Figuring out how your mutual fund manager votes
NEW YORK (AP) — Do you think a particular CEO makes too much money? Would you like to replace the directors who signed off on that salary? Or to vote on a company's environmental policy?
If you own stock in a company, you get such opportunities. Every year, companies open the polls at their annual meetings, and shareholders elect directors to the board and vote on various policies. At Bank of America's meeting on Wednesday, for example, shareholders weighed in on executive compensation and whether to force the bank to tally its impact on greenhouse-gas emissions.
But investors who prefer owning mutual funds to individual stocks don't get to vote. Instead, the managers of their mutual funds do, carrying the weight of all the investors in the fund. Roughly half the companies in the Standard & Poor's 500 index hold their annual meetings in May, so many of those votes are occurring now.
Investors can see how their mutual funds voted on issues over the prior year: Funds typically list their voting results on their websites, and they also file documents with the Securities and Exchange Commission detailing their choices.
Because fund managers would rather spend time buying and selling stocks than studying proposals for each corporate meeting, many funds hire an advisory firm to help them. Institutional Shareholder Services, better known as ISS, is such a company. It has about 1,700 clients and issues vote recommendations on nearly 39,000 companies around the world.
The votes cast by mutual funds carry big weight. Vanguard, which controls more than $2 trillion in assets, is often a company's largest shareholder after totaling the investments across all of its funds. Vanguard and other large fund families say they vote based on what will drive the best long-term value for their investments. Vanguard prefers that the majority of directors on a company's board be independent of management, for example.
Consider UPS, in which Vanguard funds collectively own about 5.1 percent of the outstanding shares, according to FactSet. Last year, Vanguard's Total Stock Market Index fund -- the largest mutual fund with $323.7 billion in assets -- voted for a proposal to make all shares of stock have the same voting rights. The fund's managers were hoping to replace the current system under which some UPS shares carry greater influence, with 10 votes per share.
The fund voted against the recommendation of UPS management, though the proposal failed to pass. The fund also voted for all 12 of the nominees that management had recommended for its board of directors.
At Leggett & Platt, which makes mattress innersprings and other products, Vanguard's Total Stock Market Index fund last year voted for a proposal to explicitly prohibit discrimination based on sexual orientation and gender identity at the company. The vote was against the recommendation of the company's management, which said that it is already an equal-opportunity employer. The company also said that it believes written policies should specifically list only the types of discrimination prohibited by federal law. The proposal failed to pass.
Vanguard, though, acknowledges that "it would be exceedingly difficult, if not impossible" to reflect the social concerns of all its shareholders while maximizing returns. It suggests investors who want to put more emphasis in their portfolio on humanitarian, ethical and environmental concerns to look to specific kinds of mutual funds, ones that are typically called sustainable or socially responsible mutual funds.
These funds make it part of their investment philosophy to emphasize issues like executive compensation, climate change and human rights. For example, Calvert Investments focuses on sustainable investments and says it allocates its $13 billion in assets for both principle and performance.
Calvert identifies companies that it sees as strong in business ethics, environmental standards and other issues. It invests in them and tries to highlight those companies as leaders to others at conferences or in meetings with other CEOs.
It also makes proposals to try to advocate for corporate policies: It was among the investors who called upon Bank of America to tally the greenhouse gases produced by companies and projects for which it's a lender. The proposal failed to pass on Wednesday.
Sustainable-investing funds may also own stocks that may surprise some environmentalists, such as Exxon Mobil, Royal Dutch Shell and utility companies that burn a lot of coal. Calvert says it owns such companies in hopes of building long-term relationships and driving change.
Over the years, corporate America has grown more willing to talk with investors about such issues, says Stu Dalheim, vice president of shareholder advocacy at Calvert. That's made the job easier for socially responsible investors, but it still isn't easy.
"I think the trend is moving in our direction," Dalheim says. "There's more acknowledgment from companies and investors broadly that sustainability factors are important, but on some of these major challenges, there's not enough progress."