You can't blame investors for being a bit paranoid about fund management, thinking that the brass always puts shareholder interests last.
The problem with that line of thinking is that it's tough to figure out those times when management really is out to get you.
That's why some investors took the release of the largest-ever study on mutual-fund proxy voting as a sign that fund firms are in the pocket of Corporate America, while others suggested the results show that management is doing everything right.
The truth lies somewhere in the middle.
Since 2004, the U.S. Securities and Exchange Commission has required funds to disclose annually how they voted the proxy ballots for all companies in which they are invested. The idea behind the disclosure is simple: Funds represent their shareholders, so those owners should know how management votes.
The disclosure forced many fund companies to get a lot more serious about the way they handled proxies. Funds now keep their proxy-voting policy on company Web sites; investors can learn how management is likely to vote on key issues such as executive compensation, implementation of poison pills and anti-takeover measures, and more. The record of votes winds up on the Web, too.
On Thursday, the Investment Company Institute - the trade association for fund-management companies - released the results of the most comprehensive study yet on how funds vote proxies, examining more than 3.5 million proxy votes cast by 160 of the largest mutual-fund companies for the 12 months ended June 30, 2007.
Several smaller studies previously suggested that funds vote almost exclusively in favor of proposals made by corporate management and against proposals floated by shareholders.
The latest ICI study did little to change that perception.
In general, funds support proposals pushed by management more than 90 percent of the time, while voting in favor of shareholder proposals less than 40 percent of the time.
That makes it look like fund firms simply rubber-stamp this stuff, but the data are a bit misleading. The bulk of all ballot issues favored by management are housekeeping items, non-controversial stuff where directors are running uncontested or the company is looking to ratify the selection of an auditor. It's hard to argue that funds are voting against investor interests when they approve the auditing firm - which they do 98 percent of the time - or vote to reelect directors who have proven themselves competent (92 percent of the votes go with management), particularly because most proxy-voting committees hire an advisory firm - most notably Institutional Shareholder Services or Glass, Lewis & Co. - to help them research the issues and make decisions on even the most mundane of matters.
By comparison, shareholder proposals are rarely mundane, and some of the more esoteric ideas are silly and don't deserve voting support simply because they were floated by other investors.
"On the surface, you could look at the numbers and not think there has been much progress for fund shareholders, but you have to remember that a mutual fund should be voting with the best interest of their shareholders in mind, and that usually is going to involve voting with corporate management, particularly on the items that are not divisive," says Mercer Bullard, who runs Fund Democracy, an advocacy group for fund shareholders. "One thing that has happened with this disclosure is that the process is more thoughtful now, and that's where the progress has been made."
For proof that the whole process is more than a rubber-stamp, the ICI study showed that on "non-routine management proposals" and issues sponsored by shareholders, mutual funds favored proposals that promoted shareholder rights and weakened corporate-takeover defenses that allow a board to become entrenched and problematic for shareholders.
Moreover, when funds did vote for shareholder proposals, they were voting against management virtually every time. Funds supported nearly half of the shareholder proposals calling for modifications to corporate board structures or election processes, and more than a third of shareholder proposals related to executive compensation.
At most large firms, fund managers still don't sit on the proxy-voting committee. And so long as investors favor results to disclosures and returns to process - which is true in all funds except for those that pursue a social agenda - there will always be some lingering sense that fund firms don't care that much about these issues.
Further, there are no studies showing any kind of link between how funds vote their shares and how they perform.