As Appeared in Barron’s, May 13, 2002
A majority of Americans believe that corporations aren't doing a very good job when it comes to corporate citizenship --and this was true even before the Enron scandal. According to numerous surveys, Americans think corporations have too much power and political influence, that top executives are being paid too much, and that companies should focus on workers' well-being, communities and the environment as well as on profits. Interestingly, this skepticism about corporations comes at a time when Americans own more corporate shares-either directly, or indirectly through mutual funds and retirement plans-than at any other time in history. Theoretically, such ownership should bring more power and influence over corporate behavior. Yet most Americans continue to feel powerless -- even over companies whose shares they own.
The solution involves proxy voting, the often overlooked but key mechanism through which shareholders can play a role in corporate governance. As owners of a corporation, shareholders have the right to take part in the firm's strategic management by participating in annual meetings. Most investors, unable to attend, participate by way of a proxy ballot that authorizes a representative to vote on their behalf. These proxies contain proposals on key issues of corporate governance, including capital structure, auditing, board composition, and executive compensation. In addition to management proposals, proxies sometimes include shareowner proposals, too -- often involving issues like diversity, environmental practices or adoption of standards to avoid sweatshop practices overseas. Proxy voting is the primary forum where management seeks affirmation of what it's doing, and where shareowners weigh in on important issues.
And in recent years, proxy votes on shareholder resolutions have had a measurable impact -- belying the notion that ordinary investors can't affect corporate behavior. For example, shareholder pressure on corporations doing business with South Africa's apartheid regime helped to change corporate practices -- and to end odious oppression. More recently, shareholders have helped convince Home Depot to stop selling timber harvested from old-growth forests and Coca-Cola to increase the recycled content of their plastic bottles. Numerous companies have agreed to adopt non-discrimination policies and improve environmental reporting as a result of proxy votes.
Because shareholder resolutions often challenge the priorities and prerogatives of corporate management, there are those who want to limit proxy initiatives and curtail the right of shareholders to include resolutions on proxy ballots. In 1997, the Securities and Exchange Commission proposed new rules that would have made it easier for companies to decline placing resolutions on proxy ballots by determining them "irrelevant to corporate business" -- and would have raised the threshold for re-submitting unsuccessful resolutions in subsequent years. After a storm of protest by investor groups, the SEC withdrew the proposals. Still, each year businesses petition the SEC for permission to exclude shareholder proposals on social, environmental and corporate governance issues, arguing that such matters should be left to the "ordinary business judgment" of corporate management.
The "ordinary business" exclusion may already be too broad. Certainly, the Enron scandal demonstrates the need for more, not less, shareholder oversight in monitoring-and governing-the "ordinary business" of America's corporations.
Given that proxy voting is the vehicle whereby shareowners communicate directly with company management, it is perhaps surprising that so few investors actually exercise their ownership rights by engaging in the proxy-voting process. Many individual investors do not bother to read, let alone return, their proxy ballots. Most retirement plans delegate proxy voting to money managers, and many public pension funds do not even maintain records or monitor how their managers are voting their proxies. Similarly, very few mutual funds report to their shareholders on how they are voting their proxies.
Investors who own shares directly, however, at least have an opportunity to make their views known to corporate management. Investors who own shares indirectly through retirement plans or mutual funds generally do not. These investors seldom know how their money managers are voting their proxies -- or even if they are doing so.
In fact, in the institutional market, only the trustees of certain private retirement plans are legally required to vote proxies, maintain records and monitor compliance as part of their fiduciary responsibilities. Mutual-fund and public pension-fund investors lack this protection. Some fund managers argue that investors don't care how the proxies are voted. (Not surprisingly, a large majority of these managers routinely vote with corporate management.)
We believe, however, that a majority of mutual-fund and pension-plan investors, given the choice, would not vote their proxies for non-diverse, self-perpetuating boards, excessive CEO compensation or substandard environmental, labor or human rights practices. Moreover, there is mounting evidence that responsible corporate practices are beneficially linked to long-term corporate performance. The approach taken by most mutual-fund companies and pension funds (i.e., not reporting their proxy votes) needs to be re-examined. Shareholders and investors have a right to know how their fund managers -- their fiduciaries, after all -- are voting.
In 1999, Domini Social Investments and the California Public Employees' Retirement System (CalPERS) became, respectively, the first mutual-fund company and first public retirement system in America to publish their proxy votes. We did so because we believe mutual funds and pension plans have an obligation to shareowner participants to disclose how they vote on important issues of corporate governance, as well as social and environmental issues. Proxy-voting transparency should be considered a fundamental aspect of fiduciary responsibility in mutual-fund and pension-fund governance.
The tremendous growth in equity investing in the U.S. in the past decade has ripened the moment for restoring the notion of shareholder responsibility and ownership rights. Moreover, the intersection of capital markets and electronic information technology offers tremendous opportunities for communication and constructive change. Mutual funds and retirement systems can make information available on their Websites about upcoming proxy issues, how they intend to vote, and how they actually do vote on each and every proxy for each and every company in their investment portfolios.
It's time for all mutual-fund managers and public pension-fund fiduciaries to recognize what the Department of Labor has already declared -- in the context of private pension funds it oversees: that the proxy is an important asset and should be voted with due regard for shareholders' interests. And it's time for mutual funds and public pension funds to be required to disclose their proxy-voting records. The result will be increased shareowner participation in corporate management, improved corporate governance, greater corporate responsibility and stronger long-term performance by U.S. corporations.
Philip Angelides is the California State Treasurer. Amy Domini is president of the Domini Equity Fund and author of Socially Responsible Investing; Making a Difference and Making Money