Publicizing
proxies controversial
Investment
industry regulation is continually pushing for increased disclosure. Americans
are a little tougher and more advanced in ways, thanks to their much larger and
more mature industry. A hot topic today is whether or not fund managers should
be required to disclose how they vote shares on stocks they hold on behalf of
clients. I say yes.
Shareholders
of a company are entitled to vote on a variety of corporate issues. From
appointments of auditors and members of the board of directors, to executive
compensation, shareholders have a say in some important corporate decisions.
Fund
managers can often get very well acquainted with corporate executives since
they spend lots of time with them in meetings as part of their stock research.
As we saw during the boom in technology stocks, some analyst and fund managers
became so tight with company executives that they always gave some troubled
companies glowing buy recommendations.
Tightened
regulations on analyst recommendations and a persistent mistrust of the
industry spurred the discussion of publicly disclosing how mutual fund managers
vote the shares of companies in their funds.
Early this
year, the U.S. Securities and Exchange Commission (SEC) voted
in favour of requiring mutual fund managers to disclose their proxy voting
records. Canadian regulators haven’t tabled any similar rule yet, but I’ve got
to think that topic is on their radar.
A fiduciary
is a person in a position of trust. If you deal with a lawyer, accountant,
financial advisor, or other person whose advice you rely upon to make
decisions, such professionals owe you a duty of care. In your relationship with
them, they are fiduciaries.
The law
says that fiduciaries, because of their position relative to clients, must act
in the best interests of their clients.
Mutual fund
managers are no different. Most mutual funds are trusts. Fund investors are
considered beneficiaries of the trust while fund managers (and fund sponsors)
are like trustees since they’re responsible for making investment decisions on
the trust’s assets. Hence, fund managers are required to manage money such that
decisions are to the benefit of their investors.
In the
context of voting shares, this means that fund managers must vote on corporate
issues in such a way that best serves the interests of fund investors. For
instance, if a company is proposing to change auditors, the manager should
inquire about the reasoning. If it’s the first change in ten years it may not
be a big a deal. If, however, this is the third time in six years such a change
has been proposed, big red flags should pop up in the manager’s head.
This fiduciary duty is supported not
only by the law in most countries, but also by industry associations. For
example, the Association for Investment
Management and Research (AIMR), which licenses the CFA charter, supports
this view in Standard B.1 of their Standards of
Professional Conduct, which states:
“Members must act for the benefit of their clients and place their
clients’ interests before their own”.
As noted,
Canadian fund managers are required to vote their shares, but not to disclose
them in any way. Hence, almost nobody discloses this information. However, one
Canadian firm is raising the bar.
Cambridge
Ontario-based Meritas Mutual Funds is a
socially responsible fund company. Aside from assessing the pure investment
merit of companies, they also spend lots of time evaluating a company’s record
on ethical and environmental issues. This includes everything from community
involvement to human rights practices and the environmental friendliness of a
firm’s practices.
From
Meritas’ home page, simply click on any of their funds and look toward the top
right for a link entitled “Proxy Voting Record”. What you’ll see is a long list
of stocks and meeting dates. Click on a firm name and you’ll see the issues
voted upon, how they voted, and whether their vote was against management.
As an
example, here
is how Meritas voted on a variety of issues at the recent annual meeting for
Royal Bank of Canada.
Why is
something so fundamental so controversial? The most controversial aspect of
this issue is that some question if some managers simply don’t vote at all. I’m
no legal expert, but failing to vote seems to me like a breach of fiduciary
duty.
I honestly
wonder about managers that turn their whole portfolios over two to three times
(or more) each year. If they have no intention of hanging onto a stock for any
length of time, do they really care whether a firm changes their auditors or
stock option plan?
Similar
concerns exist for managers whose funds hold hundreds of stocks. This applies
to both actively managed and index funds. It’s not uncommon to find Canadian
equity funds holding more than 100 stocks or global stock funds holding 300-400
stocks. I think many investors would be interested to know if these managers
voted on every issue with every company in their portfolios – and whether such
decisions were consistent with their fiduciary duty. I’m curious.
That said,
I think most managers do fulfill their fiduciary duty when it comes to voting
shares. But I admit to having that doubt in the back of my mind that a few fail
in this regard. I vote yes for disclosing proxy votes.
Dan Hallett, B.Comm., CFP, CFA is the Senior
Investment Analyst with Sterling
Mutuals Inc. He can be reached at dhallett@sterlingmutuals.com Sterling Mutuals Inc. is registered as a
mutual fund dealer in Ontario, British Columbia, Alberta, and Manitoba.