Mutual fund voting: mgmt, ISS or muse? James Cotter – Wake Business Alan Palmiter – Wake Law Randall Thomas – Vanderbilt Law Villanova Securities Symposium March 14, 2009

N19 The four largest fund families (Fidelity, Vanguard, American Funds and Putnam) account for more that half of the industry total assets under management; the ten largest fund families account for two-thirds. “Investments” / invest with confidence, the right way to invest, all we do is invest

And now some numbers …

28.9% (probably closer to 33%) SOURCE: FEDERAL RESERVE BOARD, FLOW OF FUNDS ACCOUNTS OF THE UNITED STATES

72% / 48% which means 21-24% / 14-16% ICI, How Is the Industry Structured

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

A fund manager's focus belongs on investment management, not on becoming an arbiter of political and social disputes. Preserving the confidentiality of proxy voting is essential to ensuring the independence and integrity of the process. The effect would be to make mutual funds the prime pressure point for every activist group with a political or social ax to grind with corporate America. “No institutional investor [including no mutual fund] testified before Congress about the ... Sarbanes-Oxley reform bill. ... Among the some 17,000 responses to the SEC proposal to grant limited access to proxies to permit institutions to nominate corporate directors, no large shareholder [including no large mutual fund] demanded more substantial access.” The Battle for the Soul of Capitalism (2006)

Panic of 1884 Background of ISS Muse (apparently a rock band)

Now some data …

Source: Corporate Library/AFSCME (2005) labor unions and corporate governance groups have sponsored a series of studies that seek to shame mutual funds (in the eyes of their investors) into greater shareholder activism, specifically on executive pay proposals. But mutual fund voting on executive pay issues, compared to other governance issues, remains relatively low. And industry has been doubtful of the motives of labor unions. Nonetheless, voting by mutual funds on pay issues shows significant variance among different funds, as shown in a Corporate Library / AFSCME study of fund voting on compensation proposals during the 2005 proxy season: N41 See Jennifer Levitz, Do Mutual Funds Back CEO Pay?, Wall Street Journal C1 (Mar. 28, 2006) (reporting on study sponsored by Corporate Library and American Federation of State, County and Municipal Employees that the largest mutual funds vote for shareholder proposals seeking executive pay reform only 27.6% of the time). Corporate Library / AFSCME study (mutual fund voting during 2005 proxy voting season). See Jennifer Levitz, Do Mutual Funds Back CEO Pay?, Wall Street Journal C1 (Mar. 28, 2006). Source: Corporate Library/AFSCME (2005)

Source: Corporate Library/AFSCME (2005) labor unions and corporate governance groups have sponsored a series of studies that seek to shame mutual funds (in the eyes of their investors) into greater shareholder activism, specifically on executive pay proposals. But mutual fund voting on executive pay issues, compared to other governance issues, remains relatively low. And industry has been doubtful of the motives of labor unions. Nonetheless, voting by mutual funds on pay issues shows significant variance among different funds, as shown in a Corporate Library / AFSCME study of fund voting on compensation proposals during the 2005 proxy season: N41 See Jennifer Levitz, Do Mutual Funds Back CEO Pay?, Wall Street Journal C1 (Mar. 28, 2006) (reporting on study sponsored by Corporate Library and American Federation of State, County and Municipal Employees that the largest mutual funds vote for shareholder proposals seeking executive pay reform only 27.6% of the time). Corporate Library / AFSCME study (mutual fund voting during 2005 proxy voting season). See Jennifer Levitz, Do Mutual Funds Back CEO Pay?, Wall Street Journal C1 (Mar. 28, 2006). Source: Corporate Library/AFSCME (2005)

Source: Corporate Library/AFSCME (2005) labor unions and corporate governance groups have sponsored a series of studies that seek to shame mutual funds (in the eyes of their investors) into greater shareholder activism, specifically on executive pay proposals. But mutual fund voting on executive pay issues, compared to other governance issues, remains relatively low. And industry has been doubtful of the motives of labor unions. Nonetheless, voting by mutual funds on pay issues shows significant variance among different funds, as shown in a Corporate Library / AFSCME study of fund voting on compensation proposals during the 2005 proxy season: N41 See Jennifer Levitz, Do Mutual Funds Back CEO Pay?, Wall Street Journal C1 (Mar. 28, 2006) (reporting on study sponsored by Corporate Library and American Federation of State, County and Municipal Employees that the largest mutual funds vote for shareholder proposals seeking executive pay reform only 27.6% of the time). Corporate Library / AFSCME study (mutual fund voting during 2005 proxy voting season). See Jennifer Levitz, Do Mutual Funds Back CEO Pay?, Wall Street Journal C1 (Mar. 28, 2006). Source: Corporate Library/AFSCME (2005)

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

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

Our preliminary data … (on mutual fund voting)

Mutual funds vs. all shareholders (“for” votes) Management proposals Shareholder Mutual funds 91.8% 30.5% All shareholders 93.9% 27.7%

Management proposals (excluding proposals to elect directors, approve auditors) For ISS 83.0% 7,949 Against 65.2% 1,513 No ISS Recommend 80.5% 41

Shareholder proposals Management Against ISS For 42.6% 1,493 9.3% 1,314 No ISS Recommend 43.5% 31

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%

Some specific results … (ISS influence generally)

Declassify board 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%

Declassify board 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% 26

Take away …

Mutual funds All Shs MGT + ISS 63.5% 31.0% MGT (not ISS) 15.0% 32.1% (not MGT) 9.5% 31.3% Muse (not MGT or ISS) 12.0% 5.7% 28

The end

Declassify board Management For Management Against ISS 85.8% 217 60.4% 193 Against -- 20.6% 2 No ISS Recommend 96.7% 60.2% 5

Majority voting for directors Management For Management Against ISS 88.0% 50 43.8% 176 Against 67.7% 10 21.1% 4 No ISS Recommend --

Submit poison pill to shareholder vote Management For Management Against ISS 78.1% 13 57.7% 139 Against 59.5% 5 25.4% 28 No ISS Recommend -- 60.8% 4

Separate chair and CEO Management For Management Against ISS 83.2% 1 30.8% 113 Against -- 0 16.2% 53 No ISS Recommend -- 27.7% 3