Here Comes The Sun(A)
Amid widespread fear and depression over the looming war, I feel a little sheepish in admitting how giddy I am over a recent Securities and Exchange Commission (SEC) rule change. But I’m convinced that this event is the silver lining in the dark cloud that was last year’s corporate ethical meltdowns, and will take my joy where I can find it these days.
By a vote of 4-1 in January, the Commissioners voted to require mutual funds to disclose to their clients how they vote on proxy proposals, which are the corporate equivalent of ballot referenda. This coming transparency is a major breakthrough. Mutual fund shareowners (52% of American households) will be able to evaluate if their fund managers are casting votes in accordance with their own values. Shareholder activists such as ourselves will be able to identify where individual mutual funds stand on our proposals, and target our lobbying efforts accordingly as we try to win support for them.
It could not have happened without the implosions of Enron, et al, which spurred a suddenly critical mass to wonder how large and supposedly competent mutual fund investment managers could have approved the company’s board of directors, auditors, and pay packages by margins typically exceeding nine to one. And not just for Enron, but for virtually every company they own, (which is just about every company listed in the U.S.). In its dogged opposition to the rule change, the mutual fund industry claimed, somewhat incredibly, that tracking and reporting all those votes would be way too expensive and cumbersome. They lugged huge sample printouts to public hearings as if time had reversed and we were all living in the pre-Internet era. We can affirm from our own experience that tracking and reporting proxy votes does not threaten the reporting firm’s survival nor its overall profitability. It hasn’t even been terribly inconvenient.
The real nightmares the mutual fund industry sought to head off were different ones. One is the blatant exposure of the conflict of interest that arises whenever a mutual fund is supposed to independently evaluate a proxy proposal at a company whose business it wants. The new sunlight will not eliminate this conflict of interest. Rather, it will illuminate it, and allow mutual fund shareowners to decide for themselves if and when they think that fund managers’ objectivity has been compromised. This will inevitably cause some attrition as some clients switch to funds whose voting practices better reflect their values.
The second nightmare is what John J. Brennan and Ned Johnson, the respective leaders of the Vanguard Group and Fidelity Investments, characterized as the “[opening up of] mutual-fund voting decisions to thinly veiled intimidation from activist groups whose agendas may have nothing to do with maximizing our clients’ returns.” That pretty much sums up the long held and hardened attitude among many in the industry that shareholder activists’ goals cannot be both good for society and the bottom line. It is true that many social and environmental proposals would require a short-term increase in corporate expenditures, but most make strong arguments justifying the expense. (For example, apparel companies that spend money to identify and eliminate sweatshop contractors will be better positioned to head off boycotts, reputation damage, and lawsuits.) Business as usual, in contrast, solely values the short-term primacy of shareholder returns over long-term social and environmental sustainability. The mutual funds that fought this change are correct in predicting that they will be judged accordingly. The AFL-CIO has announced that it will begin grading mutual fund companies’ votes on proxy issues, and they won’t be the last stakeholder to do so.
The mutual fund trade association is taking its case to the Office of Management and Budget, arguing that the new rule would harm mutual fund shareholders by increasing paperwork burdens and costs. Yet the most that the OMB can do is suggest alternative disclosure methods that could reduce the paperwork burden. It’s time for the mutual fund industry to stop whining and start to cast votes on proxy proposals that they won’t be afraid to reveal to their own clients.
 The change will go into effect beginning with votes cast in 2004.
 Wall Street Journal, January 14, 2003.