GOVERNANCE MAP

SRI Funds Vote as One on Exec. Pay

 Fund Votes research shows that SRI firms agree on what is to be done to improve the executive compensation. 

Almost without exception, six SRI investment firms (including Domini, Calvert, Citizens, Parnassus, MMI Praxis and Walden) voted exactly alike on shareholder resolutions addressing various aspects of executive compensation in 2008 (blue bars on graph).   By comparison, mainstream mutual funds were less unanimous in their voting (red bar graph series).

All SRI funds supported categories of resolutions such as those calling for an advisory vote on executive compensation, performance-based equity compensation, and others.  None of the SRI funds supported resolutions calling for recoupment of unearned management bonuses (at Wyeth - MMA Praxis, Motorola - Domini, Calvert and MMA Praxis, and Wal-Mart - MMA Praxis) and a limit or discontinuation of stock option awards, amongst others. 

On the one category in which there was disagreement (‘Limit Executive Compensation’), there appears nevertheless to be near-consensus at the level of the individual resolutions.  All SRI funds supported the resolutions at AT&T and IBM addressing the calculation of performance-based compensation for executive officers using projected returns on employee pension fund assets.  

Of all resolutions addressing executive compensation, there appears to have been general disagreement only on a resolution filed at Bank of America calling for a curb on CEO compensation increase beyond diluted earnings per share growth. 

Besides the Bank of America resolution, only two other votes cast by SRI funds contradicted the consensus on executive compensation . 

The overall consensus on 2008 executive compensation resolutions (of which there were 154) for the six SRI fund families studied comes out at 98%.

Strong mutual fund support for shareholder-sponsored resolutions on executive compensation in 2008

 

A new Research Brief from Fund Votes finds that 8 out of the 9 financial firms named in the US government bailout plan had been targeted by shareholder activists with a ‘say-on-pay’ resolution in 2008.   A number of major mutual fund families failed to support those initiatives and actually voted overwhelmingly against increasing oversight on executive compensation.

 

121,000 votes by 47 mainstream fund groups and six socially responsible investment (SRI) groups show mutual funds more likely to support shareholders in their quest to rein in executive compensation in 2008 compared with 2004 - the first year that votes were disclosed.  SRI funds lead the charge against runaway senior executive compensation at large US corporations. 

Other key findings:

·         Mutual fund support for shareholder-sponsored compensation resolutions is increasing, led by SRI mutual funds.  Mainstream fund groups cast an average of 41% of votes (including votes ‘for’, ‘against’, and ‘abstentions’) in support of shareholder-sponsored compensation resolutions in 2008, up from 20% in 2004.

·         Mainstream funds cast the majority of their votes in support of five of the 17 categories of shareholder sponsored compensation resolutions.   SRI funds voted overwhelmingly in support of compensation resolutions.

·         ‘Say-on-Pay’ resolutions received a majority of mainstream mutual fund votes in support in 2007 and 2008, while the number of resolutions voted on in this category soared to 79 and average general shareholder votes inched up to just below 40%.

·         The American Federation of State, County and Municipal Employees (AFSCME) promoted new types of resolutions in 2008: one type requests boards not to allow tax gross-up payments to senior management, and another calls for three key principles to be incorporated into contracts with senior management.  Both categories did well in their first year, with the former earning 58 percent average support from mainstream fund groups surveyed.

·         Resolutions addressing severance pay continue to attract the highest support from mainstream fund groups: 70% average support from fund groups in 2008.  This is the only category of shareholder resolution earning an overall majority support from general shareholder bodies: 55 percent of votes cast at AGMs in the 2008 proxy season (including abstentions in the denominator) voted ‘for’ the 7 resolutions in this category.

·         Resolutions asking the board to recoup management bonuses based on erroneous financial reporting, restated financials, fraud, etc. were squarely voted down by mutual funds in 2008.  From a high of 33% of mainstream mutual fund votes in support in 2008 (averaged across fund groups), the five resolutions in this category earned a mere 2.2% average votes in support in 2008.

Fund Votes is an independent project started in 2004 by Jackie Cook.  Its primary objective is to track mutual fund proxy voting in the US and Canada. Over 12.5 million voting decisions spanning five years of mutual fund disclosures in the US and two in Canada have been indexed against shareholder resolutions and other key data.  Data drawn from Fund Votes’ proprietary mutual fund voting and shareholder resolutions databases have been used in a number of industry reports and news articles.

 

Download the report from the Fund Votes website.

Large Fund Groups Failed to Support Tighter Pay Practices at Banks named in Bailout Plan

Today the US government announced that it would inject $250 billion into the US banking system by buying large stakes in nine banks: Citigroup, JPMorgan Chase, Morgan Stanley, Goldman Sachs Group, Bank of America Corp, Merrill Lynch & Co, Wells Fargo & Co, State Street Corp and Bank of New York Mellon. 

