The report further subdivides shareowner resolutions into those addressing CSR and those addressing corporate governance (CG). The scant support for CSR resolutions by mainstream funds decreased from 9.2 percent in 2004 to a paltry 7.7 percent in 2005, suggesting that these mainstream funds consider conscientious voting to entail increasing opposition to CSR resolutions.
"Nine mainstream funds did not support a single resolution categorized as CSR [in 2005]," states Jackie Cook, the senior research associate at TCL who conducted the analysis, in the report she authored.
Ms. Cook cites a specific example to illustrate this dynamic.
"Oppenheimer supported two resolutions in 2004 that appeared again in the respective companies' proxies in 2005, and it did not support them second time around," Ms. Cook told SocialFunds.com.
Oppenheimer flip-flopped from support to opposition on a resolution asking ExxonMobil (ticker: XOM) to amend its equal employment opportunity (EEO) statement to cover sexual orientation. The fund family also shifted its vote from support to abstain on a resolution asking Walt Disney (DIS) to report on supplier labor standards in China, according to Ms. Cook.
The report delves into even more depth on the corporate governance resolutions than with the CSR resolutions, dividing the results into distinct CG categories such as majority vote director elections. This particular category saw a major jump in activity, from only 12 such resolutions in the 2004 proxy season to 57 in the 2005 season. Mutual fund support for this type of resolution also increased, which is a change from the 2004 proxy season when it was opposed by all but a few funds.
"However, in the 2005 fund voting data, mainstream funds supported this resolution an average 60 percent of the time and the six SRI funds voting on this issue supported it 100 percent of the time during the period July 2004 to June 2005," writes Ms. Cook in the report.
Ms. Cook also examined mutual fund family proxy voting guidelines to assess how they impacted voting results. In many instances, what was striking was the ways in which the guidelines could not account for the way the votes were cast.
"Vanguard distinguished itself as one of six mainstream funds to oppose all shareholder-sponsored resolutions on majority voting in director elections in either of the reporting periods (the others being Barclays, Blackrock, Dodge & Cox, Putnam, and State Street)," she writes in the report. "Under the section entitled 'Election of directors" in Vanguard's proxy voting guidelines, director independence and declassified boards are emphasized [but there] is no reference to the director election process."
While the report breaks down the CR resolutions into categories, "an analysis
of investment funds' support for the various categories of CSR resolutions
is beyond the scope of the present report," writes Ms. Cook in the report.
However, Ms. Cook gathered all the data necessary for such an analysis,
and has made this unpublished data on mutual fund voting records on CSR
resolutions broken down to the category level available to SocialFunds.com.
Subsequent articles in this series examine this unpublished data to analyze
reasons behind the decrease in SRI fund support for CSR resolutions and
the drop in support for climate change resolutions.
Unpublished Data Clarifies SRI Proxy Voting on CSR Resolutions
In part two in this multi-part series, SocialFunds.com
examines unpublished data associated with a recent report from The Corporate
Library, and finds that statistics are not always what they seem at first
glance.
January 18, 2006 - The Corporate Library (TCL)
report
on 2004 and 2005 mutual fund proxy voting released last week defies expectation
in many ways. With the spotlight shining on proxy voting, one would anticipate
mutual funds voting more independently of management and thus increasingly
supporting shareowner resolutions. The report, which is based on 45 funds'
N-PX
filings with the SEC, does
indeed document a 1.5 percent increase in overall support for shareowner resolutions,
from 35.8 percent in 2004 to 37.3 percent in 2005.
However, when delving deeper to distinguish between support for corporate governance (CG) resolutions and those on corporate social responsibility (CSR), the report surprisingly finds support for the latter decreasing 1.3 percent, from 17.5 percent in 2004 to 16.3 percent in 2005. Even more confounding are the results that break down between mainstream funds, which support CSR resolutions less than 10 percent of the time, and socially responsible investing (SRI) funds, which support CSR resolutions about 60 percent of the time, according to the report.
"Mainstream funds' support for CSR resolutions declined by around 1.4 percent, however SRI funds' support for CSR resolutions declined by almost 3 percent," writes Jackie Cook, the senior research associate at TCL who conducted the analysis, in the report she authored. "The decrease in SRI funds' support for CSR resolutions was caused by decreased support by Catholic Funds (-14.5 percent), Pax (-13.3 percent), and Parnassus (-7.5 percent)."
source: The Corporate Library
The finding that SRI funds decreased support for CSR resolutions--which are predominantly filed by SRI funds and allied organizations--is quite counterintuitive, and may result in large part from the inherent limitations in the research methodology.
"It should be noted that, since most SRI funds apply screening criteria to their portfolios, these funds are not voting on a comparable set of resolutions to those of mainstream funds," Ms. Cook writes in the report. "Rather, they are voting on a subset at corporations that have already passed the various screening criteria applied by individual funds."
