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Fund Firms’ Proxy Votes Show Surprises

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Times Staff Writer

After years of secrecy, the nation’s mutual funds have released a flood of detail about their votes at annual meetings, opening a window on what has been a shadowy yet pivotal aspect of the corporate election process.

And the early reviews have unearthed some surprises. Major funds including Fidelity Investments and Vanguard Group don’t always live up to their reputations as partners of management, the newly released records of their proxy votes show.

These big funds and others sometimes oppose company-nominated candidates for the board and resist pay plans cooked up in the executive suite, the documents show.

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At the same time, funds often vote no or stay on the sidelines when activists push companies to adopt new compensation plans or take stands on social issues, such as fighting gender discrimination.

The disclosures were required by the Securities and Exchange Commission, which wanted to let the public know how the $7.6-trillion fund industry -- which owns 20% of publicly traded stocks -- wields its voting muscle.

Under the SEC rule, companies were required to report by Aug. 31 their proxy votes for the 12 months that ended June 30.

Proxy votes are ballots cast by company shareholders on a variety of matters, including corporate policies on executive pay and shareholder resolutions decrying global warming.

The rule forcing funds to disclose these votes was approved by the SEC last year over the objections of the fund industry, which contended that the move would increase costs and that most shareholders didn’t care to see the information.

Already, watchdog groups have jumped in to analyze the data, putting fund votes under the spotlight they had long shunned. An AFL-CIO analysis of fund votes on executive pay last week found that funds run by American Century Cos., Vanguard, Janus Capital Group Inc. and Oppenheimer Funds Inc. usually voted against “pay abuses,” while Putnam Investments, Fidelity and AIM Investments scored significantly lower.

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The analysis looked at how the 10 largest mutual fund families voted on selected resolutions at a dozen public companies, including Allergan Inc., Delta Air Lines Inc., Broadcom Corp. and Union Pacific Corp.

“What we’re seeing is a textured picture of accountability,” said Bill Patterson, director of the AFL-CIO office of investments, which pushed hard for the disclosure requirement. “We’re seeing many mutual funds showing a great deal of care and nuance in their proxy votes, and we’re seeing others that are very far from where they ought to be.”

Some funds, including Vanguard, Fidelity and T. Rowe Price Group Inc. have made their votes accessible on their websites, although they may choose instead to provide it to shareholders on request.

“We’re still digesting it,” said Richard Ferlauto, director of pension investment policy at the American Federation of State, County and Municipal Employees, of the information that the SEC has asked of 4,828 funds.

Some wonder whether the prospect of public scrutiny -- the SEC approved the rule in January 2003 -- influenced funds to stake out more independent positions than they might have otherwise during this year’s annual meeting season.

For example, at the March 3 showdown over the leadership of Walt Disney Co. in Burbank, Fidelity funds including Magellan, Growth & Income and Equity Income withheld their support for reelecting Michael Eisner as chairman. The stunning 45% protest vote against Eisner led to his stepping down as chairman and represented perhaps the high-water mark in shareholder rebellion this year.

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“I think the mutual funds felt -- because of the disclosure -- there was a need to show some independence,” Patterson said.

Yet for all that, the funds did not march in lock step. Vanguard funds including its 500 Index and Institutional Index stood by Eisner and the rest of the beleaguered Disney board. Differences even took place inside fund families. At T. Rowe Price, the Equity Index 500 backed Eisner, while the Capital Appreciation Fund and Dividend Growth Fund did not.

Although funds typically do not discuss specific votes, they universally say shareholder interests are paramount in their voting decisions.

“We vote in a manner that will maximize the value of the company’s stock in the fund,” said John Demming, a spokesman with Valley Forge, Pa.-based Vanguard.

“Our voting process reflects our understanding of the company’s business, its management and its relationship with shareholders over time,” says American Funds, owned by Los Angeles-based Capital Group Cos., on its website. “In all cases, we remain focused on the investment objectives and policies of the funds.”

Not all funds interpret that focus the same way, and disclosures underscore a range of philosophies within the mutual fund industry.

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At its April 27 annual meeting, for example, IBM Corp. strongly opposed a shareholder proposal that would allow for cumulative voting, a procedure that increases the influence of minority factions by allowing them to cast all their votes for one candidate, instead of diluting their votes for an entire slate.

Fidelity’s Magellan Fund abstained from the vote. American Funds’ Growth Fund of America supported the measure, and Vanguard’s 500 Index sided with management against the plan, which was defeated handily.

The new public spotlight on fund policies could make funds less comfortable voting outside the mainstream, said Roy Weitz, who runs FundAlarm, a watchdog website.

“I think there’s going to inevitably develop an industry consensus on some of these issues,” Weitz said, predicting that funds would become more likely to conform on such matters as stock options expensing, board election policies and long-term incentive packages for executives.

Much of the early attention has focused on Fidelity and Vanguard, the two largest mutual funds. Boston-based Fidelity manages $876 billion in mutual fund assets, and Vanguard oversees $740 billion. Both companies opposed the SEC disclosure rule.

Vanguard withheld support from at least one director on a corporate slate in about 60% of its companies, a decrease from 70% in 2003, by Vanguard’s own count. Vanguard resisted directors who served on corporate panels that violated Vanguard guidelines such as awarding what the fund believes is excessive compensation.

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Fidelity most frequently parted company with management on the subject of stock compensation, voting against more than half such proposals this year, often out of concern that such measures could harm stock values. At the same time, Fidelity usually opposed shareholder resolutions on pay, such as linking it to performance.

“Our guidelines are designed to ensure that the best interest of our shareholders are foremost in the voting of all proxies,” said Vin Loporchio, a spokesman for Fidelity Investments.

Fund watchdogs have long wondered whether the big mutual fund companies purposely side with management as a means to foster other business relationships, such as running the retirement plans for companies they hold stakes in.

In its report, the AFL-CIO noted that Fidelity, Capital Group, Vanguard and others did business with companies in their funds’ portfolios, and it called for greater disclosure of these potential conflicts.

Even without that additional disclosure, however, the new data provide a wealth of material that the funds had resisted providing. Former SEC Chairman Harvey L. Pitt had pushed for disclosure as one of various reforms passed in the aftermath of corporate scandals.

The Investment Company Institute, which represents the mutual fund industry, even tried to get the White House to derail the requirement after it had been passed. Asked about the battle, institute spokesman Chris Wloszczyna termed it “ancient history.”

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“The rule is approved,” Wloszczyna said. “What you do at this point is get down to the business of helping our members comply with it.”

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