A LARGE mutual fund company can cast thousands of proxy votes annually on behalf of shareholders, and for years those votes have remained secret.
Not much longer.
By the end of this month, fund companies will have to disclose how they vote each year on issues arising at companies they invest in, such as executive compensation and the election of directors. This means investors will be able to find out whether their fund always sides with management or votes against over-the-top executive pay or anti-takeover measures that may not be in shareholders' interest.
This new disclosure is the result of a regulation passed last year by the Securities and Exchange Commission. It applies not just to fund companies - which in 2002 controlled about 18 percent of shares in U.S. companies - but to brokerages, pension funds and financial advisers who vote shares on behalf of investors.
The SEC rule began requiring fund companies and others last year to publish the guidelines they use when voting. And by Tuesday, they must divulge how they actually voted on proxy issues during the past year.
The push for such disclosure began a few years ago by shareholder activists, experts said, but gained momentum during the recent outbreak of corporate scandals. Fund companies can furnish the information upon request or post it on their Web sites. It will also be available online with regulators at www.sec.gov.
"It is good for shareholders. The more transparency, the better," said Cheryl Gustitus, a senior vice president with Institutional Shareholder Services Inc., a Rockville company that provides research, voting recommendations and other services to fund companies and other large investors. "It will identify the fund companies that are not performing their fiduciary responsibility to the extent that they should be."
The Calvert Group Ltd. in Bethesda, which offers more than a dozen socially responsible mutual funds, has been disclosing its voting records since 2001.
"We think it's very useful, particularly in the aftermath of the corporate scandals," said Joe Keefe, a senior adviser with Calvert.
And disclosure is good for corporate America, some say.
Fund companies and other institutional investors have been criticized for not bothering to vote or just going along with management's recommendations, said Burton Rothberg, assistant professor of accounting at Baruch College in New York.
"That's bad. It means companies won't be properly governed. If they can't be properly governed, all sorts of bad things happen. That's what did happen," Rothberg said.
Disclosure encourages fund companies and other institutional investors to pay close attention to how they vote.
"This is helpful to American businesses. They now have a large group of owners who are clearly spending time and effort thinking about how to vote on important corporate issues," Rothberg said.
Not everyone is gung-ho about disclosure, however.
Some large fund companies, such as the Vanguard Group, opposed it, pointing to a lack of interest by investors and administrative costs. Many, too, worried that they would come under pressure from unions or other interest groups once their votes became public.
Ronald Muhlenkamp, a portfolio manger with Muhlenkamp & Co. in Pennsylvania, opposes the regulation, saying his fund company doesn't want to be in a position some day of having to defend votes it made years earlier. From now on, Muhlenkamp said, his fund company will always vote with management.
"If we didn't believe the management is working in the shareholders' interest, we wouldn't own the stock," said Muhlenkamp, adding that his shareholders support the decision to vote with management.
"Shareholders want us to spend our time making them money, researching investments," Muhlenkamp said.
But Gustitus, with Institutional Shareholder Services, said the SEC is likely to find such a policy unacceptable. Fund companies should be voting in the interest of shareholders and that means sometimes going against management, she said.
Fund companies often have a proxy committee that develops a policy on how funds will vote on issues, although fund managers have leeway to cast ballots the way they think best. Sometimes fund companies hire outsiders to advise on proxy matters or handle voting on routine issues.
Rothberg recently studied the proxy guidelines of the top 10 fund companies, including T. Rowe Price Associates of Baltimore. He found that funds favored giving management wide leeway in the day-to-day running of the company. Funds also tended to side with management when it came to social or ethical issues raised by activists.
But funds largely opposed anti-takeover measures that were more about protecting executives' jobs than getting the best price for shareholders. Many funds also opposed the repricing of stock options, which essentially rewards executives even though the company's stock price falls.
Experts say they don't expect many small investors to base their investment decisions on how a fund votes. Fees, long-term performance and other factors are more important, they said. But investors who want to delve into funds' voting records should start by reading voting policies, then see how their fund votes, said Christopher Traulsen, a senior analyst with Morningstar Inc.
"There may be good reasons to vote with management on proxies, but if they always vote with management, that tells you something is amiss," Traulsen said. "That tells you they are not looking at their proxy votes very critically."
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