In other words, SRI funds are voting on a much smaller set of resolutions--not only because of screening, but also due to the simple fact that SRI fund firms tend to be much smaller than mainstream fund families and hold many fewer companies in their portfolios.
"It was not any conscious decision on our part to reduce voting on CSR," said Jerry Dodson, president of Parnassus Investments. "It's probably because the statistical sample is so small that a change in how two or three resolutions are voted would make a major difference."
According to unpublished data provided to SocialFunds.com by Ms. Cook, Parnassus voted on only 16 resolutions in 2005, opposing five and abstaining from five. Of the 20 resolutions it voted on in 2004, it opposed eleven. So the 7.5 percent decrease in Parnassus' support for CSR resolutions hinges on a single vote.
"We don't vote for all the CSR resolutions--we do look at each one carefully, but sometimes we don't agree with all of them," Mr. Dodson told SocialFunds.com.
Anita Green, vice president of social research at Pax World Funds, concurs.
"If there is a change in our numbers, it is not due to a change in policy or voting procedure--it's more likely just a statistical anomaly," Ms. Green told SocialFunds.com.
Of the 13 resolutions it voted on in 2004, Pax opposed only two and abstained on one, according to the data provided by Ms. Cook. Of the 11 resolutions it voted on in 2005, Pax opposed four--as with Parnassus, the decrease resulted from a mere vote.
Another somewhat confounding aspect of the report is how "abstain" votes are counted, which voice neither support ("for") nor opposition ("against").
When investigating Investor Responsibility Research Center (IRRC) data published in the Social Investment Forum (SIF) 2003 Trends Report a few years ago, Ms. Cook contacted IRRC to inquire how it counts abstain votes on individual resolutions to ascertain whether they qualify for re-submission, and discovered that IRRC leaves them out of the equation. IRRC divides the number of votes "for" by the sum of the number of votes "for" plus the number of votes "against." IRRC had consulted with the SEC, which confirmed that this is the correct method for tallying votes to determine eligibility for re-submission.
For the purposes of the TCL study, which seeks to provide a comprehensive view of mutual fund proxy voting, Ms. Cook reasoned that including the "abstain" votes (by dividing the number of votes "for" by the sum of all votes--"for," "against," and "abstain") was necessary to account for all votes cast.
"Abstain votes skew the results either way you count them," Ms. Cook told SocialFunds.com.
Excluding abstain votes (as IRRC does) paints an accurate picture of voter will on specific resolutions, as it only counts clear expressions of support or opposition, but it neglects to account for a portion of the votes cast--perhaps appropriately, as these voters deferred from expressing a clear will. Including abstain votes (as the TCL report does) accurately accounts for all votes as is appropriate for a broad survey of proxy voting across entire mutual fund families. However, one effect is that this method de facto lowers support by increasing the denominator--despite the fact that these voters expressed neither support nor opposition to the resolution.
"If we were to apply the SEC-sanctioned IRRC method to the fund voting data, the effect would definitely be an increase in support for CSR resolutions by SRI funds," said Ms. Cook.
Catholic Funds and Parnassus, which together account for the lion's share of the decrease in SRI support for CSR resolutions, also account for the most abstentions on CSR resolutions--Catholic Funds abstained on 61.4 percent of its CSR resolutions in 2005, and Parnassus on 31.3 percent.
"Our proxy guidelines include an explicit list of issues on which we abstain," Catholic Funds President Ted Zimmer told SocialFunds.com. "We chose these because we do not claim much expertise on these issues and/or because it may not be clear how Catholic values influence the appropriate response to the issues."
Using the IRRC calculation method, SRI fund support for CSR resolutions decreased a mere 0.5 percent from 2004 to 2005, and increased by 2.6 percent for all shareowner resolutions (as opposed to decreasing 0.4 percent, as the results that count abstain votes find.)
source: Jackie Cook
Counting abstentions as the SEC instructs results in a much different picture
of SRI fund voting on shareowner resolutions, especially those focused on
CSR.
Back to top
Eroding Support for Shareowner Resolutions on Climate Change Revealed
by Unpublished Data
In part three of this multi-part article, SocialFunds.com
examines unpublished data associated with a recent report on mutual fund
proxy voting from The Corporate Library, and finds decreasing support for
climate change resolutions
January 25, 2006 - The Corporate Library (TCL)
report
comparing 2004 and 2005 mutual fund proxy voting records is a bit of an enigma,
as it delivers some counterintuitive findings--such as decreasing support
for corporate social responsibility (CSR) shareowner resolutions. TCL Senior
Research Associate Jackie Cook surmises aloud in the report she researched
and authored that the issue of climate change may hold the key to explaining
the apparent declining support for CSR resolutions.
