April 13, 2005
SRI Funds Vote Proxies More Conscientiously Than Conventional Funds on Corporate Governance
by William Baue
A study on proxy voting by socially responsible investment and conventional funds finds SRI funds
voting against management more often on social, environmental, and governance issues.
The August 31, 2004 deadline for mutual funds to disclose their proxy voting records to investors
via filings to the US Securities and Exchange Commission (SEC) has spawned a series of studies on mutual fund transparency and
voting propensities. This week, the Social Investment Forum Foundation released the latest such report.
The study proceeded from the hypothesis that socially responsible investing (SRI) funds excel in
supporting social and environmental shareholder resolutions while conventional funds excel in
supporting corporate governance resolutions.
"No one will be surprised to learn
that SRI funds are way ahead of 'conventional' mutual funds when it comes to voting on
environmental and social issues," said Tim Smith, president of the Social Investment Forum (SIF) and senior vice-president at Walden Asset Management. "But many will
be interested to learn that SRI funds have a more effective record than conventional funds in
voting on corporate governance issues as well."
The study looks at voting by ten
conventional fund firms and ten SRI fund firms on six corporate governance resolutions, six
social/environmental resolutions, and four "vote-no" campaigns to withhold re-election votes for
ill-performing directors. The study finds SRI funds outpacing their conventional counterparts by
about a six-to-one margin (84.6 percent compared to 15.1 percent) in supporting social and
environmental resolutions. On corporate governance resolutions and "vote-no" campaigns, SRI fund
support exceeded that of conventional funds by about a two-to-one ratio (87.4 percent compared to
"When we aggregated all votes against management and the withhold votes
from directors, four fund complexes (all of them conventional funds) had averaged votes of less
than 25 percent," state report authors Tracey Rembert (who coordinates SIF's advocacy and public
policy program), Aileen Nowlan, and Michael Pryce-Jones. "Surprisingly, three of those four are the
three largest fund families in America."
"Fidelity, Vanguard, American, and Federated were least likely to vote
against management, with Federated having only 16.7 percent of its votes against
management," the report continues.
In fact, Federated seems so accustomed to voting with
management in opposing social, environmental, and corporate governance resolutions that it
apparently failed to notice when management recommended voting for a shareholder resolution.
Federated's proxy voting guidelines (which are buried on firm's website and difficult for average
investors to access, according to the study) state that it votes against all shareholder proposals
not recommended by management.
"But that fund family's votes, cast at Coca-Cola [ticker:
addressing the HIV/AIDS pandemic (a social resolution), were against the proposal--even though
management recommended voting for it," the report states. "Federated funds were the only ones [in
the study] to vote against management."
One limitation of the study was its relatively
small sample, as it consciously traded off depth of analysis at the conventional fund firms in
exchange for breadth of coverage. Instead of looking at just the biggest funds, which would have
concentrated focus on a few firms with big funds, the study chose the top three funds at the top
ten conventional firms, arguing that firm-wide proxy voting is relatively consistent. In
comparison, a recent University of Michigan study of mutual fund proxy
voting forthcoming in the Journal of
Financial Economics analyzed a much larger set, for example examining 31 Vanguard funds and
28 Fidelity funds instead of just three.
And focusing on large-cap domestic equity
concentrated on funds with the greatest exposure to companies where most shareholder resolution are
filed, but also precluded consideration of the two largest SRI funds, both from Ariel.
Perhaps the most useful aspect of the study is
its assessment of best practice (and its opposite.) For example, the report looked at the ease of
finding proxy voting guidelines and actual votes cast on fund websites, the quality and breadth of
proxy voting guidelines, and conflicts of interest policies.
"Most funds' customer
service options (both conventional and SRI) fall short in answering basic questions related to
proxy voting and disclosures linked to the rule itself," the report states. "Questions about the
rule or proxy disclosures in general were met with highly inconsistent customer service across most
"Many funds could not answer basic questions, or gave out incorrect information,"
the report continues. "One [customer service] agent even went so far as to insist that the public
is not allowed to have such voting information."