Monday, May 17, 1999

Mutual Fund News - Susan Heinrich

Proxy voting by mutual funds becomes issue as industry grows. No law requires firms to disclose their voting policies

By SUSAN HEINRICH Mutual Funds Reporter The Financial Post

When the Schneider family agreed to sell control of hog processor Schneider Corp. in early 1998 to a U.S. company that offered less money than hostile bidder Maple Leaf Foods Inc., Mackenzie Financial Corp. took action.

In an attempt to get more money for its mutual fund investors, Mackenzie took part in a lawsuit against Schneider. It wasn't the only one. Royal Bank Investment Management, the fund operation of Royal Bank of Canada also got involved in the suit. Together the two institutions owned about 27% of Schneider. The legal tangle ended in Schneider's favour. But the participation in the lawsuit by two of Canada's largest mutual fund companies was an indication of a growing activism by funds in the company's they invest in.

The case garnered much attention in the press. That also made it unusual: because of the press coverage, investors knew the position those fund companies had taken. Each year mutual fund managers vote millions of shares on behalf of fund investors who indirectly own the shares held in their mutual fund units. That process is known as proxy voting. But clients are never informed about how their mutual fund is voting on a particular issue, or whether a mutual fund manager voted at all. That lack of disclosure has lead to a call for change by some fund industry watchers.

Glorianne Stromberg, the author of two reports recommending broad changes in the Canadian investment funds industry, believes investors could benefit from knowing more about proxy voting.

"Philosophically, I [believe] the vote belongs to the fund, and the fund is the unitholders," says Ms. Stromberg, a securities lawyer by training and a former Ontario Securities Commissioner. "After all, the vote is valuable. Voting shares usually trade at a premium to non-voting shares," she points out.

For those reasons in her January report to Industry Canada, Ms. Stromberg recommended that fund managers start disclosing their voting policies.
(1) Specifically, she advised they should "articulate clearly in the fund's prospectus what the fund manager's voting policy is." If they deviate from that stated policy, they should be required to explain how and why, she says. In extreme cases, the company could even issue a press release at the time of the vote, she says.

Opinions on the issue also emerged from the report of the Senate Committee on Banking, Trade and Commerce, headed by Senator Michael Kirby, that wasreleased last fall. Since investors give up their right to vote proxies when they buy mutual funds, Sen. Kirby explained, "fund managers should be required to clearly articulate what their policy is with respect to voting proxies. If fund managers deviate from that voting policy, they need to clearly explain . . . why they have done so," he said.

So far, mutual fund companies have remained silent on the issue of proxy voting. There is no policy or law requiring a fund company to actually vote on behalf of its unitholders, or even to disclose what its voting policy is, according to Rebecca Cowdery, manager of the investment funds team at the Ontario Securities Commission.

But that doesn't mean they don't have responsibilities that pertain to voting of stock. "They do have a fiduciary obligation to act in the best interest of unitholders," Ms. Cowdery says.

A canvas of some of Canada's biggest fund groups indicates they do have very specific voting policies, and vote when they feel it is necessary. The fiduciary obligation ends up requiring the manager to vote if it can benefit the investors in any way, explains Harold Hands, Mackenzie's legal counsel and executive vice-president.

"The manager, I believe, has a clear duty to vote if there is an economic issue that will benefit the fund investors." Like most fund companies, Mackenzie doesn't disclose its voting policies in its prospectus -- the legal document that must be given to all fund investors. Securities laws in Canada don't require them to do so. The same is true in the U.S. But Mr. Hands says any Mackenzie investor who inquired about the company's voting policy would certainly be given that information.

At least one investor's advocate thinks this is important enough that he has been lobbying regulators and the industry. "I believe they should vote and they should be disclosing how they vote stock," says Joe Killoran. "I think we have to get this out in the open to the beneficial owners of the funds. They have a right to know how their money is voted."

As a shareholder of Trimark Financial Corp., one of Canada's biggest publicly traded mutual fund companies, Mr. Killoran has asked the company to put the issue of proxy voting and other proposals on the company's agenda at its annual meeting in June.

Trimark has declined. The company circulated similar proposals by Mr. Killoran to its shareholders two years ago, but no interest was expressed by shareholders at the company's annual meeting. Trimark says it does not necessarily disagree with the proposals, but believes they are better considered by regulators or the mutual funds industry trade group than at its annual meeting.

Proxy voting has taken on more significance in Canada as the fund industry has grown.

The reality is fund companies are not supposed to exercise control over the companies they invest in, explains Mr. Hands. "Mutual funds, by their nature, are passive investment vehicles. They can't be used to change or control the direction of a company. That is not their purpose."

Theoretically, if a fund company does not like a decision made by company management, they can vote with their dollars and sell the stock. But practically that is not always possible, or desirable in the Canadian stock market, where liquidity can be an issue. For funds that have grown into billion-dollar giants, unloading a big position without disturbing the price of the shares can be difficult.

So far Canada's regulators seem content with the status quo on proxy voting. The issue is not on the agenda of the Canadian Securities Administrators, the national body of regulators, according to Ms. Cowdery.

John Riedl, an analyst with Toronto corporate governance specialist Fairvest Securities Corp., believes proxy voting will become more of an issue as retail investors become more knowledgeable.

"I think [in the past] the retail client was somewhat oblivious to corporate governance and shareholder rights issues," Mr. Riedl said. "I think there are a lot of educated people out there now that are really sort of getting interested in these issues."

(1) I brought this up with Glorianne Stromberg years ago and asked her to examine it in her first industry report.

(2) I prepared a brief for the Kirby Commission with regards to this issue and he wasn't interested at the time.

(3) Susan Heinrich has had this story for some time. I had hoped that it would have made the print prior to the Trimark annual shareholder's meeting.