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.

Shareholder Support for Climate Change Resolutions Unremarkable

Shareholder support for Global Warming shareholder resolutions has been creeping up over the past three years. In 2006 a climate change resolution achieved a record 39% support by shareholders. This was put forward by the Nathan Cummings Foundation at Standards Pacific Corporation.

A recent article by Bill Baue of SocialFunds entitiled Mutual Funds Inch Toward More Conscientious Proxy Voting on Social and Environmental Resolutions makes this case. It is based a collaborative analysis of the data that I have gathered.

However, support in this area has yet to really gather momentum amongst mainstream funds.

Average shareholder support on climate change and energy efficiency-related resolutions has increased less than four percent since 2004. No more mainstream funds supported at least one global warming issue in 2006 than did in 2004. Counting only progressive resolutions in this category, no more resolutions were presented for shareholder vote in 2006 than in previous years.

So credit is due where credit is earned. The following mainstream funds supported at least one of the progressive resolutions on Global Warming and Energy Efficiency in 2006:

• ABN AMRO
• AIM
• AMERITAS
• BRIDGEWAY
• COLUMBIA
• GARTMORE
• GOLDMAN SACHS
• JANUS
• JOHN HANCOCK/MIT
• JP MORGAN
• LEGG MASON
• LORD ABBETT
• MASSMUTUAL
• MORGAN STANLEY
• NEUBERGER BERMAN
• SALOMON
• SCHWAB
• SMITH BARNEY
• T ROWE
• TIAA-CREF
• WELLS FARGO

It almost goes without saying that this issue would be supported by SRI funds, including (for those that voted on the issue):

• CALVERT
• CITIZENS
• DOMINI
• GREEN CENTURY
• MMA PRAXIS
• PARNASSUS
• PAX

Note that I distinguish progressive resolutions in this category from those that appear to have a conservative agenda aimed at stalling progressive change in this area. In all, there were five such resolutions in 2006. These were filed on or behalf of groups such as the Free Enterprise Action Fund and called for companies to revisit the scientific evidence on climate change in order to assess whether expenditures in increasing energy efficiency were justified. These have been omitted from the analysis.

Fund families' votes on each of the 2006 Global Warming/Energy Efficiency resolutions have been detailed at the fundvotes.com website.

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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Funds Support Majority Vote on Director Elections

With the receding likelihood of the enactment of the 'proxy access rule', certain investor groups' strategy has been to promote the ‘majority vote’ rule with respect to director elections.

This may be seen as an alternative method of gaining some control over corporate board composition in the US. The rule requires that directors can only be elected to the corporate board if they receive a majority of votes in support of their nomination (as opposed to votes withheld).

Whereas in 2004 only around 12 such proposals were voted on at annual meetings of shareholders of US public companies, this year (2005) there appears to between 50 and 60 such proposals. Most of these have been submitted by labour groups and appear to receive higher levels of support than most of the other categories of shareholder proposals.

The voting records of 45 fund families, as published in their 2005 SEC filings, were analysed. In 2004 only two of the 29 fund families voting on shareholder resolutions addressing one of the 12 majority vote proposals supported the proposal. In 2005 34 of the 41 fund families voting on this issue at one or more of their portfolio companies supported one or more of the 50-60 such proposals.

Pressure for the adoption of this rule has also come from influential groups such as the Council for Institutional Investors (CII), and Institutional Shareholder Services (ISS).

Many companies have responded to this pressure (whether direct or indirect) by implementing the rule. Examples include Pfizer, Circuit City, Abbott Laboratories, Best Buy, Altria, United Technologies, Microsoft, Walt Disney, Prudential Financial, Aetna, Gap, Avnet, Lucent Technologies, Pitney Bowes, Lockheed Martin Office Depot and KB Homes.

It will be interesting to see how shareholders use this opportunity. It seems logical to predict greater levels of 'withhold' in future director elections - especially since investment funds are now required to disclose to the world how they vote their proxies, including how they vote on individual board candidates.

The size of the ‘withhold’ vote will become more important and the threat of a large ‘withhold’ vote will pressure boards and individual board members to be more responsive to shareholders’ other concerns.

