Gretchen Morgenson vs. the facts of mutual fund voting: Part II

As I predicted in my last post, Gretchen Morgenson again writes today about mutual fund voting. Not that my prediction required powerful foresight given Morgenson's microscopic list of subjects. I wondered whether Morgenson would again harp on conflicted voting of mutual funds for managers of investment clients without acknowledging, as the Wall Street Journal did last week, the evidence suggesting that mutual fund voting is not as conflicted as Morgenson suggests. As I said, "It's past time for her to set the record straight." Well, alas, the time has not yet come for Morgenson.

As Morgenson says today,

That Fidelity sides with corporate executives on many governance issues does not surprise some shareholder activists, who point out that the company generates enormous profits as an administrator or trustee of corporate retirement plans. That may put Fidelity in the position of trying to serve two masters.

Here Morgenson lacks even the integrity to clarify that she is stating her own opinion from past columns, as detailed in my last post.

Last month I discussed two papers, by Rothberg & Lilien and Davis & Kim, that have actual evidence on supposedly conflicted voting. The first paper concludes that fund companies that are part of companies that also do financial services do not vote against management less than those that are primarily mutual funds. The authors add,

The five large mutual funds voted against management an average of 17% of the time. This ranged from a high of 29% at Vanguard to a low of 8% at T. Rowe Price. In examining the data, we could not uncover any obvious simple patterns such as “vote with management on all board elections (or other issue)." This lack of simple global rules provide some evidence that the funds voted individual proposals on their merits rather than applying a single standard.

Davis & Kim offer more direct evidence on conflicts, concluding "that there is no evidence to show that mutual funds let non-fund parts of their companies influence their votes." The authors add that "voting appears to be independent of client ties among all the fund families in our sample. In this regard, mutual funds come up clean. Their votes are explained by the policies of their parent companies, not directly by business ties."

Morgenson's obligation to discuss this evidence is made all the more acute by the fact that the Davis-Kim study was undertaken in part because of her earlier accusations of fund conflicts. As the authors state (p.6):

The conflict of interest explanation [of mutual fund passivity in governance] is illustrated by episodes such as the decision by Armstrong World Industries, a principal supporter of the recent Pennsylvania antitakeover law, to switch its $180 million employee savings plan to Fidelity Investments from Vanguard Group, after Fidelity withdrew its opposition to the new law” (p. 602). Gretchen Morgenson, the New York Times financial writer, notes that several mutual funds vote in favor of options expensing, but Fidelity does not; indeed, Fidelity was in the minority in voting against options expensing at Intel, perhaps because “Fidelity is the record-keeper for Intel’s 401 (k) plan, which held eight Fidelity funds worth $1 billion at the end of 2003” (“A door opens. The view is ugly,” New York Times, 12 September 2004).

The authors actually get evidence on Morgenson's accusation that Fidelity's voting is determined by specific client relationships. They find, for example, (p. 20) that

voting on anti-takeover devices by Fidelity and Vanguard shows that how each fund voted bears no statistically significant relation to whether the portfolio company was a client or to the size of the fund’s stake in the company in percentage or dollar value terms. Fidelity generally voted in favor of shareholder resolutions requiring a vote on the poison pill; the exceptions were companies that did not have a pill or were in the process of terminating it.Indeed, Fidelity voted in favor of such a resolution (and against company management) at PG&E, a California energy company and major client with over $1.5 billion invested with Fidelity, even though PG&E intended to remove the pill upon emerging from Chapter 11. Vanguard, in contrast, voted against the proposal, as did Putnam, though PG&E was not a client of either.

To be sure, Morgenson makes minimal efforts in today's article to present the other side by getting quotes from Fidelity. Obviously these self-interested defenses do not have the same impact as would reporting evidence from neutral academic studies. Moreover, Morgenson deliberately slants her writing to minimize the impact of the rebuttals. For example, while Morgenson does state Fidelity's position that it will oppose anti-takeover provisions proposed by management and support shareholders in other respects, this paragraph is immediately followed by the quote about conflicts of interest presented at the beginning of this post.

Morgenson's conflict-of-interest slant is critical to her approach to this issue, as is evident by how often it appears in her stories. Indeed, without this slant there would hardly be a story. Even Morgenson has to acknowledge that mutual funds do not vote rigidly for corporate managers. In any event, her readers care about fund returns. They don't care whether their funds are activists unless it's evident any such activism would help the bottom line. And whether it would requires them to accept that Morgenson and the tiny stable of shareholder "activists" she trots out week after week know better than the mutual funds how they should vote. For example, "activists" have long touted separating the board chair and ceo positions – a position that doesn't look so self-evidently brilliant in light of the dysfunction it brought to HP.

So to create a scandal about mutual fund voting, Morgenson needs smoking guns. She's tried techniques other than the conflict of interest angle. For example, Morgenson tries the populist gambit, lamely asserting today that Fidelity doesn't care about executive compensation issues because its chief executive is so rich. And she ends with a murky story about Fidelity's support for efforts to water down SOX provisions that are unpopular with much of corporate America in exchange for some sort of exemption – a story Fidelity denies. These misfires demonstrate how badly Morgenson needs the conflict of interest angle.

Ironically, if Morgenson were more interested in nuance and policy and less in scandal-mongering she could tell a useful story. As I noted in my September post, Davis & Kim find that funds' general voting policies do tend to favor managers more at mutual funds whose parents do more pension business. Thus, Davis & Kim suggest that

shareholder activists who want to make mutual funds more responsive to shareholder value in their proxy voting . . . should not be too concerned with whether funds vote differently between clients and non-clients. . . . . Instead, they should focus at the fund company level on voting policies and guidelines that lead to different aggregate voting outcomes.

In other words, there is actually a story if Morgenson wants to follow it -- analyze fund voting guidelines and consider specifically how they might be improved.  This might help any readers who might care about shareholder activism to choose their investments. But Morgenson prefers to desert her thoughtful readers because she is about heat, not light, scandal not ideas -- a sad illustration of the state of business journalism today.