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Mr. Harvey L. Pitt,
Chairman
United States
Securities and Exchange Commission
450 Fifth Street,
NW
Washington, DC
20549
Re: Disclosure of
Mutual Fund Proxy Voting
Dear Chairman Pitt:
Two years ago,
Domini Social Investments became the first mutual fund manager in America to
publish the actual proxy votes we cast for each company in our Funds’
portfolios. Our votes are published on
our website, www.domini.com. We also publish on an annual basis comprehensive
proxy voting guidelines so that our Funds’ shareholders know how we intend to
vote their shares on important issues of corporate governance and social and
environmental responsibility. On behalf
of Domini Social Investments, I am writing to urge the Commission to propose
and adopt rules requiring that all mutual funds do the same, as it has become increasingly
clear that mandatory (as opposed to voluntary) disclosure is in the best
interests of America’s mutual fund shareholders.
On two earlier
occasions, in 1971 and 1978, the Commission proposed rules mandating disclosure
of mutual fund voting policies and practices, but each time withdrew its
proposals. As you know, enormous
changes have taken place in the mutual fund industry since that time. These changes clearly evidence the need for
renewed consideration of proxy voting disclosure and transparency, consistent
with the Commission’s role of protecting mutual fund investors and maintaining
the integrity of the securities markets.
After two decades
of rapid growth, mutual funds now account for approximately 22 percent of all
US equity shares (and therefore voting power). Whereas in 1980 barely six percent of US
households owned mutual funds, by 2000 mutual fund ownership had climbed to
almost 50 percent of US households. Many employers have opted to convert defined
benefit plans into defined contribution plans where employees allocate their
own investments, principally to mutual funds.
Institutional investors, who own more than two-thirds of US equity
shares, now invest approximately one-third of their assets in mutual funds. As a result of these changes, mutual funds
today arguably hold the swing vote when it comes to corporate governance.
Against this
backdrop, the Commission has stepped up efforts in recent years to require and
encourage the disclosure of meaningful information by mutual funds to their
investors. Federal disclosure rules now
mandate that mutual funds provide investors detailed information – in plain
English – about investment objectives, investment policies, strategies, risks, fees
and holdings. Earlier this year, the
Commission took a step in the direction of proxy disclosure as well, proposing
that registered investment advisers be required to disclose their proxy voting
practices on their Form ADV registration statements. In its filing (No. S7-10-00), the Commission stated that it was
proposing the rule change “so that [adviser] clients will be fully informed
about who is responsible for voting their proxies and how their interests in
proxy voting decisions are protected.”
The Commission’s
Form ADV proposal stopped short, however, of requiring actual disclosure of
proxy votes, and though the provision would benefit the clients of investment advisers, including mutual funds, it would
not require that mutual funds in turn disclose their proxy voting practices to
their own investors. There are still no regulatory requirements
or even industry guidelines for the disclosure of voting or governance
information that would allow mutual fund investors to evaluate how mutual fund
managers are discharging their proxy voting duties. In our view, the Commission needs to take this additional step:
mutual funds should be required to disclose their proxy voting practices to
their shareholders, and to disclose actual proxy votes cast as well.
Today, most mutual
funds routinely vote with corporate management. Meanwhile, their shareholders remain in the
dark because these votes are not disclosed.
Even those mutual funds that take a more careful or activist approach to
corporate governance (i.e., sometimes voting against company management if fund
management deems it in their shareholders’ interests) – either by voting
directly or delegating their voting responsibility to proxy adviser firms –
generally do not disclose to their own shareholders either their proxy voting
policies (if they have them) or their actual proxy votes.
In a Washington Post report earlier this
year,
representatives of two of the nation’s largest mutual fund companies stated
that they do not disclose either their proxy voting guidelines or their actual
votes because their investors “have not evidenced any real interest in how we
discharge our voting responsibilities [Fidelity].” “People invest in mutual funds because they want professional
investment management and someone to vote their proxy [Vanguard].” Interestingly, implicit in each statement is
the recognition that voting such proxies is a fiduciary responsibility.
The question then
surely becomes: if proxy voting is a fiduciary responsibility of fund
management, why is disclosure not mandated?
I can think of no other instance where the Commission countenances
opacity rather than transparency in the discharge of fiduciary
obligations. Indeed, when it comes to
proxy voting there is not even a record-keeping requirement, let alone a
disclosure requirement. I believe it is
time to address this anomaly.
The manner in which
mutual funds exercise their proxy voting responsibilities should be considered
a fundamental indicator of responsible mutual fund governance. We believe that the current approach taken
by most mutual fund companies in not disclosing their policies or votes should
be considered an abdication of their fiduciary responsibility. To argue that
ordinary investors are not “demanding” this information is surely beside the
point, and this has never been the sole basis or even a primary reason for
disclosure. Indeed, in a great many
cases, ordinary investors are simply unaware of what they are missing, and are
not therefore in a position to “demand” it.
