In most cases, mutual fund advisers vote to support the recommendations of company management. This is true not only for management’s proposed slate of directors, which routinely receive the support of 99% of those voting, but also for management proposals on other subjects. For instance, during the 2000 proxy season, management proposals on proxy statements were supported on average by 85% of the stockholders who voted; proposals opposed by management were opposed on average by 74% of the stockholders who voted. This high level of consensus between stockholders and management is not surprising, at least for actively managed mutual funds. Owning the stock of a company ordinarily indicates a belief in the ability of the company’s management; supporting management’s position in voting matters often follows as a matter of course.

From time to time however, investment advisers to mutual funds may disagree with management over a proposal—such as the terms of a stock-related incentive plan, the attraction of a takeover bid or a proxy fight between an outside organization and company management. Furthermore, if a stockholder resolution raises a significant corporate issue, investment advisers to mutual funds will diligently consider whether to support the stockholder or management on such a resolution.

FundsMutual fund advisers may wish to communicate with other institutional investors regarding corporate governance issues in general and proxy proposals in specific. In 1992, the SEC liberalized its rules in connection with communications among stockholders. Under the current rules, an investment adviser to a mutual fund is permitted to discuss specific proposals with other institutional investors as long as they do not agree to act in concert and no one solicits a proxy from another. Despite the rule changes, mutual fund advisers—a fairly competitive lot—do not regularly discuss their views on pending proxy proposals with other fund advisers or institutional investors, although they may exchange views on a particularly controversial proposal. Nor do fund advisers participate in discussions among stockholders through Internet chatrooms. Instead, most fund advisers gauge the market’s receptivity to a management proposal by monitoring the trading in the company’s stock immediately following a proposal and listening carefully to the content and tone of the questions asked of management during analyst conference calls.

Fund advisers, like many other institutional investors, subscribe to various proxy voting and research services. The main proxy research services in the United States are the Investor Responsibility Research Center (IRRC), Institutional Shareholder Services (ISS) and Proxy Monitor. These firms provide in-depth analyses with respect to nonroutine proxy matters, together with proxy voting administration and record keeping services; ISS and Proxy Monitor also provide voting recommendations along with their analyses. These firms have grown in importance as mutual fund advisers and other institutional investors search for objective analyses of contested matters. A few commentators contend that the vote recommendations of the proxy research services have significantly influenced the outcome of certain recent proxy fights, especially when a company’s stockholder base was heavily weighted toward public pension funds and index funds. While proxy research services provide helpful analysis and recommendations, they usually supplement internal research by mutual fund advisers, who typically make independent decisions on controversial proxy issues.

A significant influence on the voting decisions of mutual fund managers is the lobbying efforts by portfolio companies. Public companies employ investor-relations personnel and proxy-solicitation firms to identify large shareholders and communicate with them on proxy matters in order to obtain their support for management proposals.’ For example, companies experiencing takeovers, proxy fights or stockholder- proposed resolutions frequently meet with mutual fund advisers to explain their positions and seek support. Similarly, a company that intends to propose controversial items for approval at its annual meeting may consult with mutual fund advisers to assess their receptivity to such items.

The utility of the proxy rules, the necessity for management to communicate clearly with stockholders and the willingness of institutional investors to consider challenges to management were all highlighted in the 1995-1997 proxy fight involving the Student Loan Marketing Association—previously called “Sallie Mae.” Sallie Mae is the largest provider of financing for student loans in the United States, probably including loans taken out by many readers.

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Voting Policies and Practices of Mutual Funds: Proxy Decision Making by Mutual Funds