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Atlantic drift may bring proxy voting transparency to UK

June 2005

Sarbanes-Oxley has opened the proxy voting records of thousands of US mutual funds to public scrutiny, adding a new dimension to shareholder activism. The knock-on effects are now being felt in other countries

At the start of September last year, US mutual funds and investment advisers began publicly disclosing details of how they cast their votes at company annual meetings. The requirement, which forms part of the Sarbanes-Oxley Act, has created a vast quantity of information on how US mutual funds, which control $4.7trillion (£2.53tn) of equities, exercized proxy voting rights on behalf of their individual investors.

Most of the resolutions filed by shareholders each year on which mutual funds cast proxies cover conventional corporate governance matters, such as shareholder rights. But around a third relate to social and environmental matters, such as a company’s stance on human rights in its operations or when it plans to produce a sustainability report.

Last month the first detailed study of how US mutual funds voted their proxies was published by the Social Investment Forum, a non-profit SRI research body. From the 3700 US mutual funds, the study selected for analysis the voting record of the ten largest conventional fund groups and the ten biggest SRI fund groups in terms of total net assets.

Household names such as Citigroup Asset Management, Fidelity Investments, Merrill Lynch and Franklin Templeton were among the conventional funds, while the SRI funds included Calvert Group, Domini Social Investments and Pax World Funds. All shareholder-proposed resolutions filed and voted on in the year to the end of June 2004 were considered.

Looked at in the round, the findings are broadly what one might expect: SRI funds were more likely to vote against management in support of social and environmental resolutions than conventional ones. But within this overall picture, other patterns emerged. Compared with mainstream investors, SRI funds also appear much more likely to support corporate governance resolutions on issues such as stock options and golden parachutes. They are twice as likely to withhold votes from directors of troubled companies, compared with their conventional peers.

Conversely, some conventional funds ‘revealed significant support’ for social resolutions in their proxy voting. One conventional fund family, Charles Schwab, ‘stood out by supporting half of all social resolutions studied’. Another such fund, Pimco, ‘had much higher levels of voting against management on [social and environmental] resolutions’ than the other conventional funds studied. The only conventional funds to vote against management on human rights resolutions were Pimco and Schwab. Vanguard abstained on almost all of the social votes studied.

What are we to make of all this? Perhaps the most interesting conclusion to draw is that the gap between SRI funds and some conventional funds, while undeniably large, may not be quite the chasm that rhetoric sometimes suggests, at least in terms of proxy voting. The overall support level of SRI mutual funds for social and environmental shareholder resolutions was 85 per cent compared to 15 per cent in the case of conventional funds, but these headline figures conceal relatively strong support from some conventional funds.

The requirement to disclose is now prompting mutual fund managers to review their proxy voting practices. Tracey Rembert, author of the forum study, says this has led to ‘improvements in policies and voting guidelines that benefit individual fund owners looking for this information’.

What’s more, the mutual fund disclosure regime is making waves outside the US, and other national securities regulators are now following the SEC’s example. This July, Canadian mutual funds will have to begin collecting information on their proxy voting policies and records for release in June 2006. The new rules are similar to those that apply to US mutual funds.

In the UK, pressure is growing for a similar transparency regulation. Some investment managers have already acted: last month Standard Life Investments for the first time began revealing details online of its proxy voting. But only around 30 UK investment managers at present make such disclosures, among them F&C, Henderson Global Investors, Insight Investment, and Co-operative Insurance Services, which has made public details of its proxy voting in respect of UK companies since January 2002.

All these investment managers are known for their SRI approach. In Europe, too, SRI investors are leading the way. Members of the European Social Investment Forum, the SRI trade body, recently began piloting transparency guidelines on voting and engagement by institutional investors.

Overall, the UK investment industry is behind the US in this area, and its accountability is now under intense scrutiny. Paul Myners, chairman of Marks & Spencer and author of an influential report to the Treasury in 2001 on institutional investment, said last month: ‘One specific question is why the trend to public disclosure of voting by fund managers is so slow; there is surely a strong case for making such disclosure mandatory, as the Company Law review recommended some years ago.’

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