The Advisors' Blog

– Ted Allen, ISS’s Publications

Last week, AFSCME and Shareowners.org released a report on how 25 large mutual fund families voted on compensation issues during the 2009 proxy season. Notwithstanding the title, “Compensation Complicity: Mutual Fund Proxy Voting and the Overpaid American CEO,” the report found that mutual funds overall have become more supportive of shareholder proposals seeking annual advisory votes and other pay reforms.

The average level of support for compensation-related proposals–which also included resolutions seeking compensation consultant reforms, votes on “golden coffin” benefits, equity retention periods, and performance-based equity and severance–was 56 percent in 2009, up from 45 percent in 2008. The report was based on 2009 Form N-PX filings by mutual funds that included their votes from July 1, 2008, through June 30, 2009. According to the report, “the increase in aggregate support appears to have been driven by a substantial increase in support of [“say on pay”] shareholder proposals–from 45 percent in 2008 to 60 percent in 2009.”

The report, which was co-sponsored by the Corporate Library, also reviewed voting on management-sponsored equity plans, management “say on pay” votes, and the election of certain compensation committee members at S&P 500 firms.

Overall, the 25 mutual fund families were slightly less willing to vote against directors over compensation issues. The average support for selected S&P 500 directors (those who received more than 30 percent opposition overall based on pay concerns) was 50 percent in 2009, as compared with 48 percent in 2008.

The average level of support for management proposals on compensation issues was unchanged in 2009 at 84 percent, the report found. However, the mutual funds were less likely to back management during advisory votes on compensation; the average support was 77 percent last year, according to the report. That was below the 89 percent approval rate by all investors, according to ISS data.

The report observed that fund families have different approaches to executive pay issues. “Some emphasize strict limits applicable to management-proposed pay plans; others favor more specific measures suggested in shareholder proposals; and others express discontent primarily through withholding support for the reelection of certain directors deemed responsible for pay decisions. Indeed, only two fund families ranked in the top 10 for all three types of voting (management, shareholder proposal, and director), and only seven fund families ranked in the top 10 for two or more types of voting,” the report said.