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September 12, 2004

Your Mutual Fund Helped Loot Economy

As corporations defrauded the public in the 1990s with distortions of their budgets and excessive, unchecked pay for CEOs, it turns out mutual funds were sitting there as the cheerleading squad for all these excesses.

No one knew this until this past month-- although many suspected it-- since mutual funds were not required to tell their customers how they voted all the shares of stock that they controlled.

But cursory analysis shows how bad the situation was:

Although a fund manager must vote its shares in the best interests of clients, most funds voted with management, rubber-stamping chief executives' power and pay grabs through the 1990's.
However, the recent disclosures showed some surprises of mutual fund activism. In a number of cases, the mutual funds voted against incumbent directors at companies and have at times resisted the big pay packages proposed by management.

On the other hand, the mutual funds seem to almost universally vote no or abstain when activists push for broader reform or push resolutions on social issues such as ending gender discrimination.

Some activists think that, anticipating the new disclosure rules, the funds increased their independent voting this year.

As interesting as the trends are the differences in voting strategy reflected by the funds, differences now highlighted by the disclosure rules:

For example, at the March 3 showdown over the leadership of Walt Disney Co., Fidelity funds including Magellan, Growth & Income and Equity Income withheld their support for re-electing Michael Eisner as chairman. The stunning 45 percent “withhold” vote against Eisner led to his departure as chairman and represented perhaps the high-water mark in shareholder rebellion this year. . . Yet for all that, the funds did not march in lock step. Vanguard funds including its 500 Index and Institutional Index stood by Eisner and the rest of the beleaguered Disney board. Differences even took place inside fund families. At T. Rowe Price, the Equity Index 500 backed Eisner, but the Capital Appreciation Fund and Dividend Growth Fund did not.
A whole new realm of power is opening up for investor activists, since they now wll have the information tools to embarass mutual funds that collaborate with management in bad social decisions.

Given inequality in wealth, most of that power in corporate voting will remain with the wealthy, so there are limits to how much power progressives can exercise through such investor activism. But when combined with consumer boycotts and labor actions, such voting fights may play a key role in targetting companies that undermine labor and environmental standards in our society.

Posted by Nathan at September 12, 2004 10:53 AM