Fundcos ignore investor interests: SIO

Conventional mutual funds — those without an explicit SRI mandate — overwhelmingly vote in line with corporate management, even when it is against the best interests of shareholders, according to a study by the Social Investment Organization.

In a report entitled A Survey of Canadian Mutual Funds on Proxy Voting, the SIO found funds voted along with management on 67% of shareholder resolutions. Of the 63 resolutions examined in the study, only one was supported by management, while three received no management recommendation.

“We looked at literally hundreds of votes in Canada, the United States and around the world,” says Eugene Ellmen, executive director of SIO. These resolutions were screened to ensure they were proposed by reputable shareholders.

The resolutions considered in the study represent all of the major governance issue areas, including executive compensation, dual class share issues, poison pills, golden parachutes, along with all the usual social and environmental issues, including human rights, climate change and employee issues.

“Our view on this is that these are the ones that truly represent the best investor opinion on these issues,” says Ellmen. “They’re not the kind of wacky resolutions that you sometimes find. These are the ones that are most deserving of investor support.”

Fund companies have been required to disclose their proxy voting record to investors since August 31, 2006, when National Instrument 81-106: Investment Fund Continuous Disclosure came into force.

Perhaps recognizing it as a hot topic, funds gave their greatest support to resolutions regarding climate change, but these still received support of only 41%.

Proposals related to corporate governance received only 30% support from mutual fund proxy votes.

The SIO found that SRI-mandate funds — specifically, those managed by The Ethical Funds Company, Meritas Mutual Funds, and Inhance Investment Management — offered 79% support for the resolutions in the study.

These SRI funds voted against management 51% more often than did conventional funds, with the widest discrepancy coming on resolutions regarding employee relations. The gap between SRI and conventional funds closed, however, on questions regarding the disclosure of political donations.

But not all conventional funds sided with management on every issue. The SIO report points out that AIM Trimark Investments, Guardian Group of Funds, National Bank Financial and RBC Asset Management all voted against management on more than half of the resolutions.

At the other end of the spectrum, AIC Limited, Counsel Group of Funds, and Fidelity Investments all voted with management on every single issue.

“We think there may be just a culture of routinely supporting management on these kinds of thing, a culture of not rocking the boat,” Ellmen says. “There’s a tendency to just vote with management on these and not really scrutinize the issues.”

Fund investors may not even know how or why their fund managers are voting as they do. Of the 27 fund families studied, only 14 publish their full voting guidelines, while the remaining 13 publish only a bare summary of their guidelines, the minimum requirement under NI 81-106.

“We found that the fund companies are not properly communicating the importance of shareholder voting to the managers,” Ellmen says. “Without direction from the top, managers are inclined to vote against these resolutions.”

Only four fund families include specific guidance on their social and environmental voting guidelines, including the three SRI fundcos and Desjardins Funds.

“The usability of proxy voting records varied greatly,” the report says. “The most notable finding in this area is that 15 fund families are not in compliance with the Continuous Disclosure requirement that each proxy vote include a brief identification of the matter to be voted on at the meeting.”

These fundcos tend to simply state the identification number of the shareholder resolution and how the company voted, leaving it up to the investor to research what was proposed.

“We’re definitely going to write a letter to the OSC about this, because the whole point to having public disclosure of the proxy votes is to provide tools to investors about how their funds do vote on these issues,” says Ellmen. “If you look it up on your fund’s website and find this incomprehensible spreadsheet…what’s the point of doing all this?”

For the full report, please click here.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(09/19/07)

Steven Lamb