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March 10, 2005
Biting the Hand That Feeds: Mutual Fund Ties to Corporate Clients Can Affect Proxy Voting
    by William Baue

Study reveals that individual mutual fund firms do not alter proxy voting whether companies are clients or non-clients, but fund firms with more clients tend to vote and adopt voting policies favoring management.

"There is no correlation between how we vote [on proxy resolutions] with respect to whether someone is a 401 (k) client or not," a Fidelity spokeswoman told New York Times reporter Gretchen Morgenson for a September 2004 article. However, Vanguard founder John Bogle confirmed such conflicts of interest, stating "votes against management may jeopardize the retention of clients of 401 (k) and pension accounts" in his letter to the Securities and Exchange Commission (SEC) on proxy voting disclosure.

Which is true--do mutual funds really vote blindly, or do they lean toward management in hopes of attracting or retaining corporate pension plan business?

Both, according to a new study entitled Would Mutual Funds Bite the Hand that Feeds Them? Business Ties and Proxy Voting from the Ross School of Business at the University of Michigan.

Thanks to the new SEC disclosure rules, Professors Jerry Davis and Han Kim were able to examine the proxy voting records of 21 mutual fund firms, including Fidelity, Vanguard, and Putnam (which have over 30 corporate clients) as well as Janus, Oppenheimer, and Franklin (which have under 10). The research focuses on resolutions addressing corporate governance issues empirically linked to shareowner value in a 2004 study by Harvard Professor Lucian Bebchuk, such as staggered boards, poison pills, and golden parachutes.

"Our results show that, while potential conflicts of interest exist, there is no sign that proxy voting depends on whether a firm is a client or not," the authors state in the report. "In this regard, mutual funds come up clean."

Interestingly, these findings do not necessarily surprise the researchers. After all, the votes were cast for the first time under the microscope of public scrutiny and in the shadow of the mutual fund scandals. It is to be expected that mutual funds would go to lengths to avoid the appearance of nepotistic conflicts of interest, they contend.

While the researchers did not find differences between client and non-client voting within fund families, they did find differences when they stepped back to compare fund firms with more clients to those with less.

"In actual aggregate votes, the more clients and business ties fund families have, the more they tend to vote against shareholder proposals," Prof. Kim told

For example, Fidelity voted in favor of the shareowner resolutions studied only 33 percent of the time, with Putnam and Vanguard supporting them 47 and 51 percent of the time, respectively. Fund firms with less than 10 clients supported shareowner resolutions more frequently: Oppenheimer 53 percent of the time, Janus 74 percent, and Franklin 78 percent. However, confounding these findings are a set of fund firms with more than 30 clients that also tend to support shareowner resolutions: AIM/Invesco 54 percent, T. Rowe Price 67 percent, and American Funds 70 percent.

Taking another step back to examine the policies guiding proxy voting, the researchers found that mutual fund firms with more clients tend to adopt proxy voting policies which allow them to vote with management more often than fund firms with fewer clients.

"At the policy level, we find a positive relation between the volume of pension business a fund company does and its propensity to vote with management," Profs. Davis and Kim write. "Mutual funds may have to bite some feeding hands in order to appear even-handed, yet they also have incentives to create policies that lead to less hand-biting."

"These incentives are greater the more feeding hands there are for a mutual fund company," they add.

According to the authors, all mutual fund firms must adopt proxy-voting policies that appear aligned with shareowner interests. Fund firms with significant income from offering their portfolios through corporate pension plans, however, tend to craft proxy voting policies that minimize the incidence of voting against management. Conversely, fund companies with fewer contracts for corporate pension plans are freer to flaunt management interests by adopting policies more singularly focused on enhancing shareowner value.

Profs. Davis and Kim conclude by extrapolating the implications of their research.

"Our findings concerning the relation between business ties and aggregate voting at the family level have important implications for shareholder activists who want to make mutual funds more responsive to shareholder value in their proxy voting," write the authors. "They should not be too concerned with whether funds vote differently between clients and non-clients."

"If there was any such discriminatory voting behavior, the SEC's newly adopted regulation on proxy voting disclosure took care of it," they continue. "Instead, they should focus at the fund company level on voting policies and guidelines that lead to different aggregate voting outcomes."


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