Proxy voting lets shareholders speak to management Many have remained on the sidelines

Mutual funds

March 22, 1998|By Bill Barnhart | Bill Barnhart,CHICAGO TRIBUNE

The time when company managements at least pay lip service to the notion that the owners of the company have democratic rights to protest management behavior -- corporate annual meeting season -- looms.

Workers whose retirement assets are held by pension funds -- especially public-employee and union-sponsored funds -- have seen increasing activism on the part of their fund managers toward curtailing corporate conduct that entrenches management at the expense of shareholders.

But workers involved in the fastest-growing arena of retirement savings -- defined contribution plans, such as 401(k) plans, invested in mutual funds -- largely have been on the sidelines. Most mutual fund managers do not consider shareholder proposals but, rather, hire professional proxy voting services to handle the paperwork.

Among the shareholder proposals expected to surface in this year's round of annual shareholder meetings are demands that companies disclose their so-called soft-dollar contributions to political parties -- the subject of a major controversy in Washington -- reform of the nominating process for corporate directors, including greater power for individuals to run for the board without being on the board's own slate; requirements that shareholders vote before a company lowers exercise prices of executive stock options that have been rendered worthless by poor performance; and shareholder approval for executive severance packages that, in several notable instances, have been shown to be wildly excessive.

In addition, perennial proposals demand shareholder approval before so-called poison-pill anti-takeover measures are enacted; seek to eliminate pensions for nonemployee directors and try to force disclosure of companies' workplace discrimination policies and goals.

Progressive shareholder activism has evolved from largely social and political issues -- during the 1970s and 1980s, for example, shareholders pressured firms that did business with the apartheid system in South Africa. Today, activism tends to center on corporate conduct deemed harmful to shareholders' long-term interests.

"We focus on economic issues, because we're representing working people as the beneficiaries of pension funds," said Craig Rosenberg, director of the Taft-Hartley (union pension fund) division of the Proxy Monitor, a research and proxy voting agency for institutional investors.

Linda Selbach, manager of the global proxy group for Barclays Global Investors, with $500 billion under management, said she expects to support shareholder proposals recommending a majority of independent (nonemployee) directors on corporate boards and independent-director majorities on boards' audit, nomination and compensation committees.

Last year, the Securities and Exchange Commission suggested new limitations on the shareholder-proposal process that corporations favored but shareholder activists loudly opposed.

The SEC put its ideas on hold after the two experts it asked to review the issue -- Harvey Goldschmid of the Columbia University law school and New York lawyer Ira Millstein -- advised the SEC to back down on several key points.

"All of the things that have happened in the last five years where people who care and have been paying attention to this stuff have been so incredibly positive that this would just reverse all that, and people just came out of their shoes and said, 'How could you possibly consider this?'" said Jack Marco of Chicago-based Marco Consulting Group, which works on investment issues with union pension programs.

"Last year, about 35 shareholder proposals received a majority vote," Marco said. "Five years ago, if they got a 5 percent vote, it would have been a big deal."

The voices of mutual fund companies were nowhere to be found in the published comments to the SEC proposals. Conventional wisdom is that fund managers won't oppose management because they fear losing access to the companies they follow.

Investment theory suggests that fund managers can vote with their feet and sell the holdings of a company if they dislike management behavior. In reality, the concentration of superior investment returns in the giant multinational corporations makes it difficult for fund managers to do the so-called Wall Street walk without eroding their annual investment performance.

"I think they have been on the sidelines; I have not seen them as players," Marco said. "The mutual funds are the next great battleground. They own gigantic blocks" of stock.

Vanguard Group is one of the few fund companies that reads and votes proxy statements internally. In the case of controversy, chief executive officer Jack Brennan votes the proxies, said spokesman Brian Mattes.

Shareholder activism through the proxy voting process is just one way that major holders can influence management, Mattes added.

By no means does Vanguard intend to abdicate its shareholder voting rights, he said, but big-ticket mutual fund investors may not need the public glare of formal shareholder proposals and proxy-voting fights to influence corporate behavior.

Pub Date: 3/22/98

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