Eight of these nine banks were targeted with ‘Say-on-Pay’ resolutions in the 2008 proxy season.

Executive pay practices at large banks have been placed front and center in the financial crisis: 
• Pay practices are blamed for excessive risks taken by banks. 
• Government conditions on the bail-out plan include executive pay restrictions. 

Government conditions target severance pay and recouping incentive payouts based on ‘inaccurate’ performance measures (earnings, gains, etc.). 

Many shareholder activists argue that tighter pay practices would follow if shareholders could annually cast a vote on an advisory resolution ratify the boards’ compensation reports. 

Who voted down ‘Say on Pay’ at big banks?

Analysis of mutual fund voting data from Fund Votes’ proprietary database of investment fund proxy voting shows that sixteen of the 70 fund groups (including 1700 individual funds) surveyed by Fund Votes failed to support even a single ‘say-on-pay resolution at the eight bail-out banks targeted with this resolution in 2008.  These are:

·         ADVISORS SERIES

·         ALLIANCEBERNSTEIN

·         AMERICAN CENTURY

·         DAVIS

·         DODGE & COX

·         DWS (DWS SCUDDER)

·         FIDELITY*

·         INTEGRITY

·         PUTNAM

·         RIVERSOURCE (AXP)*

·         STATE STREET

·         STEWARD

·         VANGUARD

·         WELLS FARGO

*=Abstained on all votes

Many large fund groups and all of the socially responsible investment groups surveyed supported every such resolution at the eight bail-out banks.  These include:

·         AFSCME

·         AIM

·         AMERITAS

·         ARTISAN

·         BRIDGEWAY

·         CALVERT

·         COVENTRY

·         CREDIT SUISSE

·         DOMINI

·         DREYFUS

·         FIFTH THIRD

·         FRANKLIN TEMPLETON

·         GREEN CENTURY

·         JANUS

·         MELLON

·         MMA PRAXIS

·         NEUBERGER BERMAN

·         PARNASSUS

·         PAX

·         PIONEER

·         RUSSELL (FRANK RUSSELL)

·         SCHRODER

·         SCHWAB

·         SIERRA CLUB

·         TIAA-CREF

·         WALDEN

Data used in this study are available for download from the Fund Votes website.

Mutual Fund Voting Survey - 2004-2008

1.6 million mutual fund votes analyzed from disclosures made by 31 August 2008

40 mutual fund families profiled on 2008 votes

600,000 votes on shareholder-sponsored resolutions over 5 years broken down into categories

10.5 million US mutual fund proxy voting records analyzed over five years

Average support for management resolutions at 90%, stable over 5 years

Average support for shareholder resolutions at 36.6% in 2008, up from 31.3% in 2004

SRI mutual fund groups such as Domini, Calvert and Citizens continue to support both governance and social and environmental resolutions filed by shareholders to a far greater extent (at around 81 and 88 percent, respectively) than do mainstream mutual fund groups such as Vanguard, Fidelity, Putnam and others (at around 45 and 11.5 percent for governance and social resolutions, respectively).

Interestingly, opposition to CSR resolutions by mainstream fund groups (votes cast ‘against’ CSR shareholder resolutions) has fallen by a full 13 percent over the five year period, from 85 percent in 2004 to 72 percent in 2008. This corresponds with a large and sustained increase in abstentions by mainstream funds on CSR resolutions over the five year period from 10 percent in 2004 to 16 percent in 2008.

Survey available for download at Fund Votes.

2007 Mutual Fund Votes TalliedHow Activist Are Funds This Year?

In the first summary of how mutual funds voted in 2007, FundVotes.com compares 54 large funds. Funds’ votes on management- and shareholder-sponsored resolutions are tallied and funds are ranked on their ‘activism’ in these two areas.

Drawing on a database of over 7.5 million voting decisions, funds’ 2007 voting records were compared with previous years (2004, 2005 and 2006). On average, funds were slightly less likely to support management resolutions this year than last (although not compared to 2005 and 2004). However, consider this result in context:

Abstentions on management resolutions are slightly up on last year and previous years – so in actual fact, funds are not rejecting shareholder resolutions much more than last year.

Average support for shareholder resolutions is down, and abstentions on shareholder resolutions are up. Both of these results may be explained by the smaller proportion of shareholder resolutions calling for majority voting in director elections – which last year received over 50% support from mutual funds.

As in previous years, SRI funds (Domini, Calvert, Parnassus, Citizens, Coventry and MMA Praxis) were least likely to support management resolutions and most likely to support shareholder resolutions.

Director Elections Proposals Published in Proxies up to July 14, 2006

So far this proxy season 94 proposals calling for the majority vote standard to be applied to director elections have been published in proxy materials this proxy season. Thirty-one of these were voted on at meetings last year. Full details provided at: Open AGM

Director Elections Proposals Published in Proxies up to March 31, 2006

At least 49 resolutions calling for a majority vote threshold to be applied to director elections have been published in US public company proxies already this year (up to 31 March 2006).

