Investment managers must take proxy voting seriously, lawyer says

(July 28, 2003) Mutual fund and pension managers who do not take proxy voting seriously could be risking a lawsuit, delegates attending a compliance conference in Toronto were warned last week.

Stephen Erlichman, a senior partner at law firm Fasken Martineau, admits it might be difficult to prove that an investment manager has breached his or her fiduciary responsibility by not voting proxies. But he added, “The risk of potential legal liability is real, based on existing Canadian case law and case law elsewhere in the world.”

“It is incumbent on investment managers for pension funds and mutual funds to have appropriate proxy voting policies and to consider the circumstances of each specific case and on the basis of what is in the best interest of the fund, whether to vote or refrain from voting on a proposal,” Erlichman said at the conference, sponsored by the Strategy Institute.

“I believe fiduciaries are required to at a minimum seriously put their minds to the issues involved in every proxy voting situation,” he added.

There are a number of arguments against proxy voting disclosure, Erlichman pointed out, including whether it is even useful or of interest to investors and whether it might result in political pressure on money managers to vote on a specific matter. “Notwithstanding those negatives, it appears the advocates of such disclosure are winning the day at this time,” he said.

The U.S. Securities and Exchange Commission adopted new guidelines in January that would force fund companies to disclose their proxy voting policies and voting records.

Although the rules have been passed, Erlichman noted lobbying efforts continue to stop or delay their implementation. Still, he believes it’s only a matter of time before the rules are final. “The writing is on the wall in the U.S. and advisors will soon have to get their proxy voting hats in order.”

Erlichman’s landmark 2000 report recommending the creation of a mutual fund governance regime in Canada suggested that each fund complex be required to disclose the guidelines managers use in determining whether or how to vote proxies at shareholder meetings.

“Although disclosure is not a panacea for all problems, sunlight is the best of disinfectants and electric light the best policeman, and accordingly, appropriate disclosure still is advantageous for securities holders,” the report said.

Erlichman did not go as far as to suggest that funds also release their proxy voting records, although a handful of Canadian fund companies have since taken that step, including Ethical Funds and Meritas.

In its framework for a mutual fund governance regime released in 2001, the Canadian Securities Administrators did not specifically recommend the disclosure of proxy voting guidelines. But the CSA did suggest fund companies adopt “policies and procedures” for proxy voting.

Erlichman, in a bulletin issued last year, called the CSA’s response to the proxy controversy “curious,” considering that corporate and fund governance issues are constantly in the headlines. “Proxy voting remains a topical issue and in light of the corporate scandals of the last few years it’s not likely to go away,” he added at last week’s conference.

Earlier this year, Eugene Ellmen, executive director of Canada’s Social Investment Organization, was even more critical, calling the CSA’s response to the proxy voting controversy “woefully inadequate.”

“It would not require mutual funds to spell out their policies or provide detailed descriptions of their votes,” he said. “We believe the CSA should scrap their existing proposal on this issue, have a look at what the SEC has approved and introduce similar rules to give Canadian investors the same rights as U.S. investors.”

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca