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March 14, 2007

Mutual Funds Inch Toward More Conscientious Proxy Voting on Social and Environmental Resolutions
    by Bill Baue

Corporate social responsibility resolutions addressing climate change reveal the increasing complexity of assessing proxy voting records. -- Apparently, the rubber stamp is dying a slow death. Optimists predicted that the SEC rule requiring mutual funds to disclose their proxy voting records starting in August 2004 would deter funds from reflexively voting with company recommendations--which almost invariably suggest voting against shareowner resolutions. Research on fund voting on corporate social responsibility (CSR) resolutions addressing social and environmental issues provided to by Jackie Cook, a senior research associate with The Corporate Library (TCL), provides a more realistic perspective. This data complements research Ms. Cook conducted for a recent TCL report on voting by 29 large mainstream funds on corporate governance resolutions that examined over 6 million voting decisions parsed from over a thousand N-PX filings, the SEC form where funds disclose annual proxy voting records.

According to the data on CSR resolutions, funds are collectively inching their way toward more conscientious voting. Ms. Cook analyzed 592 CSR resolutions that elicited more than 24,000 voting decisions over the past three proxy seasons by 60 fund families (up from the 45 fund firms Ms. Cook analyzed last year for She found that overall support for CSR resolutions fell from 15.7 percent in 2004 to 14.8 percent in 2005, then rose to 21 percent in 2006.

Support for CSR resolutions by the 52 mainstream funds surveyed fell slightly from 2004 (7.8 percent) to 2005 (7.7 percent) before rising to 13.4 percent in 2006. The eight socially responsible investing (SRI) funds surveyed showed much more robust support for CSR resolutions-- from 68 percent support in 2004 to 61.9 percent in 2005 to 71.8 percent in 2006.

"Looking at the big picture tells an incomplete story--a closer examination reveals several layers of complexity," Ms. Cook told "For example, the progress made overall comes despite significant lagging by some of the largest firms."

The three biggest fund families--American Funds, Fidelity, and Vanguard--have the biggest rubber stamps. For example, Fidelity voted against 126 CSR resolutions and for not a single one in 2005. This past proxy season, Fidelity supported one single CSR resolution while opposing 124 to raise its support rate from 0 to 0.8 percent. Vanguard takes a slightly different tack to arrive at similarly low support rates--it abstains on almost all CSR votes, which effectively creates the same impact as against votes in rubber stamping management recommendations. The firm explains its rationale in the "corporate and social policy issues" section of its proxy voting guidelines.

"The Board generally believes that these are 'ordinary business matters' that are primarily the responsibility of management and should be evaluated and approved solely by the corporation's board of directors," states Vanguard. "Often, proposals may address concerns with which the Board philosophically agrees, but absent a compelling economic impact on shareholder value (e.g., proposals to require expensing of stock options), the funds will typically abstain from voting on these proposals."

This explanation conveniently ignores two important issues. First, companies routinely request permission from the SEC to omit CSR resolutions from their proxy under the "ordinary business" provision, so resolutions that survive this challenge clearly do not pertain to "ordinary business" (and it is safe to assume the same of those that go unchallenged.) Secondly, resolution filers increasingly demonstrate economic impacts on shareowner value from the environmental and social issues they address, effectively forcing funds to at least weigh in one way or the other instead of simply sticking their heads in the sand by abstaining.

Climate change represents a case in point. Investment analyst reports for the past three years have discussed the economic impacts of climate change. The Stern report, issued in late 2006 (after the end of the proxy season) established these impacts beyond reasonable doubt. Yet Vanguard abstains on all climate change resolutions.

Climate change resolutions also demonstrate another confounding aspect of CSR resolutions: the advent of resolutions addressing social and environmental issues that actually advocate practices and policies that run counter to the sustainability agenda. The 2006 proxy season saw four climate change resolutions falling into this category, where funds exhibited conscientious voting by opposing the resolutions as an expression of support for corporate action to address climate change.

This significantly complicates the statistical assessment (and led Ms. Cook to exclude such resolutions from her overall calculations.) For example, two firms that issued investment analyst reports discussing the economic impacts of climate change appeared on first blush to have voting records in 2006 that ran counter to supporting corporate action on climate change. Goldman Sachs, which has a proactive corporate environmental policy, has issued a series of analyst reports on climate change, and Wells Fargo, which is the largest corporate purchaser of alternative energy in the US, has issued an analyst report on alternative energy. It would appear that both firms opposed action on climate change in 2006, each voting against seven resolutions and for only one.

However, four of the resolutions Goldman Sachs and Wells Fargo voted against were in fact resolutions opposing action of climate change. So the firms actually supported action on climate change in five out of eight resolutions.

On first glance, TIAA-CREF similarly appeared to have an inconsistent record voting on climate change, supporting almost all such resolutions in 2004 and 2005, then opposing about half the climate change resolutions it faced in 2006.

"After close analysis, TIAA-CREF determined that proposals at Occidental, Ford, GE, and General Motors all made arguments against climate change and the need for corporate action," John Wilcox, TIAA-CREF's senior vice president of corporate governance, told "In these cases, we voted against the proposals, consistent with our position on climate change resolutions."

TIAA-CREF's voting record also illustrates another significant trend in 2006--a shift to voting for political influence resolutions asking companies to disclose and provide board oversight for their political donations. After voting against all 24 such resolutions in 2004 and 2005, TIAA-CREF voted for 27 of 34 such resolutions in 2006, radically upping its record from zero to 79 percent support.

Stepping back to look at the bigger picture, TIAA-CREF more than doubled its support for CSR resolutions in general over the past three years, from 19.3 percent in 2004 to 43.7 percent in 2006--a period that saw a formalization of TIAA-CREF's commitment to SRI by creating a position of Director of Social Investing in June 2005. TIAA-CREF thus exemplifies the action spearheaded by the activist SRI funds such as Calvert, Citizens, Domini, MMA Praxis, and Pax that are all working to bury the rubber stamp.

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