"Lower support for CSR-related resolutions in 2005 might have much to do with a high number of resolutions addressing climate change and greenhouse gas emissions being withdrawn prior to coming to vote," Ms. Cook states in the report. "Activist shareholders submitting climate change resolutions can increasingly make a business case for their proposals and management might feel more compelled to enter into dialogue with activist shareholder groups."
"ISS [Institutional Shareholder Services] notes that 26 of the 40 climate change resolutions filed during 2005 were withdrawn as management and activist groups engaged in dialogue around these issues," she continues. "Furthermore, if this reflects a change in the strategy of key shareholder activists, then the most compelling CSR cases might not end up being voted on by shareholders, leaving those that remain on the proxies possibly less appealing on average."
At the same time the opposite effect may be happening, with very compelling climate change cases remaining on the proxies of companies that are intractable and closed to compromise, lending extra merit and appeal to supporting these resolutions. Indeed, the 2005 crop of climate change resolutions included one at ExxonMobil (ticker: XOM) that received 35.5 percent support on average from the fund families tracked by Ms. Cook, according to unpublished data she provided to SocialFunds.com. (The resolution, which asks the company to report on how the company will meet the greenhouse gas reduction targets of those countries in which it operates that have adopted the Kyoto Protocol, received 28.44 percent overall support at the 2005 annual general meeting.)
Delving deeper into the data behind the report reveals other, even more perplexing trends on climate change resolutions, about a dozen of which were voted on by funds each year.
"Climate change proposals were supported much less in 2005 than in 2004--a very surprising finding in light of international adoption of the Kyoto Protocol in early 2005 and a growing body of scientific evidence of global climate change," Ms. Cook told SocialFunds.com.
According to unpublished data Ms. Cook provided to SocialFunds.com, support for climate change resolutions by the 45 mutual funds analyzed fell from 25.5 percent in 2004 to 18.6 percent in 2005. The socially responsible investing (SRI) funds all maintained full support for climate change resolutions (Calvert and Citizens), supported the proposals in 2004 and did not face a climate change resolution in 2005 (Domini and Pax), or did not face the resolution either year (Ariel and Parnassus). Catholic Funds increased support from ten abstentions in 2004 to five abstentions and one "for" vote in 2005. TIAA-CREF (which is not categorized as SRI but offers SRI options and often votes consistently with SRI funds) supported nine climate change resolutions and opposed one both years, while abstaining on one additional resolution in 2004.
On the other end of the spectrum, 15 of the mainstream funds that faced climate change resolutions (including mutual fund giants Fidelity and Vanguard) maintained consistency by voting "against" them both years. Three mainstream fund families (Alliance, American Funds, and American Century) moved from some support in 2004 to none in 2005.
In the middle of the spectrum are a number of mainstream fund families that increased support for climate change resolutions from 2004 to 2005. Several of these firms have recently enhanced their commitment to environmental sustainability. For example, Merrill Lynch published a report in early 2005 on investment opportunities in the auto sector created by climate change, and the mutual fund side of the business went from opposing eight climate change resolutions in 2004 to supporting one and opposing three in 2005. JPMorgan Chase adopted a new environmental policy in 2005, and JP Morgan mutual funds voted against two climate change resolutions both years, but added a vote of support for one climate change resolution in 2005.
Counterbalancing this trend were firms that have recently enhanced their commitment to environmental sustainability whose support for climate change resolutions decreased from 2004 to 2005. Goldman Sachs, which adopted a comprehensive environmental policy in 2005 and has issued research reports using SRI strategies, decreased support for climate change resolutions by 16.7 percent, from supporting three resolutions and opposing six in 2004 to supporting one and opposing five in 2005. Smith Barney, which issued an SRI report in 2005, went from supporting two resolutions in 2004 to supporting one in 2005 (and opposing eight both years.)
Of course these decreases result from changes in only one or two resolutions,
but on an issue as vital (and increasingly supported by mainstream institutional
investors) as addressing climate change, erosion of support is a matter
of concern. It will raise greater concern if this trend continues in the
2006 proxy season, instead of simply being an anomaly in first two proxy
seasons subject to mutual fund disclosure of voting records.
Back to top
Using Mutual Fund Proxy Voting Data to Promote More Conscientious Voting
The final installment of this multi-part series steps
back to consider the implications of the findings and how to harness them
to push mutual funds to support corporate social responsibility.
February 03, 2006 - After examining 2004 and 2005 mutual fund proxy voting
data provided by The Corporate Library (TCL)
Senior Research Associate Jackie Cook, we return to the original question:
do the SEC disclosure rules
boost "incentives to fund managers to vote their proxies conscientiously?"