Certainly, ordinary investors were not demanding disclosure of
comprehensive risk and standardized performance information, but the Commission
nevertheless required such disclosure because it believed that investor
education and mutual fund transparency would lead to better mutual fund governance
and stronger markets. As you recently
remarked yourself, “It is axiomatic that comprehensible information is the
lifeblood of strong and vibrant markets.”
At Domini, we do
not believe that mutual fund investors “want…someone to vote their proxy” for
non-diverse, self-perpetuating boards, excessive CEO compensation or
substandard environmental, labor or human rights standards. Nor do we believe that social, environmental
and corporate governance issues are unrelated to long-term corporate performance. Proxy voting is the most direct means by
which individual investors – either directly or through mutual fund or other
financial intermediaries – can play an active role in influencing corporate
behavior. It seems to us that the
Commission should be encouraging investors to do so – they are, after all, the
owners of these corporations.
There is also
mounting evidence that progress on social, environmental and corporate
governance issues is linked to long-term corporate performance, and increasing
numbers of institutional investors actively vote their proxies as a strategy
for influencing corporate behavior and enhancing portfolio performance. A study of the CalPERS shareowner process
found that engagement with company management, including proxy voting, could
yield positive results to a portfolio. Certainly, some mutual fund managers might
conclude that fund performance could be enhanced through corporate governance
activity as well as through trading activity, or that encouraging improved corporate
citizenship on the part of a portfolio company may constitute a more promising
strategy than selling its stock entirely.
This is particularly true at a time when so many investors are invested
in index funds, where trading activity is not used as a performance-enhancement
strategy and voting/governance activity may constitute an important means of
increasing fund value. Disclosure of
such activity may be of value not only to investors but to financial intermediaries,
ranking agencies and others interested in determining how such shareholder
activity might impact company and fund performance.
Moreover, proxy
votes on shareholder resolutions have had a measurable impact on corporate
behavior – and in the view of many, on corporate and mutual fund performance –
over the last decade. For example,
shareholder pressure on corporations doing business with the Apartheid regime
in South Africa convinced scores of companies (including IBM and Mobil Oil) to
change their policies. More recently,
shareholders have helped convince Home Depot to stop selling timber harvested
from old growth forests and Coca-Cola to increase recycled content in plastic
bottles. Numerous companies have agreed
to release EEO data, adopt non-discrimination policies toward gay and lesbian
employees and improve environmental reporting as a result of proxy votes.
The Commission need
not embrace the notion that proxy voting on social, environmental or corporate
governance issues positively impacts fund value or corporate financial
performance in order to acknowledge that many investors surely believe that it
does; and if this is true, that they should be entitled to this information –
just as they are entitled to information on mutual fund strategies, risks and
fees.
We believe it is
time for the Commission to acknowledge what the Department of Labor has
acknowledged in the context of private pension funds governed by ERISA – that
the proxy is an important asset and should be voted by fund fiduciaries with
due regard for shareholders' interests.
When investors buy mutual fund shares they are hiring (and paying for)
professional management with respect to both investment services and voting/governance services. Disclosure with respect to the latter should
be considered a fundamental fiduciary obligation that mutual funds owe to their
shareholders, and should be required as a matter of law. Certainly, disclosure would promote
accountability and transparency, which are not only guiding principles of our
financial regulatory system but have been special concerns of the Commission in
recent years.
I would urge the
Commission to once again take up the work it began in the 1970s, and to build
upon the disclosure agenda it has advanced through the Plain English initiative
and the Form ADV proposal of earlier this year. In our view, there is simply no justification for the continued
opacity of mutual fund voting/governance activity in a regulatory scheme that
otherwise embraces and promotes transparency.
Nor is there any basis for denying this potentially valuable information
to mutual fund shareholders, or for allowing mutual fund managers to proceed
unchecked and unaccountable. The
required disclosure of proxy voting policies and practices is clearly
consistent with the Commission’s position on virtually every other mutual fund
governance and disclosure issue that I am aware of.
Americans are
increasingly cynical about the enormous power of global corporations that seem
to be beyond the control of anyone but a small group of inside shareholders and
their hand-picked managers. This is
unfortunate, given that so many Americans today own shares of these very same
companies, either directly or through financial intermediaries such as mutual funds. There is no reason why small groups of
inside shareholders should exercise such control over American corporations at
a time when shares are more democratically dispersed than at any time in
history. Proxy voting disclosure will
provide the information that mutual fund investors need to ensure that their
mutual funds are accurately representing their interests when they vote on
corporate governance, social and environmental issues. I see no justification for withholding this
important information from America’s mutual fund investors.
On behalf of Domini
Social Investments, I would urge the Commission to propose for adoption a rule
requiring all mutual funds to adopt and publish proxy-voting policies and to
record and publicly disclose their proxy votes.
Thank you in
advance for consideration of this matter.
Sincerely,
Amy Domini
Founder and Managing Principal
Cc: Mr. Jonathan
Katz, Secretary
Securities and Exchange Commission
(Reference: Proposed Rule S7-10-00)
