Mutual funds are quietly emerging as a key tool for corporate reform, as they bridge populist power and institutional influence. On the populist side, nearly 90 million Americans own mutual funds; on the institutional side, mutual funds hold approximately $10.9 trillion in assets, and own almost a quarter of US corporate equity (as of July 2010, according to the Investment Company Institute). And rule changes in the US and Canada in 2003 forced mutual funds to tell their investors (and anyone else interested) how they vote on director elections and shareowner resolutions on environmental, social, and governance (ESG) issues at companies held in funds.
New research shows Canadian mutual funds upping their support for such resolutions, and lowering support for corporate recommendations such as director candidates and executive compensation. And new SEC rules in the US give mutual fund shareowners the power to nominate fund directors, further empowering the people to effect change.
The Shareholder Association for Research and Education (SHARE) published a report on proxy voting at Canadian mutual funds last week (with key support from Columbia Institute and its Responsible Investment Program). In this third report in an annual series, co-authors Laura O’Neill of SHARE and FundVotes Founder Jackie Cook revealed that mutual fund shareholder support for shareholder proposals on environmental and social issues increased from 26% in 2006 to 39% in 2009. Canadian SRI mutual fund companies supported 98% of the proposals that raised environmental and social matters.
Support for corporate management declined steadily over the four-year period from 2006 to 2009. Hot-button issues: director candidates for board elections, and executive compensation. The declines were steeper among funds managed by the three Socially Responsible Investment (SRI) mutual fund companies included in the survey. The report surveyed 21 fund families with more than $530 billion in combined assets, representing the lion’s share of the $547 billion (approximately) invested in Canadian mutual funds as of 30 June 2009.
These statistics matter because many people don’t appreciate the considerable ownership power and influence wielded by mutual funds. Mutual funds were first organized In the midst of the Great Depression “to provide professional fund management for the common person”, American Funds’ Jon B. Lovelace Jr. told me years ago. Lovelace’s father organized one of the nation’s first mutual fund companies, Capital Research and Management Company, in 1931, and Lovelace himself built American Funds into the nation’s third largest mutual fund family, after Fidelity and Vanguard.
That’s why the SEC decided, back in January 2003, to mandate disclosure of proxy voting policies and records by mutual fund managers and investment advisers: to protect the interests of average investors. The SEC cited one “significant benefit” of the rule as “providing stronger incentives to fund managers to vote their proxies conscientiously” (Canada enacted a similar rule soon after the US). The SEC ruling requires funds to file their proxy voting record for the previous 12 months on Form N-PX no later than August 31st each year. The public availability of this information inspired the launch of platforms such as ProxyDemocracy, MoxyVote, and FundVotes that track how mutual funds vote. Many funds – with the notable exception of Fidelity and Vanguard – increasingly support climate change resolutions, according to a Ceres report issued in June (the fifth annual analysis).
UMass legal scholar Jennifer Taub goes one step further, noting that mutual funds, in addition to their status as shareholders of corporate stock, are issuers and have shareholders of their own. In its recent proxy access ruling, the SEC included mutual funds as falling under Rule 14a-11, which means they must give eligible shareholders access to the proxy to nominate directors. Because few mutual funds hold annual meetings, Taub writes, “the practical effect may seem quite subtle.”
Subtle or not, we believe this slight shift in the balance of power reinforces an ethic of representative self-governance, which fits the mutual fund tradition like hand and glove.