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January 17, 2006
The Corporate Library Report on Mutual Fund Proxy Voting Finds Stagnation and Even Retreat
    by Bill Baue

Part one of this multi-part series discusses the report findings on decreasing mainstream fund support for CSR resolutions; subsequent articles examine unpublished data from the research.

When the Securities and Exchange Commission (SEC) passed a new rule requiring mutual funds to disclose their proxy voting records annually starting in August 2004, one "significant benefit" cited was "providing stronger incentives to fund managers to vote their proxies conscientiously." The SEC did not define what exactly constitutes "conscientious" proxy voting, but the between-the-lines assumption was that transparency would force funds to vote more independently of corporate management recommendations, thereby fueling support for shareowner resolutions.

(Read all four articles in the series here.)

Last week, the Corporate Library (TCL) released the first report to compare 2005 proxy voting records to 2004 results. This is a major step beyond previous reports--from the likes of the Investor Responsibility Research Center (IRRC), the University of Michigan, and Common Cause--that analyzed only the first year's voting results and so could not identify trends toward more conscientious voting. These reports did identify baseline findings of widespread rubber-stamping by mainstream funds of management's will, as expressed in resolutions filed by management as well as in its recommendations on how to vote on resolutions filed by shareowners. TCL's report reveals many areas where voting seems to be stagnating or even retreating further into pro-management land, instead of advancing toward independence.

The report, which examines over a million voting decisions culled from the N-PX forms of 45 fund families filed in August 2004 and August 2005, breaks down results between mainstream and socially responsible investing (SRI) funds. It also breaks down resolutions between those proposed by management and those filed by shareowners. Support for management resolutions rose from 86.3 percent to 87.9 percent from 2004 to 2005, with increases fueled by both mainstream (1.5 percent, from 90.3 percent to 91.8 percent) and SRI funds (2.3 percent, from 67.9 to 70.2 percent).

The report further subdivides shareowner resolutions into those addressing CSR and those addressing corporate governance (CG). The scant support for CSR resolutions by mainstream funds decreased from 9.2 percent in 2004 to a paltry 7.7 percent in 2005, suggesting that these mainstream funds consider conscientious voting to entail increasing opposition to CSR resolutions.

"Nine mainstream funds did not support a single resolution categorized as CSR [in 2005]," states Jackie Cook, the senior research associate at TCL who conducted the analysis, in the report she authored.

Dodge & Cox and Federated maintained consistency in not supporting CSR resolutions in both years examined. The seven other fund families, including American, Fidelity, Oppenheimer, and Vanguard, on the other hand, all shifted from at least some degree of support for CSR resolutions in 2004 to none in 2005.

Ms. Cook cites a specific example to illustrate this dynamic.

"Oppenheimer supported two resolutions in 2004 that appeared again in the respective companies' proxies in 2005, and it did not support them second time around," Ms. Cook told

Oppenheimer flip-flopped from support to opposition on a resolution asking ExxonMobil (ticker: XOM) to amend its equal employment opportunity (EEO) statement to cover sexual orientation. The fund family also shifted its vote from support to abstain on a resolution asking Walt Disney (DIS) to report on supplier labor standards in China, according to Ms. Cook.

The report delves into even more depth on the corporate governance resolutions than with the CSR resolutions, dividing the results into distinct CG categories such as majority vote director elections. This particular category saw a major jump in activity, from only 12 such resolutions in the 2004 proxy season to 57 in the 2005 season. Mutual fund support for this type of resolution also increased, which is a change from the 2004 proxy season when it was opposed by all but a few funds.

"However, in the 2005 fund voting data, mainstream funds supported this resolution an average 60 percent of the time and the six SRI funds voting on this issue supported it 100 percent of the time during the period July 2004 to June 2005," writes Ms. Cook in the report.

Ms. Cook also examined mutual fund family proxy voting guidelines to assess how they impacted voting results. In many instances, what was striking was the ways in which the guidelines could not account for the way the votes were cast.

"Vanguard distinguished itself as one of six mainstream funds to oppose all shareholder-sponsored resolutions on majority voting in director elections in either of the reporting periods (the others being Barclays, Blackrock, Dodge & Cox, Putnam, and State Street)," she writes in the report. "Under the section entitled 'Election of directors" in Vanguard's proxy voting guidelines, director independence and declassified boards are emphasized [but there] is no reference to the director election process."

While the report breaks down the CR resolutions into categories, "an analysis of investment funds' support for the various categories of CSR resolutions is beyond the scope of the present report," writes Ms. Cook in the report. However, Ms. Cook gathered all the data necessary for such an analysis, and has made this unpublished data on mutual fund voting records on CSR resolutions broken down to the category level available to Subsequent articles in this series examine this unpublished data to analyze reasons behind the decrease in SRI fund support for CSR resolutions and the drop in support for climate change resolutions.

Part two of this multi-part series examines unpublished data to explain the apparent decrease in support for CSR resolutions by SRI funds.

Part three of this multi-part series examines unpublished data and finds decreasing support for climate change resolutions.

Part four of this multi-part series steps back to consider the implications of the findings and how to harness them to push mutual funds to support corporate social responsibility.


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