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July 27, 2000
Merrill Lynch Fund Participant Pioneers Divestment Resolution
A shareholder resolution urging the divestment of Freeport McMoran stock marks a significant
breakthrough in mutual fund governance.
SocialFunds.com --
Although socially responsible mutual funds have made strides in raising issues of corporate
responsibility through shareholder activism, governance of mutual funds themselves generally
remains inscrutable to their own shareholders. A recent initiative by an owner of a Merrill Lynch
mutual fund may set a precedent to make fund managers more accountable.
 The resolution was initially proposed in
November 1998 by shareholder David Ortman, who asked that Merrill Lynch's Global Allocation Fund
divest of its shares in Freeport McMoran. This U.S. mining company operates the world's largest
open-pit copper and gold mine in Irian Jaya, Indonesia, with widespread allegations of
environmental damage and human rights abuses.
"The resolution cited social,
environmental, and financial concerns," said Michelle Chan-Fishel, Director of the Green
Investments program at Friends of the Earth. "The shareholder received a response saying that the
fund was not planning to hold a shareholder's meeting anytime soon, but that it would consider
including the resolution in the next proxy statement."
Although a mutual fund participant
is a "shareholder" in a very different sense, the same rules governing shareholder proposals at
publicly held companies can apply to mutual funds, and were used to file the Merrill Lynch
resolution. To the company's credit, they did not directly challenge the proposal, merely deferring
circulation until this year.
But last month when Merrill Lynch sent out the proxy
statement for this year's meeting, it did not include the divestment resolution, even though the
Fund's semi-annual report indicated that it still held both common and preferred Freeport stock.
Merrill Lynch, a global financial management and advisory company managing $1.5 trillion in assets,
had experienced a "senior moment."
"Apparently, the folks at Merrill had forgotten to
include the resolution in the proxy statement and it would have cost them $500,000 to correct their
mistake," said Chan-Fishel. "The victory at Global Allocation Fund was achieved in part because
Merrill Lynch mishandled the resolution, which made them miss the opportunity to challenge the
proposal."
Fortunately, Merrill was also amenable to selling the poorly performing
holding, and promptly divested itself of Freeport common stock, fulfilling part of the resolution's
request. In addition, the Fund agreed to sell its Freeport preferred stock in the next two years,
once the shares hit a target price, and to write to Freeport regarding its divestment.
Although this is apparently the only resolution at a retail mutual fund that has achieved such
remarkable results, it is not entirely unprecedented. An identical Freeport divestment resolution
was proposed last year with the Stock Account and Global Equities Account at TIAA-CREF, a national
financial services organization managing nearly $300 billion.
A leader in corporate
governance activism, TIAA-CREF did not challenge the resolution at the Securities Exchange
Commission (SEC), the regulatory agency for such proceedings, but simply submitted a rebuttal in
both of these cases. The resolution with the Stock Account resulted in a 17 percent vote and the
one at Global Equities Account eventually led to divestment of Freeport stock.
"I don't
necessarily see mutual fund divestment resolutions gaining significant traction in the future,"
said Chan-Fishel. "Divestment of a single stock could be viewed as an "ordinary business" issue
rather than a policy matter, but none of the divestment resolutions have gone before SEC scrutiny.
In this sense, I view the divestment resolutions at Merrill Lynch and TIAA-CREF as special cases."
Still, the implications of these shareholder resolutions at mutual funds stand to
democratize fund governance and investment policies and make funds more accountable to their
shareholders. Even participants who cannot choose a socially responsible mutual fund, for instance
on their 401k menu, may in the future be able to bring a measure of social responsibility to their
funds.
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SRI World Group, Inc. All Rights Reserved.
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