Additionally, the threat of a large ‘withhold’ vote may pressure boards to be more sensitive to the reputation of potential board recruits before supporting their nominations.

See: Director Map for director election outcomes.

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Fund Families ranked on Director Voting

Some funds are more likely to vote against management than others, both on management- and shareholder-sponsored resolutions.

During 2004 US Investment Companies were required for the first time to publicly disclose their voting. Also during 2004 shareholders appeared to lose the battle for access to the proxy ballot in proposing their own nominees.

So for the mean time, boards and management go on appointing their own nominees, with funds’ votes having no direct bearing on the outcome of board elections. Some funds nevertheless research and vote on director nominees as if their votes counted. We are able to identify these funds by analyzing their proxy voting records.

Ranking Criteria.

I analyzed the voting behavior of 22 fund families (including 159 individual funds, reported in 47 N-PX filings), and ranked them on how ‘Activist’ the funds appeared to be on director elections.¹

Fund Families were scored on two dimensions: (1) the extent to which they voted against board nominees (‘critical’) and (2) the extent to which they voted on individuals rather than on entire slates (‘discerning’). Based on the average scores on these two measures, funds were grouped into quadrants: Low Critical, Low Discerning; High Critical, Low Discerning; Low Critical, High Discerning; and High Critical, High Discerning.

Activist	Bordering on Activist	Complacent
Citizens	Bridgeway	Aim
Domini	Calvert	Ariel
Janus	Green Century	Dodge & Cox
Vanguard	Integrity	Dreyfus
	Putnam	Enterprise
	T Rowe	Fidelity
		Investment Co of America
		Merrill Lynch
		Scudder
		Smith Barney
		Strong
		Templeton

Activist.

I've labeled as ‘Activist’ those funds which fall into the upper right quadrant. Activist funds are more critical and more discerning than their peers: they are more likely to vote against management recommendations for board nominees and also tend to apply a more individualized approach to voting on board nominees across their portfolio of companies. According to these criteria, the following four funds are Activist: Vanguard, Janus, Domini and Citizens. Two of the four Activist funds (Domini and Citizens) are SRI funds.

Bordering on Activist.

One fund that didn’t make the ‘Activist’ category is Green Century (high critical, low discerning), which opposed 80% of board nominees at its portfolio companies. However, all of its decisions were made at board level rather than at the level of individual nominees. Likewise, Calvert voted against management nominees 40% of the time, but only 1% of the time did they make an individualized voting decision.

Other funds, while not opposing many director nominees, did oppose selected individuals spread across a number of boards. For instance, Integrity group of funds (low critical, high discerning) only opposed 9% of nominees, but these were spread across 25% of its portfolio companies’ board elections.

Complacent.

I've labeled as 'Complacent' those funds that fall into the lower left quadrant. These are funds that are both less critical and less discerning than their peers. The majority of funds analyzed fall into this category. However, Dodge & Cox and Strong deserve special mention as not opposing a single director nominee across all portfolio company board elections.

Co-Nominees of fund trustees twice as likely to crack nod.

Funds showed reticence in voting against boards to which their own trustees were being nominated. Whereas the average support for management nominees was around 82% overall, boards to which fund trustees were being nominated achieved around 91% support from respective funds.

For those funds analyzed, only in one instance did a fund vote against its own trustee. Vanguard Institutional Index Fund and Total Stock Market Fund cast votes against J. Lawrence Wilson in the September 2003 director elections at Cummins Inc., while he served as a director of The Vanguard Group.

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^{1. The data on which this analysis is based was compiled for The Corporate Library.}

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Social Screens for Director Nominees: Domini 400 Board Elections

Socially Responsible Investment (SRI) firms often support individual directors on the boards of portfolio companies, even when those same individuals are deeply implicated in the dirty and dangerous industries from which SRI recoils.

In the latest director voting disclosures it was revealed that Domini Social Investments, one of the nation's leading socially responsible investment companies, voted in support of 57 individual directors that also happen to hold board level positions in various arms manufacturing, defense contracting and nuclear energy companies.

While it is unfair to single out Domini Social Investments, since they are widely recognised as one of the leading lights in the SRI industry, the case study is intended to raise general questions concerning the application of socially responsible voting principles to director nominations.

