March 14, 2007
Mutual Funds Inch Toward More Conscientious Proxy Voting on Social and Environmental Resolutions
by Bill Baue
Corporate social responsibility resolutions addressing climate change reveal the increasing
complexity of assessing proxy voting records.
Apparently, the rubber stamp is dying a slow death. Optimists predicted that the SEC rule requiring mutual funds to disclose their
proxy voting records starting in August 2004 would deter funds from reflexively voting with
company recommendations--which almost invariably suggest voting against shareowner
resolutions. Research on fund voting on corporate social responsibility (CSR) resolutions
addressing social and environmental issues provided to SocialFunds.com by Jackie Cook, a senior
research associate with The Corporate Library (TCL), provides a more realistic perspective. This
data complements research Ms. Cook conducted for a recent TCL report on voting by 29 large
mainstream funds on corporate governance resolutions that examined over 6 million voting decisions
parsed from over a thousand N-PX filings, the SEC form where funds
disclose annual proxy voting records.
According to the data on CSR resolutions,
funds are collectively inching their way toward more conscientious voting. Ms. Cook analyzed 592
CSR resolutions that elicited more than 24,000 voting decisions over the past three proxy seasons
by 60 fund families (up from the 45 fund firms Ms. Cook analyzed last year for SocialFunds.com.) She found that overall support for CSR resolutions
fell from 15.7 percent in 2004 to 14.8 percent in 2005, then rose to 21 percent in 2006.
Support for CSR resolutions by the 52 mainstream funds surveyed fell slightly from 2004 (7.8
percent) to 2005 (7.7 percent) before rising to 13.4 percent in 2006. The eight socially
responsible investing (SRI) funds surveyed showed much more robust support for CSR resolutions--
from 68 percent support in 2004 to 61.9 percent in 2005 to 71.8 percent in 2006.
at the big picture tells an incomplete story--a closer examination reveals several layers of
complexity," Ms. Cook told SocialFunds.com. "For example, the progress made overall comes despite
significant lagging by some of the largest firms."
The three biggest fund
families--American Funds, Fidelity, and Vanguard--have the biggest rubber stamps. For example,
Fidelity voted against 126 CSR resolutions and for not a single one in 2005. This
past proxy season, Fidelity supported one single CSR resolution while opposing 124 to raise its
support rate from 0 to 0.8 percent. Vanguard takes a slightly different tack to arrive at
similarly low support rates--it abstains on almost all CSR votes, which effectively creates the
same impact as against votes in rubber stamping management recommendations. The firm
explains its rationale in the "corporate and social policy issues" section of its proxy voting guidelines.
"The Board generally believes that these
are 'ordinary business matters' that are primarily the responsibility of management and should be
evaluated and approved solely by the corporation's board of directors," states Vanguard. "Often,
proposals may address concerns with which the Board philosophically agrees, but absent a compelling
economic impact on shareholder value (e.g., proposals to require expensing of stock options), the
funds will typically abstain from voting on these proposals."
conveniently ignores two important issues. First, companies routinely request permission from the
SEC to omit CSR resolutions from their proxy under the "ordinary business" provision, so
resolutions that survive this challenge clearly do not pertain to "ordinary business" (and it is
safe to assume the same of those that go unchallenged.) Secondly, resolution filers increasingly
demonstrate economic impacts on shareowner value from the environmental and social issues they
address, effectively forcing funds to at least weigh in one way or the other instead of
simply sticking their heads in the sand by abstaining.
Climate change represents a case
in point. Investment analyst reports for the past three years have discussed the economic impacts
of climate change. The Stern report, issued in late 2006 (after the end of the proxy season)
established these impacts beyond reasonable doubt. Yet Vanguard abstains on all climate
Climate change resolutions also demonstrate another confounding aspect
of CSR resolutions: the advent of resolutions addressing social and environmental issues that
actually advocate practices and policies that run counter to the sustainability agenda. The 2006
proxy season saw four climate change resolutions falling into this category, where funds exhibited
conscientious voting by opposing the resolutions as an expression of support for corporate
action to address climate change.
This significantly complicates the statistical
assessment (and led Ms. Cook to exclude such resolutions from her overall calculations.) For
example, two firms that issued investment analyst reports discussing the economic impacts of
climate change appeared on first blush to have voting records in 2006 that ran counter to
supporting corporate action on climate change. Goldman Sachs, which has a proactive corporate
environmental policy, has issued a series of analyst reports on climate change, and Wells Fargo,
which is the largest corporate purchaser of alternative energy in the US, has issued an analyst
report on alternative energy. It would appear that both firms opposed action on climate change in
2006, each voting against seven resolutions and for only one.
four of the resolutions Goldman Sachs and Wells Fargo voted against were in fact resolutions
opposing action of climate change. So the firms actually supported action on climate change in
five out of eight resolutions.
On first glance,
TIAA-CREF similarly appeared to have an inconsistent record voting on climate change, supporting
almost all such resolutions in 2004 and 2005, then opposing about half the climate change
resolutions it faced in 2006.
"After close analysis, TIAA-CREF determined that proposals
at Occidental, Ford, GE, and General Motors all made arguments against climate change and the need
for corporate action," John Wilcox, TIAA-CREF's senior vice president of corporate governance, told
SocialFunds.com. "In these cases, we voted against the proposals, consistent with our position on
climate change resolutions."
TIAA-CREF's voting record also illustrates another
significant trend in 2006--a shift to voting for political influence resolutions asking
companies to disclose and provide board oversight for their political donations. After voting
against all 24 such resolutions in 2004 and 2005, TIAA-CREF voted for 27 of 34 such
resolutions in 2006, radically upping its record from zero to 79 percent support.
Stepping back to look at the bigger picture, TIAA-CREF more than doubled its support for CSR
resolutions in general over the past three years, from 19.3 percent in 2004 to 43.7 percent in
2006--a period that saw a formalization of TIAA-CREF's commitment to SRI by creating a position of
Director of Social Investing in June 2005. TIAA-CREF thus exemplifies the action spearheaded by
the activist SRI funds such as Calvert, Citizens, Domini, MMA Praxis, and Pax that are all working
to bury the rubber stamp.