GOVERNANCE MAP

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.

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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Board Elections and Scandal Directors

In an article entitled Teflon Directors published today at the Forbes website, Maya Roney reports on the present whereabouts of the directors who served on the boards of Enron, Global Crossing, Worldcom, Adelphia, Tyco and Waste Management during the 'scandal' periods.1

Between them, these directors still hold in excess of 120 directorships at other public listed US companies.

We know that shareholders have a difficult time challenging board nominations supported by incumbent boards. However, withheld votes in director elections indicate general levels of shareholder dissatisfaction with the status quo.

In 2003, shortly after the breaking news of corporate scandals, average votes for the 'teflon directors' listed in the article was 3% less than that of all other nominees to US public company boards. Since the average level of support for board nominees is around 95%, 3% makes quite a big difference in guaging general levels of shareholder confidence.

However, the margin has narrowed to 1.3% in 2004 and 0.5% in 2005. This suggests that shareholders become complacent or, as Roney points out, are not informed about the past failures of board nominees: "...many companies don't make it easy for shareholders to find out where their directors have been..." omiting mention of Enron, Global Crossing or WorldCom from directors' bios.

The Corporate Library maintains a database of 'problem directors', amongst which are listed many of the teflon directors. Now that the majority vote standard is taking hold, reputation may start counting for something in director elections.

1. This blogger was quoted in the article.

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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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Competition in the Market for Corporate Leadership?

The recent spate of corporate scandals in the US highlighted a number of corporate governance weaknesses: some institutional, some less tangible.

Closer scrutiny of individual board members, those with oversight responsibility, reveals a number of areas where conflict of interest may arise.

In the US, in 2004, 24 directors held six or more directorships at the 2000-odd large public companies covered in The Corporate Library's Board Analyst database. Thirty seven of the CEOs of these companies held three or more additional seats on large public company boards, accounting for a total of 59 memberships on compensation committees. There were more than 500 instances where two or more directors sat together on two or more of the largest US public company boards.

It has been argued that the pool of candidates for board seats is too small to avoid all compromising relationships.

A review of the regulations governing the proxy voting process, and the experiences of shareholder activists, reveals just how difficult it is to access the proxy ballot. This is particularly so for director nominations.

Institutional obstacles to shareholder nominations leave incumbents in control of the ballot. As a result, the number of nominees rarely exceeds the number of board seats. Furthermore, shareholders are only able to withhold their votes, not vote against nominees.

The apparent use of personal connections to find new nominees knits the management and directors into a tight network of individuals who serve, or have served, on both sides of the governance fence and who meet with each other frequently, and often in reciprocal roles.

Information available on individual nominees is limited to short bios provided by the nominating board. These bios may or may not contain relevant information on the nominee's past performance, such as having served on the board of a company that has failed under the cloud of a governance scandal.

If the pool of available directors is too small, the market for corporate leadership is not competitive in the areas that count: the ability to exercise scrutiny and independent oversight and the ability to balance short-term business and personal interests against long-term social, environmental and economic interests.

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