Of these, 12 are repeat resolutions which last year earned anywhere from 30 percent support (Paccar Inc) to 58 percent support (Raytheon Co).

At this rate of publication, it is possible to predict there will be almost 100 such resolutions voted on by shareholders before the end of the year.

The list of Director Elections Majority Vote resolutions and links to respective proxies are published at: Open AGM

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Shareholders Turn their Attention on Board Elections: 2006 Proxy Season

The wave of proxy submissions that traditionally heralds the start of a new proxy season has not yet begun. Yet even at this stage at least three proxies containing proposals calling for a majority vote standard to be applied to director elections have been filed with the SEC. Predications are that this number will exceed 100.

The three are:

Analog Devices (Meeting date: March 14, 2006),
Hewlett Packard (Meeting date: March 15, 2006), and
Ciena Corp. (Meeting date: March 15, 2006)

All three of these resolutions were filed by the United Brotherhood of Carpenters and Joiners of America. None of these three companies faced this resolution last year.

Resolutions calling for a majority vote threshold in director elections showed the largest increase in levels of shareholder support from 2004 to 2005.

In 2004 13 such proposals were filed, averaging 11 percent support (counting votes for as a percent of votes for and votes against).

In 2005 60 such proposals were filed, 58 of which came to the vote, with an average support of 44%. Fourteen resolutions achieved majority shareholder support.

Analysis of funds’ voting behaviour as reported in N-PX filings showed a similar increase in support. Whereas in 2004 almost no funds supported resolutions calling for the majority vote threshold to be applied to director elections, in 2005 the 45 fund families studied supported this resolution 60 percent of the time, and many supported all such resolutions across their portfolio companies (most notably, the SRI funds).

However, this is not the only way in which shareholders are attempting to pry open the boardroom doors. So far this season two resolutions requiring cumulative voting in director elections have been published in early proxy filings by Tri-Continental Corp. (Meeting date: May 4, 2006 ) and WGL Holdings (Meeting date: March 1, 2006)

And at least two proxies published so far this season contain resolutions calling for declassification of the board: Analogic Corp (Meeting date: January 27,2006) and Span America Medical Systems (Meeting date: February 28, 2006)

In fact these three types of proposals (majority vote threshold for director elections, cumulative voting in director elections and declassification of the board) may be seen as part of a broader strategy by shareholders to achieve, in a limited way, what was lost when the SEC dropped the ball on the proposed 'Proxy Access Rule'.

This rule, initially proposed in draft form in October 2003, gave shareholders a glimmer to hope for achieving some say in board elections, albeit very limited. When the SEC failed to proceed with implementing this rule in 2004 shareholders had already started to dream of promoting board candidates who would truly represented their interests.

While majority voting in director elections gives shareholders limited power to keep certain nominees off the board, it does not allow shareholders to actually nominate their own candidates.

In 2005 proposals at Alaska Air Group and Nortel Networks called for shareholder say in proposing board candidates. In a high profile case, AFSCME filed a lawsuit against American International Group for excluding from its proxy a resolution that would have required the company to allow shareholders to nominate directors (see: Majority-Vote Director Election Shareowner Resolutions To Top 100, Dominate Proxy Season.

Perhaps this season will see more such resolutions. Perhaps companies will attempt to deter this type of shareholder action by adopting the less threatening majority vote rule, as many already have.

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New Staff Report by The Corporate Library:Analysis of Fund Voting (2004-2005)

On Tuesday this week The Corporate Library released a new report authored by this blogger.

The report presents the results of an analysis of the voting behaviour of funds as reported in their 2004 and 2005 proxy filings. It compares voting records on a number of dimensions:

• across the two years (2004 and 2005),


• across 45 fund families and two groupings of fund families: ‘mainstream’ and socially responsible investment (‘SRI’) funds, and


• across 2 main types of shareholder-sponsored resolutions: corporate governance (‘CG’) resolutions and corporate social responsibility (‘CSR’) resolutions, with a closer look at the subcategories of CG resolutions.