As a socially responsible investment (SRI) company, Domini Social Investments is very careful about where it invests. Domini applies a set of inclusionary and exclusionary screening criteria to its index of 400 stocks (Domini 400 Social Index^SM).

Domini also engages in shareholder activism by sponsoring or co-sponsoring shareholder resolutions and by voting in accordance with its publicly disclosed voting guidelines for principled decision making on human rights, environment and corporate governance issues.

In board elections Domini applies a number of governance-related considerations to candidates: board attendance, board diversity, board independence, independent chairperson, independent committees, and number of other directorships.

However, board candidates are not evaluated on the same social criteria as are applied to shareholder and other management-sponsored resolutions. Domini is not alone in this regard, but this does highlight a massive gap in the SRI industry: individual accountability of board nominees.

I applied Domini’s weapons and nuclear power screens to board elections reported in Domini’s first N-PX filing (24 August 2004)¹ to identify nominees that were supported in their elections to Domini 400 socially screened company boards, but who hold leadership positions at companies in the weapons and nuclear power industries.

Sixty-nine weapons, defense and nuclear power companies were identified that would have been excluded from the Domini index based on the criteria provided at the Domini website. Some of these companies, for instance, Lockheed Martin, Northrop Grumman, Raytheon, FPL, Unicom and Stone & Webster are explicitly mentioned at the Domini website where the screens are explained.

Directors of these companies accounted for 103 nominations in the board elections of Domini Social Investment Fund’s portfolio companies. In 72 cases (70%), Domini Social Investment Fund voted in support of the nominee. The 72 nominations supported are accounted for by 57 individuals.

Some of these individuals are CEO-Chairpersons of the boards of the excluded companies: Marshall Larsen is CEO-Chair of Goodrich Corp, an aerospace and defense company (nominated to the board of Lowe and supported by Domini), Nicholas Chabraja is CEO-Chair of General Dynamics Corp, an aerospace and defense company (nominated to the board of Ceridian Corp. and supported by Domini), John Rowe is CEO-Chair of Exelon, a nuclear power plant owner and operator (nominated to the boards of Unemprovident, where support was withheld, Sunoco and Northern Trust Corp., where Domini supported his nomination) and Lewis Campbell is CEO-Chair of Textron, a defense supplier (nominated to the board of Dow Jones & Co, where his nomination was supported by Domini).

Chairperson of Alliant Techsystems, an aerospace and defense company, Admiral Paul Miller is also amongst those supported by Domini in his nomination to a Domini portfolio company board (Donaldson Co.). Admiral Joseph W. Prueher is on the board of Fluor Corp, a defense contractor, and was on the board of Integrated Defense Technologies, and aerospace and defense firm, until it was acquired by DRS Technologies in 2003. He was supported in his nomination to the board of Merrill Lynch & Co.

Mayo Shattuck, CEO, Chairman and President of Constellation Energy, a nuclear power plant owner and operator, is also a director of the Nuclear Energy Institute, the US membership organization and lobby group for the Nuclear Energy industry. His nomination to the board of Gap, Inc., was supported. Support for his nomination to Capital One was withheld. John Deutch, director of Raytheon since 1998, was director of the United States Central Intelligence Agency from 1995 to 1996, Deputy Secretary of Defense from 1994 to 1995 and Undersecretary of Defense, Acquisition and Technology from 1993 to 1994. His nomination to the board of Cummins Inc. was supported by Domini.

This analysis is intended to raise the following questions:

If the motive for SRI is social conscience, should the champions of nuclear energy and the arms industry receive the stamp of approval from SRI shareholders concerned about these very issues and not prepared to allow their investments to flow into these operations?

If the motive for SRI is to change the way that businesses operate, would the market for corporate leadership respond if candidates for corporate leadership positions were evaluated on social principles?

If the motive for SRI is long-run returns based on strong stakeholder relations, are the captains of corporations that violate stakeholder relations the best representatives of the screened portfolio corporation in relations with stakeholders?

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^{1This covers voting, from July 2003 to June 2004, at Domini's portfolio of 400 socially screened stocks comprising the Domini Social Equity Fund.}

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