Joan Bavaria's Response to Wall Street Journal editorial on Proxy Voting Disclosure Rule(A)
There are some things best kept secret, even though secrecy is a form of lying. In poker or war or football, it’s best to keep your next move from your enemy. When my husband and I ran off and got married with another couple, we kept it secret, and had a great time doing so. Usually you keep surprise parties secret, too. Parents keep their sex lives secret from their kids. And General Motors goes to great lengths to keep its product-testing secret from its competition.
The situations where secrets (or carefully contained lying) might be appropriate fall into three categories, as far as I can tell. Those categories include adversarial competition or conflict where strategic decisions require the element of surprise to win some sort of contest. The second category could be described as protection from an emotional event or circumstance judged to damage the receiver. The third would be saving up something for purposes of injecting happy surprise into someone’s life. Most other excuses for secrecy are lame, in my opinion.
One of the lamest of all excuses for hiding information is an excuse I’ve heard way too many times in my professional career. An all-too-common response to the request for information has been some version of the accusation that I (or my colleagues) represent “thinly veiled intimidation from activist groups”. This is a blatant attempt to inappropriately invoke Category #1 as a reason for secrecy. I want to step my five-foot two-inch female frame back and say “Aww, c’mon, guys, ME??”
The latest prize for lame excuse for secrecy goes to John Brennan, Chairman and CEO of The Vanguard Group and Edward C. Johnson 3d, Chairman and CEO of Fidelity Investments, who wrote the above descriptive phrase about activist groups. By any measure, these guys represent a GIGANTIC amount of investment clout. They joined together in an editorial (carefully pointing out that they usually “compete ferociously”) in the Wall Street Journal on January 14, 2003, denouncing a proposed requirement for mutual funds to disclose how they vote the proxies of corporations whose stock they hold. These powerful men attempted to create fear (a proven great motivator) of “activist groups” who are looking to “intimidate” and “distract investors from more critical issues in judging funds”.
This is, quite simply, total hogwash. Transparency never hurt anyone by itself, although, as above, I’ve conceded that I would not recommend it for quarterbacks or submarine captains. The regulated shareholder proxy system injects some small measure of stakeholder influence into the governance of the corporations that, you could say, increasingly rule the world. For investors who own stock through a vehicle like a mutual fund to be kept in the dark about this process is completely unnecessary. To say that giving them the information would “distract” them is insulting.
Read carefully, though, the editorial reveals what I believe could be the true motivation behind the letter: profit margins. Mr. Brennan and Mr. Johnson point out that there would be a lot of work that someone would have to do to sort through the proxies that come through their systems. They even made an attempt to quantify that work to 4,000 pages of data per mutual fund. They implied that the “burden” would shift back to the shareholders; but really, the burden of shifting through the paperwork would lie with the mutual fund itself, and that would cost money. It’s simply cheaper to keep this voting undisclosed. I certainly hope there is no other secret ulterior motive.
In an age of investor cynicism, daylight or transparency is more important than it has ever been around issues of corporate governance. Trust is impossible to build on a foundation of suppressed information, and trust is nothing less than the heart and life blood of our market. The cost of secrecy is infinitely higher than the cost of processing 4000 documents. Socially responsible mutual funds, much smaller than Fidelity or Vanguard, already disclose their proxy voting to their shareholders. The self interest of financial managers should not overwhelm the right of the public to know.