Corporate CEO's should read thisBy Martha Graybow
NEW YORK (Reuters) - Big U.S. mutual funds have long preferred to stay behind the scenes in disputes with corporate America, but an angry investor movement is drawing them into the fray.
Union-backed funds and public pension funds are leading the effort, demanding that companies change their policies on everything from executive pay to board elections.
Mutual funds, quieter and more conservative, are unlikely to follow suit by sponsoring resolutions calling for reforms at companies in which they invest. But investor advocates say there are signs that big fund firms are starting to take a bit more of an activist stance.
"People are voting more conscientiously," said Timothy Smith, senior vice president at Walden Asset Management, a money manager whose fund invests in socially-conscious companies.
The $6 trillion fund industry, which represents about 95 million investors, often has been criticized for being too cozy with companies and reluctant to vote for shareholder measures that company management opposes.
Mutual funds are still not leading the charge for reform, Smith said, but they are starting to follow the agenda set by others. "What we haven't seen is a bump of a vast number of mutual funds moving into the public advocacy position, as we have with pension funds and others," he said.
Boston-based Walden, for example, sponsored a shareholder resolution at Avon Products Inc. (NYSE:AVP - news) calling for the annual election of directors, replacing the current staggered system of elections. The measure, opposed by the cosmetic company's board, passed by a vote of more than 80 percent on May 1.
"There's no way you get 80 percent of the vote without the support of many, many mainstream investors," Smith said, referring to mutual funds and other institutions.
Fund firms soon will soon see their own votes on shareholder issues reported to the public. After waging a harsh and unsuccessful fight against new disclosure rules by the U.S. Securities and Exchange Commission (news - web sites), funds themselves will be required to begin releasing their proxy voting records next year.
SCHIZOPHRENIA
Usually fund firms prefer to sell a stock rather than get involved in a shareholder battle, said Peter Sorrentino, chief investment officer at money manager Bartlett & Co. in Cincinnati. But now, fund companies are under pressure from their investors to become more active in shareholder fights, and they are struggling with how much of a role they can and should play, he said.
"There is a little bit of a split personality there where for years they've been told, 'Don't flex your muscle, don't get involved on a day-to-day basis,"' he said. "But now they are being criticized for the fact that 'Hey, you invest a lot of money for the shareholders of your fund, you ought to take more of a concerned role."'
Because fund firms are not yet required to disclose their proxy voting, it is generally not known how they vote on specific shareholder motions, observers say. But fund firms have issued general guidelines on how they vote, signaling how they will cast ballots on various issues, Smith said.
"I assume they are voting in favor of many of these corporate governance reforms," Smith said.
Fund companies say they have long been active in corporate governance, although they prefer the diplomatic route. The Vanguard Group, for example, says it advocates quiet diplomacy in the form of letters to companies and dialogue so that disagreements over corporate policies are resolved before they get to the stage of public proxy battles.
"The Fidelitys and Vanguards perhaps are not taking such a public approach, but they certainly are talking to these folks behind the scenes," said Alan Cleveland, legal counsel to institutional investors including the New Hampshire state retirement system.
Funds also are getting tougher with companies because, like many investors, they are also angry over corporate scandals that have driven down stock prices, said Russel Kinnel, director of fund analysis at research firm Morningstar Inc.
"There probably is a little more activism and impatience with management, just as there is with individual investors and pension funds," he said.