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July 21, 2006
Filing Resolutions at Mutual Funds: The Next Frontier for Shareowner Activism?
by Bill Baue
Eight years after the Northwest Corporate Accountability Project first filed an environmental
shareowner resolution, it will finally go to vote at the Merrill Lynch Global Allocation Fund.
SocialFunds.com --
It has been a long time coming for David Ortman, executive director of the Northwest Corporate Accountability Project, but the
shareholder resolution he first filed in 1998 at the Merrill Lynch Global Allocation Fund (ticker:
MDLOX) is
finally on the proxy and going to vote August 15. The resolution asks the fund to divest from
Freeport McMoRan (FCX) due to concerns over
environmental damage due to discharge of tailings from its Grasberg mine into the Irian Jaya rivers
in Indonesia. While resolution-filing on environmental, social, and governance (ESG) issues at
companies is commonplace, the tactic is very rarely used at mutual funds.
 "Unlike companies, which must have annual meetings,
mutual funds are only required to have shareholder meeting when making major changes, so you never
know when your resolution may appear," Mr. Ortman told SocialFunds.com. "Still, I think filing
resolutions at funds is a viable tactic as another front for addressing social and environmental
issues."
Michelle Chan-Fishel, program manager for the green investments project at
Friends of the Earth (FoE) and shareowner
activism coordinator, agrees.
"Filing shareholder resolutions may prove to be an
interesting way to mainstream responsible investment practices into traditional mutual funds," Ms.
Chan-Fishel told SocialFunds.com. "Such resolutions may not win majority votes, but they could
focus funds' attention on issues such as better fund governance or enhanced engagement with
investee companies, allowing funds to make improvements while staying true to what they promised
shareholders in the prospectus."
Mr. Ortman started out on the primary front, filing
resolutions directly with Freeport through the Seattle Mennonite Church.
"Freeport
investors were, shall we say, disinterested in the environmental and social aspects of what their
corporation was doing because they invest to profit from gold mining," he explained. "We were
getting low-percentage votes, so we decided to branch out."
In addition to filing at the
Merrill Lynch fund, Mr. Ortman's wife filed the same Freeport divestment resolution at TIAA-CREF, which earned 17 percent support
from participants in 1999.
"The trouble is, the next year TIAA-CREF went to the SEC and
had their lawyers fight bitterly, arguing that you could not ask a mutual fund to divest of a
specific company, because of the 'ordinary business' rule preventing micromanagement, and the SEC
issued a no-action letter allowing TIAA-CREF to leave the resolution off their proxy," Mr. Ortman
explained.
Meanwhile, Merrill Lynch issued a proxy in June 2000 with no mention of the
resolution. Merrill told Mr. Ortman it no longer held Freeport stock, but their April 2000
semi-annual report said otherwise--while it no longer held Freeport common stock, it retained
preferred stock. Merrill settled an "Understanding and Agreement" with Mr. Ortman to divest from
the preferred shares if they hit a target price by 2002, which didn't happen, and so a provision
called for including the resolution on the next proxy. In the absence of this settlement, Merrill
probably could have successfully petitioned the SEC for a "no-action" letter allowing it to omit
the proposal from its proxy, based on the TIAA-CREF "ordinary business" precedent.
The
proxy does not include a rebuttal statement from Merrill, though it does ask shareholders to vote
against the resolution. Merrill spokesperson Jessica Oppenheim did not respond to
SocialFunds.com's request for an explanation why Merrill recommends opposing the resolution.
"I'm not aware of anybody else who is doing this, but I do know of many efforts to get mutual
funds to be more active," said Mr. Ortman.
For example, a recent study by Ceres reveals that Vanguard, Fidelity, and American Funds did not support a single climate change
resolution in 2005.
"Now that mutual funds have to publish their proxy voting policies and
votes, shareholders could advocate for the creation of thoughtful proxy voting policies that
address environmental and social issues," Ms. Chan-Fishel of FoE points out.
Mercer
Bullard, founding president of Fund
Democracy, a nonprofit that advocates for mutual fund shareholder rights, sees
resolution-filing at mutual funds as a potentially effective strategy to enhance corporate
democracy.
"Getting fund shareholders to vote on a particular company or issue sure looks
like a pretty good way to put a bull's eye on the forehead of that company in the eyes of the
public," Mr. Bullard told SocialFunds.com, "and even more so with an issue because then the
legitimacy of seeking to change the fund's strategy is stronger than if you're targeting a
particular company."
Mr. Bullard, an assistant professor at the University of Mississippi School of
Law and former assistant chief counsel in the SEC's Division of Investment Management, draws an
analogy to the argument against the "Wall Street walk." Conventional wisdom used to hold that
shareholders with qualms about the environmental, social, or governance practices of a company
should "vote with their feet" by selling the stock. However, institutional investors now hold such
large tracts of shares across entire markets as to preclude divestment as an economical option and
favor shareowner engagement advocating for change at portfolio companies.
"Take Nike for
example--it's the biggest shoemaker in the world, so if we're going to improve factory conditions
in Asia, our only option is to engage with Nike," said Mr. Bullard. "Similarly, the argument would
go, if we are going to ensure capital is allocated in socially conscious ways, our only option is
to engage with Vanguard and Fidelity."
©
SRI World Group, Inc. All Rights Reserved.
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