November 14, 2002
RE: FILE NUMBERS S7-36-02 AND S7-38-02
Mr. Jonathan G. Katz, Secretary
Cc: Mr. Harvey L. Pitt, Chairman
Dear Chairman Pitt and Secretary Katz:
Tides Foundation is an organization that fosters innovative philanthropy and manages philanthropic resources dedicated to social change. We work to bring together diverse individuals seeking social justice, creative new approaches to economic enterprise and an enlightened stewardship of our natural environment.
We are writing as an investor in support of the Securities and Exchange Commission's recently proposed rules regarding proxy voting guidelines and vote disclosure by mutual funds and investment advisers, File Numbers S7-36-02 and S7-38-02. We congratulate the agency for instituting meaningful disclosure that will surely bolster confidence in the equity markets, and strongly support the recommendations set forth in these proposed rules.
The proposed rules are a major step forward in providing greater transparency to investors whose proxy assets are held in mutual funds or entrusted to investment advisers. With the proposed amendments, the SEC is making a clear statement that proxy voting is a fiduciary duty and should be exercised with the best interests of fund holders in mind. This is consistent with the fiduciary standard set by the 1974 Employee Retirement Income Security Act (ERISA), which already applies to private pension plans.
As of last December, the mutual fund industry had assets totaling $7 trillion. Individual investors accounted for three-fourths of those assets (ICI Mutual Fund Fact Book). Yet even as mutual funds hold enormous influence over capital markets, and make decisions that can significantly impact the fortunes of individual investors, most funds have been reluctant to disclose their proxy voting records or the principles that guide their voting of securities.
As owners of a corporation, shareholders have the right to participate in major policies and management decisions. Proxy voting is a primary forum through which management seeks investor affirmation of its policies, and where shareowners can weigh in on important business issues-including conflicts of interest and emerging political, social, and regulatory issues facing the company. Yet mutual fund investors are kept in the dark, with no information about how their fund is voting proxies on important issues like executive pay, options packages, auditor ratification, the election of directors, independent committees, and social and environmental policies.
Mutual funds and advisers have enormous potential to shape corporate governance and social policies at portfolio companies. Yet since the 1970s, fund participants and regulators have noted a tendency among mutual funds and advisers to automatically vote with management, wondering whether this tendency was influenced in part by a desire to win profitable 401(k) and other business from companies where proxies are being cast. It is time this potential conflict of interest was eliminated.
Greater disclosure of proxy-voting policies and practices would pressure fund managers and advisers to refrain from unilateral rubberstamping of management's decisions, and would provide investors additional tools to distinguish among funds in the market. Indeed, the proposed rules would not only help investors identify those funds and advisers that carefully examine proxy proposals before voting on them, but also those who emphasize strong corporate governance or high standards of corporate social responsibility. The amendments would also allow for fund owners to be alerted when fund managers vote counter to their best interests, and in essence, would pressure mutual funds and investment advisers to take seriously their voting duties.
Some mutual funds argue that to post votes and policies would be expensive and complicated. But there are already a number of mutual funds and institutional investors doing this, and they track their votes and post them publicly on their web sites, in order to keep costs down. In 1999, Domini Social Investments, manager of the Domini Social Equity Fund, became the first mutual fund in America to do this--along with the California Public Employees Retirement System, the largest public pension fund in the world. Since then, about three dozen mutual funds, advisers, and other institutional investors have been posting their votes or articulating detailed voting policies on their web sites, for the array of resolutions presented at meetings each year.
We urge the SEC to require that disclosure of proxy votes and voting guidelines be directly disclosed on mutual fund and investment advisers' web sites, in addition to the SEC's web site.
Additionally, we would like to see more specific guidance from the SEC on what should be covered in a proxy voting policy or set of guidelines. Hundreds of resolutions are filed by shareholders each year, on a range of issues, and voting policies should reflect the diversity of concerns coming to a vote. In fact, most fund companies-outside of socially responsible funds-do not address voting policies for the myriad social and environmental resolutions facing fund managers and advisers.
Engaged proxy voting can help foster executive accountability and social responsibility on the part of many companies, and will help convince corporations to be responsive on a range of issues, including accounting practices, executive compensation, and environmental, human rights, community, and labor concerns. There is mounting academic evidence that progress on social, environmental, and corporate governance issues is linked to positive, long-term corporate performance. When all mutual funds and investment advisers reveal how they cast proxy votes, enabling shareholders to know what is being done in their name, we can expect corporate governance and accountability to substantially improve.
Thank you for the opportunity to comment on the proposed rules.