While it would be nice to answer "yes," the data say "no," as support for
resolutions filed by corporate management increased and support for
resolutions filed by shareowners on corporate social responsibility (CSR),
and climate change in particular, decreased.
From a business perspective, these trends are perplexing, given that the most comprehensive academic study of CSR, conducted by Marc Orlitzky surveying 52 empirical studies published between 1972 and 1997, found a positive association between CSR and financial performance. So mutual funds would be hard pressed to advance a business case for opposing CSR resolutions.
It is even more difficult to account for the decreasing support for climate change resolutions, given that science and popular opinion have only hardened in the past year that climate change is not only an environmental but also a significant business risk. Indeed, a survey of 845 US mutual fund investors conducted by Opinion Research Corporation (ORC) that the Civil Society Institute (CSI) released last week finds that seven out of ten respondents want their mutual funds to support climate change shareowner resolutions.
Released in conjunction with this survey was a report from Ceres conducted by the Investor Responsibility Research Center (IRRC) finding that none of the 100 largest mutual funds whose specific votes were analyzed supported any climate change resolutions in 2005. These findings largely concur with TCL data, with some differences due to the fact that Ms. Cook of TCL did not limit her dataset to the largest funds. For example, Goldman Sachs (ticker: GS) mutual funds are not amongst the Ceres dataset of the 100 largest funds, though data provided by TCL's Ms. Cook to SocialFunds.com documents a 16.7 percent decrease in support for climate change resolutions from 2004 to 2005 by the 26 GS mutual funds covered.
While Ceres President Mindy Lubber applauds Goldman Sachs' new comprehensive, corporate-wide environmental policy and its incorporation of socially responsible investing (SRI) strategies in its equities research, she expresses concern over its proxy voting on climate change proposals.
"Goldman Sachs, while putting out a valuable set of environmental guidelines for the company, has clearly not changed all of its investment practices as it relates to climate change and we look forward to continuing to work with them to see more of that incorporated into their assessment of firms," Ms. Lubber told SocialFunds.com.
Chris Williams, a press officer for Goldman Sachs, told SocialFunds.com that the company declined to comment.
Co-op America coordinated with CSI and Ceres to launch a Web-based action campaign for mutual fund investors to send an electronic letter to the three largest mutual fund families (Fidelity, Vanguard, and American Funds) exhorting them to support climate change resolutions.
"These fund families collectively control $1 trillion, 70 percent of the US mutual fund market," said Alisa Gravitz, executive director of Co-op America. "The bottom line is this: mutual fund companies have the clout to hold the companies in their portfolios accountable for climate change impact, and furthermore they have a duty to do so."
"When investors learn about the dismal record mutual funds have on this important issue, they will be outraged that mutual funds have been so negligent--they will be furious because failure to take climate risk seriously is clearly dangerous to mutual fund investors as well as the environment," Ms. Gravitz added.
Within one week, more than 2,300 investors had sent letters, according to the automatic tracking tool on the Co-op America website. And this is not the only such campaign. Last year Amnesty International USA (AIUSA) launched the SharePower program, which provides tools for investors to harness their power as mutual fund shareholders to encourage proxy voting in support of human rights, and just this week Amnesty expanded the program to Canada. Mila Rosenthal, director of Amnesty's business and human rights program, expresses concern mixed with optimism regarding the trends toward decreasing support for CSR resolutions exposed in TCL data provided to SocialFunds.com.
"Your analysis of the results is fascinating and shows some surprising, and in some cases disappointing short-term trends, but I think the long-term trend will be a positive one for human rights," Ms. Rosenthal told SocialFunds.com. "We believe that transparency on proxy voting records will eventually push mutual funds to vote more and more positively on human rights related resolutions, as they hear from more and more individuals that these issues are important to them."
"The SharePower campaign is designed to give individuals the tools they need to communicate these values to investment companies who speak for them and their money, but SharePower is still a new initiative, and I would expect it to take a while longer for the mutual funds to get the message," Ms. Rosenthal added. "We think that within the next couple of years we'll see a more positive trend on proxy voting on social issues, as individual investors get more involved and flex their muscles."
Ms. Cook, the researcher who authored TCL's report and provided additional data from her study to SocialFunds.com, sees several ways that this information can be used to fulfill the intention of the SEC rule to promote more "conscientious" proxy voting by mutual funds.
"Shareholder activists looking to file proposals may look to previous season's
results for how to make the appeal to the shareholder body--what lines of
argument appeal in general to shareholder bodies and in particular to funds
with large holdings in particular companies," Ms. Cook told SocialFunds.com.
"And shareholder activists looking to promote their proposals for upcoming
votes might look to this type of data in devising a strategy for communicating
their case to investment funds."
| Editor's Note: |
| SocialFunds.com thanks Jackie Cook
for generously offering access to unpublished research data and analysis
for this article. |
Back to top
