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Dan's Reports
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Privacy Policy


Disclosing votes
Publicizing proxies controversial

Investment industry regulation is continually pushing for increased disclosure. Americans are a little tougher and more advanced in ways, thanks to their much larger and more mature industry. A hot topic today is whether or not fund managers should be required to disclose how they vote shares on stocks they hold on behalf of clients. I say yes.

Background

Shareholders of a company are entitled to vote on a variety of corporate issues. From appointments of auditors and members of the board of directors, to executive compensation, shareholders have a say in some important corporate decisions.

Fund managers can often get very well acquainted with corporate executives since they spend lots of time with them in meetings as part of their stock research. As we saw during the boom in technology stocks, some analyst and fund managers became so tight with company executives that they always gave some troubled companies glowing buy recommendations.

Tightened regulations on analyst recommendations and a persistent mistrust of the industry spurred the discussion of publicly disclosing how mutual fund managers vote the shares of companies in their funds.

Early this year, the U.S. Securities and Exchange Commission (SEC) voted in favour of requiring mutual fund managers to disclose their proxy voting records. Canadian regulators haven't tabled any similar rule yet, but I've got to think that topic is on their radar.

Fiduciary duty

A fiduciary is a person in a position of trust. If you deal with a lawyer, accountant, financial advisor, or other person whose advice you rely upon to make decisions, such professionals owe you a duty of care. In your relationship with them, they are fiduciaries.

The law says that fiduciaries, because of their position relative to clients, must act in the best interests of their clients.

Mutual fund managers are no different. Most mutual funds are trusts. Fund investors are considered beneficiaries of the trust while fund managers (and fund sponsors) are like trustees since they're responsible for making investment decisions on the trust's assets. Hence, fund managers are required to manage money such that decisions are to the benefit of their investors.

In the context of voting shares, this means that fund managers must vote on corporate issues in such a way that best serves the interests of fund investors. For instance, if a company is proposing to change auditors, the manager should inquire about the reasoning. If it's the first change in ten years it may not be a big a deal. If, however, this is the third time in six years such a change has been proposed, big red flags should pop up in the manager's head.

This fiduciary duty is supported not only by the law in most countries, but also by industry associations. For example, the Association for Investment Management and Research (AIMR), which licenses the CFA charter, supports this view in Standard B.1 of their Standards of Professional Conduct, which states: "Members must act for the benefit of their clients and place their clients' interests before their own".

Canadian examples

As noted, Canadian fund managers are required to vote their shares, but not to disclose them in any way. Hence, almost nobody discloses this information. However, one Canadian firm is raising the bar.

Cambridge Ontario-based Meritas Mutual Funds is a socially responsible fund company. Aside from assessing the pure investment merit of companies, they also spend lots of time evaluating a company's record on ethical and environmental issues. This includes everything from community involvement to human rights practices and the environmental friendliness of a firm's practices.

From Meritas' home page, simply click on any of their funds and look toward the top right for a link entitled "Proxy Voting Record". What you'll see is a long list of stocks and meeting dates. Click on a firm name and you'll see the issues voted upon, how they voted, and whether their vote was against management.

As an example, here is how Meritas voted on a variety of issues at the recent annual meeting for Royal Bank of Canada.

Source of controversy

Why is something so fundamental so controversial? The most controversial aspect of this issue is that some question if some managers simply don't vote at all. I'm no legal expert, but failing to vote seems to me like a breach of fiduciary duty.

I honestly wonder about managers that turn their whole portfolios over two to three times (or more) each year. If they have no intention of hanging onto a stock for any length of time, do they really care whether a firm changes their auditors or stock option plan?

Similar concerns exist for managers whose funds hold hundreds of stocks. This applies to both actively managed and index funds. It's not uncommon to find Canadian equity funds holding more than 100 stocks or global stock funds holding 300-400 stocks. I think many investors would be interested to know if these managers voted on every issue with every company in their portfolios - and whether such decisions were consistent with their fiduciary duty. I'm curious.

That said, I think most managers do fulfill their fiduciary duty when it comes to voting shares. But I admit to having that doubt in the back of my mind that a few fail in this regard. I vote yes for disclosing proxy votes.

Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at dha@danhallett.com
 
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