Monday, October 29, 2007

Do Mutual Funds vote responsibly? Evidence from Proxy voting

Another paper from the FMAs:

Do Mutual Funds vote Responsibly? Evidence from Proxy Voting
by Ng, Wang, and Zaiats

Multiple Choice answer: Sometimes

Short Answer Answer: Mutual funds frequently vote in a manner that does not appear to be in shareholders' best interest.

Essay Answer: How mutual fund managers vote the shares of their fund is a hot topic both because of the growing emphasis on corporate governance and the tremendous growth mutual funds have experienced. This mix, coupled with a few years of voting since the SEC mandated voting disclosure in 2003, is a perfect environment to study whether agency costs problems or higher stock valuation of the fund's holdings dominate when it comes to proxy voting.

It is well known that agency costs may lead fund managers to vote shares in ways that may not be value enhancing to the fund's investors. For example, suppose the parent company of the mutual fund has an investment banking arm. Voting the fund's shares against management could lead to a loss of lucrative investment banking business. So the fund's management is tempted to vote with management even if the fund's investors may not want that.

In Do Mutual Funds vote Responsibly? Evidence from Proxy Voting, Ng, Wang, and Zaiats examine the question and report that often Mutual Funds vote in a way that appears to conflict with their investors' best interests. Specifically, the authors find that funds support a majority of management sponsored proposals for anti-takeover amendments, board related votes, and award proposals. But before any indictment, there must be more convincing evidence, so the authors find that many regular shareholders also appear to vote for these proposals.

To investigate this further, proposals are broken into groups based on the ISS recommendation. (negative recommendations are counted as bad for shareholders). Again the authors find that mutual funds regularly vote for so-called negative proposals. But not at a level that is significantly different than shareholders in general.

As an aside, if I were a reviewer, I might suggest breaking the votes into groups based on how the shares did on the announcement of the vote.

Overall funds appear to disregard past performance in most of their votes but there are two noteworthy exceptions--executive pay and board related proposals are at least tied to how well the firm has done.


Ng, Wang, and Zaiats do present evidence suggesting agency cost problems affects the voting behavior of mutual funds but the evidence is not the final word and also brings into question the voting behavior of other shareholder groups.

Stay tuned, we've not heard the last word on this topic!

BTW I did see this presented at the FMAs. It was good.


Anonymous said...

Hi professor,

Completely unrelated but I thought you might have something to say. In order to get on to the masters course I want to, I have to make a very basic choice: finance OR economics.

I enjoy both. The budding social scientist and policy wonk in me says economics, but the investment-fascinated and career side of my personality says finance.

At the moment I'm just so interested in it all I don't know whether I want to work corporate, academic, public, government, or what. I have a feeling that economics will provide more cross-over potential into finance career-wise than finance will into the social science side of economics. Am I right?

FinanceProfessor said...

Yeah I think overall you are right economics will allow you to cross over more, BUT in many fields finance caries a higher salary.


As I have mentioned before, really all finance is just applied economics anyways ;)

Best advice: do what you like the best. Good luck!