It's a safe bet that quite a few portfolio managers at Fidelity Investments, American Funds, T. Rowe Price Group (TROW), and Putnam Investments (MMC) won't be getting seasonal greeting cards from Michael D. Eisner this December. Key mutual funds at all four groups withheld votes for the Walt Disney Co. (DIS) chief executive's reelection to Disney's board at the company's Mar. 3 annual meeting, contributing to an unprecedented 45% no-confidence tally. Subsequently, he lost the chairman's slot, though he remains CEO.
Which funds put the screws to Eisner -- and which did not, including Vanguard Group funds -- is one of the juicier tidbits resulting from a new Securities & Exchange Commission rule. By Aug. 31, each fund had to disclose the proxy votes it cast at companies in its portfolio in the year ended June 30. Sifting through the deluge of 3,396 filings -- some fund by fund, others for an entire fund family -- for a detailed assessment will take time. But a preliminary review suggests that the new rules are starting to have a subtle but significant impact on corporate governance.
Although many funds sided with management on most matters, they often challenged companies on such hot-button issues as antitakeover defenses, lavish severance deals for CEOs, and accounting for employee stock options. Score one for the SEC. The agency instituted the rule because it worried that funds had become rubber stamps for management or didn't bother to vote at all. With billions of dollars of business from managing 401(k) plans and pensions for companies at stake, many fund groups were loath to offend CEOs who hired them for such work by voting against them or their proposals.
Knowledge that investors and the media are closely watching how they vote seems to have stiffened the spines of many fund managers, say shareholder advocates. At four other companies besides Disney, votes withheld from directors exceeded 30%. At Federated Department Stores Inc. (FD)., the count topped 50%. Three Allianz Group (AZ) funds -- CCM Capital Appreciation Fund, NACM Growth Fund (NGWAX), and NACM Value Fund (PVVAX) -- were among those voting no at Federated. Putnam funds voted all their shares in credit-card company MBNA Corp. (KRB) against management's slate of directors.
While director votes stole the headlines, the intensified war by institutional investors on poison-pill takeover defenses went almost unnoticed. Institutions deplore them because a company that can't be taken over is worth less than one that can. This year, proposals to eliminate staggered elections for directors, which effectively stop acquirers from gaining control of boards, garnered an average 71% of votes cast, up from 63% in 2003, according to Washington-based governance research firm Investor Responsibility Research Center.
Funds' antipathy to staggered terms and poison pills prompted more companies to make concessions to avoid high votes on investor proposals against them. This year, 34 companies with staggered boards offered their own proposals for annual elections of directors, while 40 put their poison pills back in the bottle. "We're seeing an increased level of responsiveness" from companies to concerns about antitakeover measures, says Glenn Booraem, a principal in charge of proxy voting at Vanguard. That, in turn, may have spurred the resurgence in mergers and acquisition this year, says Burton G. Rothberg, assistant accountancy professor at Baruch College's Zicklin School of Business.
Discerning all the patterns in fund voting won't be easy, in part because there isn't a common disclosure format. While some fund complexes, such as the Vanguard Group, set voting policies for all their funds, others, including T. Rowe Price, give individual portfolio managers leeway to vote as they see fit.
Mutual funds weren't, by any means, hotbeds of investor activism. Virtually all rejected social and political initiatives. But the exercise in disclosure, together with new stock exchange listing standards and other SEC rules, appears to be nudging funds and companies toward better governance. Shareholders can only hope that they'll keep the pressure on.
By Amy Borrus in Washington, with Lauren Young in New York