The key findings are that:

• SRI funds are more aggressive towards management with respect to both management and shareholder-sponsored resolutions than are mainstream funds, i.e. they are less likely to support management resolutions and more likely to support shareholder resolutions. No surprises here.
• Of the shareholder-sponsored resolutions, CG resolutions are supported to a far greater extent by both SRI and mainstream funds than are CSR resolutions.
• SRI funds show higher levels of support for both CSR and CG resolutions than do mainstream funds.
• Mainstream funds are 4-5 times more likely to support CG resolutions than CSR resolutions, whereas SRI funds were 11-18% more likely to support CG resolutions. On average, SRI funds supported CG resolutions around 75 percent of the time, whereas mainstream funds supported CG resolutions around 50 percent of the time. On average, SRI funds supported CSR resolutions 60 percent of the time, whereas mainstream funds supported CSR resolutions only 16 percent of the time.
• The most popularly supported sub-categories within the broad category of CG resolutions are poison pill rescission or voting, stock option expensing and implementation of a majority voting standard in director elections.
• Resolutions on stock option expensing and poison pill rescission or voting achieved, on average, more than 80 percent support from both mainstream and SRI funds in both reporting years. However, the number of resolutions in both categories decreased by 50 percent between 2004 and 2005 due to regulatory changes and more general changes in board practices, respectively.
• The number of resolutions requesting implementation of a majority vote standard for director elections increased by around 4 times between 2004 and 2005. Whereas no funds included in the survey had supported this resolution in 2004 where it had been voted on, SRI funds supported this resolution 100 percent of the time in 2005 and mainstream funds supported this resolution 60 percent of the time.
• Average support for CSR resolutions by both mainstream and SRI funds declined between 2004 and 2005, with SRI funds as a group showing more of a decline in support than mainstream funds (3 percent as compared to 1.5%). This surprising result has been attributed to the greater use of abstentions (as opposed to a vote for or against a particular resolution) by SRI funds, in particular, Catholic Funds and Parnassus.

The report goes on to explore the voting profiles of individual fund families in relation to some of their published proxy voting guidelines and also explores the implications of, and outlook for, shareholder activism around the majority vote standard in director elections.

Download the report.

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News Update: The SEC and Electronic Reporting

Two recent developments suggest a greater commitment by the SEC to transparency via electronic reporting.

All public companies in the US are required to file the bulk of their public reports in electronic format. The repository of these documents (known as EDGAR – Electronic Data Gathering and Reporting) is made publicly available via the SEC’s website. This repository, known as EDGAR (Electronic Data Gathering and Reporting), goes back to 1996. It represents a hugely valuable resource for investors, analysts and corporations themselves and is the largest and most comprehensive such system in the world.1

1. Earlier this month SEC's new chairman, Christopher Cox, expressed his support for introducing the XBRL2 reporting format more widely: “SEC's New Chief Has a Thing for High Tech”.

Presently, the SEC only requires that ownership filings on forms 3, 4 and 5 be filed in eXtensible Markup Language (XML) format.

Since the beginning of 2005 the SEC has had in place an XBRL Voluntary Program. It is, as yet, an experiment to determine the costs and benefits of widespread adoption. Companies that wish to do so can file reports in XBRL format, based on US GAAP standards of financial reporting. A handful of companies appear to have experimented with this system in filing some 8-K and 10-Q reports. These remain unofficial, unaudited documents, supplemental to the official documents filed in HTML or text format.

2. On Tuesday the SEC announced that it was proposing a rule change that would let companies and proponents of competing solicitations post their corporate election materials on the Internet: “SEC Plan Would Let Firms Put Ballot Materials Online”.

This rule change supposedly entails reduced costs to issuers as well those mounting challenges to incumbent management. Furthermore, online availability of corporate election materials may increase the efficiency of the communications with beneficial owners via intermediaries, such as banks and brokers.

The Business Roundtable last year proposed rule changes to the current shareholder communications system, particularly with respect to companies’ access to intermediaries’ (such as brokers and banks) beneficial shareholder lists, in order to facilitate more direct communication between companies and shareholders.

This petition has been widely opposed by shareholder democracy advocates as well as smaller companies, mostly with reference to the advantage that this would give larger companies in corporate elections relative to shareholder activists, who would not have access to the same channels of communications or resources to exploit them. It is interesting to consider how the proposed rule change on electronic reporting of corporate election communications relates to these concerns.

Furthermore, the proposed provisions would not be binding – it appears that companies will be able choose whether or not to make use of this rule change. It is unlikely that they would opt-in to such a system where incumbent management fear this could weaken their position in corporate elections.

The important test of this proposal will, therefore, be whether it shifts the balance of control over the shareholder communications process (already skewed against shareholder activists) even more in favour management of public corporations.

The discussion period over the next 60 days will shed some light on the implications for shareholder democracy.

---

^{1. The Canadian counterpart of EDGAR, SEDAR (System for Electronic Document Analysis and Retrieval)), is an electronic repository of Canadian public company reports, mostly in Portable Document Format (pdf). It is the project of the Canadian Securities Administrators.}

^{2. XBRL, which stands for eXtensible Business Reporting Language, comprises a set of standards for presenting business and financial information in a XML format using a standard set of tags. This will facilitate automatic comparisons across companies, reporting periods, groups of companies, and even reporting jurisdictions using different accounting standards. XBRL International is the international non-profit consortium that has been driving this process since 1998.}

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