December 4, 2002
Mr. Jonathan G. Katz
RE: Proxy Voting by Investment Advisers (File No. S7-38-02)
Dear Mr. Katz,
We are both professors at Harvard Law School in the corporate finance area, and one of us was formerly Vice Chairman of Fidelity Investments. We appreciate the opportunity to file this brief comment on the proxy voting proposals issued by the Securities and Exchange Commission (SEC) in Release No. IA-2059.
Concerned that mutual fund managers might be too influenced by management in their voting decisions on corporate governance matters, the SEC has issued two related proposals: first, requiring all managers of mutual funds to disclose their policies for voting proxies; and, second, requiring these managers to publish a list of how they voted on every proxy item. While the first proposal will provide useful disclosures, the second will in fact undermine its stated goals and have adverse effects on corporate governance.
Some fund complexes currently disclose their proxy voting policies to fund shareholders. For example, such policies typically include voting against certain types of anti-takeover measures and stock option plans that allow the exercise price to be decreased if the stock price falls. By mandating the disclosure of proxy voting policies by all managers of mutual funds, the SEC would assure that all fund shareholders be informed of their fund manager's approach to corporate governance issues.
One important policy supported by most fund managers is confidential voting in corporate elections. If the fund manager knows that every vote opposing a company's recommendation will be brought to the attention of that company's top executives, the fund manager might be reluctant to cast such an opposition vote for fear of retaliation by the company's executives. For instance, those executives might retaliate by refusing to meet with the fund manager's analysts. Alternatively, the fund manager might fear that it would lose the retirement business of the company by voting against its proxy proposals.
Yet the second SEC proposal would eliminate these protections of confidential voting for all mutual fund managers. Of course, there may be limited circumstances in which a fund manager might choose to publicize its vote against a company proposal - for example, on a proposed merger at an unfair price in the manager's view. However, the SEC proposal would not provide the manager with a strategic choice; the manager would have to disclose its vote on every item in every proxy.
More broadly, the second SEC proposal would overrule the confidential voting policies adopted by a substantial number of publicly traded companies. According to the IRRC, over 200 U.S. companies now have in place procedures whereby proxies are counted by an independent agent and are kept confidential from company management. In the last three years, institutional shareholders have put forward seventeen resolutions recommending the adoption of confidential voting, which have on average garnered over 50% of the votes cast.
A better approach would be for the SEC to mandate aggregate reporting of proxy voting by fund managers in annual and semi-annual reports without disclosure of votes against particular companies. Under such a mandate, for example, a fund manager might disclose that it voted 12% of the time over the last six months against the adoption of stock option plans because they resulted in excessive dilution of existing shareholders. Such an approach would retain the benefits of confidential voting, while meeting the SEC's disclosure objectives on proxy voting.
If aggregate reporting of proxy voting represents an appropriate balance between confidentiality and disclosure, then this approach should not be limited to managers of mutual funds. Such aggregate reporting, together with disclosure of proxy voting policies, should be mandated for all managers of investment pools - pension funds, insurance companies, bank trust departments and foundations.
While such expanded disclosures of voting policies would be beneficial, any mandated disclosure of particular votes would be counter-productive. Indeed, if the SEC is concerned about voting behavior by money managers, it should seek to expand the use of confidential voting. Unilateral repeal of confidential voting for money managers would be a big step in the wrong direction.
Thank you again for this opportunity to comment on these proxy voting proposals. If you wish to ask questions about this comment letter, please feel free to contact us.