funds. It remains to be seen whether this opacity will apply to their proxy voting records as well.

It also remains to be seen whether such opacity will correlate with proxy voting records that seem poorly aligned with shareowner interests.

"It will be interesting to see how many fund complexes that say they evaluate social and environmental issues on an issue-by-issue basis end up voting in favor of such resolutions or if they vote with management," said Mr. Kinder.

Whether average investors will be able to access such information also remains to be seen. If companies do not include their proxy voting record on their website in any easily searchable format, investors will have to search via the SEC EDGAR website.

"No one apart from a professional investor and an especially dogged reporter is going to be able to find voting records without some real effort," said Mr. Kinder. "From a practical, if not a legal, standpoint, something's not public if it's not actively disclosed--as opposed to filed."

Ms. Durrani of ISS similarly draws a distinction between filing and reporting.

"Companies can report on issues such as environmental violations in their filings, but to really get to the meat of these issues, we look for additional environmental reports on companies websites," she said.

Ms. Durrani joined Anita Green, vice president of social research at SRI firm Pax World Funds, in recommending that investors limit their research by focusing on five key areas to assess mutual fund proxy voting align with their own values. These areas include annual director elections, separation of board chair and CEO positions, climate change, independent auditors, and board diversity.


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