PHILADELPHIA — When it comes to voting their proxies in elections for corporate directors, mutual fund companies prefer not to stand out from the crowd.
In fact, fund firms tend to “feel out” what other firms intend to do before casting their votes and “huddle” when going against management’s choice for a director, according to Michael Ostrovsky, an assistant professor of economics at the Stanford (Calif.) Graduate School of Business.
“If only one fund votes against management, and others vote with management, management may retaliate against the objecting fund,” according to a study released earlier this month, of which Mr. Ostrovsky was a co-author.
The study looked at more than
3 million votes cast by 3,600 mutual funds from 2003 to 2005.
How can management retaliate?
“It can do so by limiting its interaction with the fund to the minimal level required by the law,” the study found.
Not everyone, however, is convinced that fear of retaliation is what drives funds to vote in unison.
More likely, it’s the fact that many fund firms rely on proxy advisory services such as Institutional Shareholder Services Inc. in Rockville, Md., or Glass Lewis & Co. LLC in San Francisco, said Jeff Tjornehoj, a Denver-based senior research analyst with Lipper Inc. of New York.
“I think it’s highly unlikely that there is any collusion going on between fund companies and their voting process,” he said.
Spokespeople for ISS and Glass Lewis did not return calls for comment.
There may not be outright collusion, but there definitely is a “culture” around proxy voting that results in funds voting together, said Timothy Smith, senior vice president and director of socially conscious investing at Walden Asset Management in Boston, and chairman of the Washington-based Social Investment Forum.
If funds haven’t hired a firm such as ISS or Glass Lewis, they probably have developed their own “checklist” that automatically tells them when to oppose management, he said. Many of those checklists are very similar, Mr. Smith added.
But they are not identical. That may account for the study’s other finding: Certain mutual funds withhold votes on board candidates more often than others, Mr. Ostrovsky said.
For example, in 2004 the Fidelity Spartan 500 Index Fund from
Fidelity Investments of Boston withheld support for directors in 1.2% of the cases, according to the study. But the Vanguard 500 Index Fund from
The Vanguard Group Inc. of Malvern, Pa., withheld support in 10.7% of the cases.
Such divergence is an indication that, at least in some cases, funds are thinking independently, Mr. Tjornehoj suggested.
But that’s not enough to counter the trend of mutual funds voting in “clusters” when they go against management, Mr. Ostrovsky said.
“If it were a simple matter of funds voting for those directors they think are good, or withholding votes for those they think are bad, we would see a more even distribution, but the situation is obviously more complex,” he said.
And that’s to the detriment of shareholders, Mr. Smith said.
The voting trends uncovered by the study are an indication that funds aren’t necessarily making their proxy voting decision based on their fiduciary duty to shareholders, he said.
Mr. Tjornehoj, however, disagreed. There are many things to take into consideration when deciding how to vote a proxy, he said.
“I think it’s all too easy to point fingers when it comes to proxy voting,” Mr. Tjornehoj said.
