Mutual fund voting: mgmt, ISS or muse? James Cotter – Wake Business Alan Palmiter – Wake Law...

Mutual fund voting:mgmt, ISS or muse?

James Cotter – Wake Business

Alan Palmiter – Wake Law

Randall Thomas – Vanderbilt Law

Villanova Securities SymposiumMarch 14, 2009

And now some numbers …

28.9%

(probably closer to 33%)

72% / 48%

which means

21-24% / 14-16%

98%

Source: Rothberg & Lilien, Mutual Fund Proxy Votes (Feb. 2005)

Now some jargon …

Rule 30b1-4 (2003)

Forms N1-A, N-PX, 10Q

Rule 14a-9(Rule 14a-8)

Schedule 14A

Now some pictures …

Now some data …

Mutual Fund Voting on Executive Compensation Proposals

Managementproposals

Shareholder proposals

Capseverance

pay

Performance-basedoptions

Expensestock

options

All payproposals

Fidelity 66.5% 3.0% 0% 5.3% 2.2%

Vanguard 64.6% 95.2% 0% 100% 23.4%

American 86.5% 81.3% 0% 100% 25.4%

T Rowe Price 87.6% 92.3% 35.0% 23.1% 28.1%

Franklin Templeton 80.8% 69.2% 67.6% 67.4% 35.3%

Source: Corporate Library/AFSCME (2005)

Mutual Fund Voting on Executive Compensation Proposals

Managementproposals

Shareholder proposals

Capseverance

pay

Performance-basedoptions

Expensestock

options

All payproposals

Fidelity 66.5% 3.0% 0% 5.3% 2.2%

Vanguard 64.6% 95.2% 0% 100% 23.4%

American 86.5% 81.3% 0% 100% 25.4%

T Rowe Price 87.6% 92.3% 35.0% 23.1% 28.1%

Franklin Templeton 80.8% 69.2% 67.6% 67.4% 35.3%

Source: Corporate Library/AFSCME (2005)

Mutual Fund Voting on Executive Compensation Proposals

Managementproposals

Shareholder proposals

Capseverance

pay

Performance-basedoptions

Expensestock

options

All payproposals

Fidelity 66.5% 3.0% 0% 5.3% 2.2%

Vanguard 64.6% 95.2% 0% 100% 23.4%

American 86.5% 81.3% 0% 100% 25.4%

T Rowe Price 87.6% 92.3% 35.0% 23.1% 28.1%

Franklin Templeton 80.8% 69.2% 67.6% 67.4% 35.3%

Source: Corporate Library/AFSCME (2005)

Proposal type

ISS study(all shareholders)

Corporate Library study(only mutual funds)

2004 2005 2004 2005

Board leadership (independent chair) 28% 30% 44% 48%

Board structure / board committees 26% 29% 38% 28%

Declassify board / term limits 72% 63% 64% 64%

Director elections (majority voting) 12% 44% 21% 60%

Shareholder rights / takeover defenses 61% 58% 86% 85%

Shareholder voting rights 55% 50% 56% 63%

Total 42.3% 45.7% 51.5% 58.0%

Proposal type

ISS study(all shareholders)

Corporate Library study(only mutual funds)

2004 2005 2004 2005

Board leadership (independent chair) 28% 30% 44% 48%

Board structure / board committees 26% 29% 38% 28%

Declassify board / term limits 72% 63% 64% 64%

Director elections (majority voting) 12% 44% 21% 60%

Shareholder rights / takeover defenses 61% 58% 86% 85%

Shareholder voting rights 55% 50% 56% 63%

Total 42.3% 45.7% 51.5% 58.0%

Sources: • The Corporate Library, Analysis of Fund Voting for 2004-2005 (Jan. 2006)• ISS, 2005 Postseason Report: Corporate Governance at a Crossroads (Oct. 2005)

Proposal type

ISS study(all shareholders)

Corporate Library study(only mutual funds)

2004 2005 2004 2005

Board leadership (independent chair) 28% 30% 44% 48%

Board structure / board committees 26% 29% 38% 28%

Declassify board / term limits 72% 63% 64% 64%

Director elections (majority voting) 12% 44% 21% 60%

Shareholder rights / takeover defenses 61% 58% 86% 85%

Shareholder voting rights 55% 50% 56% 63%

Total 42.3% 45.7% 51.5% 58.0%

Proposal type

ISS study(all shareholders)

Corporate Library study(only mutual funds)

