A veil has been lifted. As of August 31, 2004, despite enormous opposition from industry giants, disclosure of proxy votes and policies became mandatory for mutual fund companies as a result of new Securities and Exchange Commission (SEC) rules adopted in early 2003. Walden was an active supporter of and petitioner for this reform. Why does mandated disclosure of proxy votes matter? Because 22 percent of outstanding U.S. corporate stocks were in mutual funds as of December 2003, according to the Investment Company Institute. This represents significant shareholder clout in the proxy arena.

Thousands of proposals make their way to company ballots each year, addressing corporate governance, capital structure, executive compensation, and corporate social and environmental responsibility, among other issues. Now, for the first time, all mutual fund shareholders can examine for themselves how their fund managers are voting on management- and shareholder-sponsored proposals on their behalf. New SEC rules require investment advisors to make proxy voting information available to their investment clients as well.

Analyses of voting patterns are rolling in. Typical was an August 31 Boston Globe feature titled "Putnam’s votes tough on boards." In the wake of its own market timing debacle, a review of Putnam’s five largest mutual funds showed the company taking a position against management more than 18 percent of the time. Putnam was particularly strict on the issue of director independence, withholding support for 275 boards (21 percent) for failing to meet the mutual fund’s guidelines. Interestingly, Putnam’s policies were overhauled early in 2003, coincident with the SEC’s passage of the new proxy disclosure rules. This suggests that one important outcome of disclosure is greater thoughtfulness and integrity in the proxy process—compelling affirmation that transparency brings accountability, which in turn strengthens corporate responsibility. The era of rubberstamping votes in favor of management is on its way out. This is good news.

Among the more extensive reports on voting practices is one from the AFL-CIO Office of Investment: Behind the Curtain—How the 10 Largest Mutual Fund Families Voted When Presented with 12 Opportunities to Curb Pay Abuse in 2004. And the record was mixed. American Century received a perfect score with its $55 billion in assets, voting 100 percent of the time for compensation policies such as offering performance-based pay, expensing stock options, or calling for shareholder votes on so called "golden parachutes" (severance packages contingent upon a change in control). By this measure, Putnam ($98 billion) was the worst performer, voting to curb potential compensation abuses just 20 percent of the time.

When the SEC presented the reform in 2003, Fidelity ($513 billion) and Vanguard ($355 billion), the first and third largest mutual fund companies, respectively, fought hard to quash proxy disclosure. Behind the Curtain reveals very different voting patterns for the two. Vanguard ranked second with 75 percent "correct" and Fidelity came in second to last with a 25 percent score. Fidelity was not supportive of shareholder initiatives, voting against all eight shareholder proposals analyzed, but also voted against management-sponsored compensation proposals three out of four times. Vanguard voted against all four management proposals included in the study. The AFL-CIO report identified a significant deficiency in the new SEC rule: failure to require mutual funds to disclose business relationships with portfolio companies that may pose a conflict of interest. It is not a stretch, for example, to envision lucrative 401(k) plan relationships clouding business judgements. Fidelity, according to the report, has business relationships with 8 of the 12 companies included in the analysis.

The bottom line? New proxy voting disclosure rules appear to be prompting fiduciaries to take more seriously their commitment to vote proxies, and to do so in the sole economic interests of fund shareholders rather than their own business interests. Now, investors have the tools to evaluate just how their managers are doing.

—H.Soumerai