2004 2005 2004 2005

Board leadership (independent chair) 28% 30% 44% 48%

Board structure / board committees 26% 29% 38% 28%

Declassify board / term limits 72% 63% 64% 64%

Director elections (majority voting) 12% 44% 21% 60%

Shareholder rights / takeover defenses 61% 58% 86% 85%

Shareholder voting rights 55% 50% 56% 63%

Total 42.3% 45.7% 51.5% 58.0%

Sources: • The Corporate Library, Analysis of Fund Voting for 2004-2005 (Jan. 2006)• ISS, 2005 Postseason Report: Corporate Governance at a Crossroads (Oct. 2005)

Now our preliminary data …(on mutual fund voting)

Mutual funds vs. all shareholders(“for” votes)

Managementproposals

Shareholderproposals

Mutual funds 91.8% 30.5%

All shareholders 93.9% 27.7%

MF voting on management proposals(excluding proposals to elect directors, approve auditors)

ManagementFor

ISSFor

83.0%7,949

ISSAgainst

65.2%1,513

No ISSRecommend

80.5%41

MF voting on shareholder proposals

ManagementAgainst

ISSFor

42.6%1,493

ISSAgainst

9.3%1,314

No ISSRecommend

43.5%31

Interpreting the data …

MF voting on all proposals(excluding director elections, auditor approvals)

ManagementFor

Management Against

ISSFor

ForAgainst

ForAgainst

ISSAgainst

ForAgainst

ForAgainst

MF voting on all proposals(excluding director elections, auditor approvals)

ManagementFor

Management Against

ISSFor

ForAgainst

ForAgainst

ISSAgainst

ForAgainst

ForAgainst

Follow Mgt + ISS

MF voting on all proposals(excluding director elections, auditor approvals)

ManagementFor

Management Against

ISSFor

ForAgainst

ForAgainst

ISSAgainst

ForAgainst

ForAgainst

Follow Mgt (despite ISS)

MF voting on all proposals(excluding director elections, auditor approvals)

ManagementFor

Management Against

ISSFor

ForAgainst

ForAgainst

ISSAgainst

ForAgainst

ForAgainst

Follow ISS (despite Mgt)

MF voting on all proposals(excluding director elections, auditor approvals)

ManagementFor

Management Against

ISSFor

ForAgainst

ForAgainst

ISSAgainst

ForAgainst

ForAgainst

Follow Muse (despite Mgt + ISS)

Vote w/ Mgmt + ISS 63.5%

Vote w/ Mgmt (despite ISS) 15.0%

Vote w/ ISS (despite Mgmt) 9.5%

Vote w/ Muse (despite Mgmt + ISS) 12.0%

TOTAL 100%

MF voting on all proposals(excluding director elections, auditor approvals)

Some specific results …(ISS influence generally)

Declassifyboard

Majority voting

Poison pill vote

Separate chair-CEO Totals

MGT + ISS 45.6% 19.6% 16.8% 27.1% 31.0%

MGT (not ISS)

18.6% 44.0% 33.4% 46.8% 32.1%

ISS (not MGT)

28.3% 33.5% 44.4% 20.8% 31.3%

Muse (not MGT or ISS)

7.6% 2.9% 5.4% 5.2% 5.7%

Declassifyboard

Majority voting

Poison pill vote

Separate chair-CEO Totals

MGT + ISS 45.6% 19.6% 16.8% 27.1% 31.0%

MGT (not ISS)

18.6% 44.0% 33.4% 46.8% 32.1%

ISS (not MGT)

28.3% 33.5% 44.4% 20.8% 31.3%

Muse (not MGT or ISS)

7.6% 2.9% 5.4% 5.2% 5.7%

Take away …

Mutualfunds

All Shs

MGT + ISS 63.5% 31.0%

MGT (not ISS)

15.0% 32.1%

ISS (not MGT)

9.5% 31.3%

Muse (not MGT or ISS)

12.0% 5.7%

The end

Declassify board

ManagementFor

Management Against

ISSFor

85.8%217

60.4%193

ISSAgainst

--0

20.6%2

No ISSRecommend

96.7%2

60.2%5

Majority voting for directors

ManagementFor

Management Against

ISSFor

88.0%50

43.8%176

ISSAgainst

67.7%10

21.1%4

No ISSRecommend

--0

--0

Submit poison pill to shareholder vote

ManagementFor

Management Against

ISSFor

78.1%13

57.7%139

ISSAgainst

59.5%5

25.4%28

No ISSRecommend

--0

60.8%4

Separate chair and CEO

ManagementFor

Management Against

ISSFor

83.2%1

30.8%113

ISSAgainst

--0

16.2%53

No ISSRecommend

--0

27.7%3