AFSCME Analyses Mutual Fund Voting Patterns On Pay Issues

In the report "Compensation Accomplices Mutual Funds and the Overpaid American CEO," the American Federation of State, County and Municipal Employees (AFSCME), The Corporate Library and the Shareowner Education Network (SEN) analyzed mutual fund voting patterns on compensation issues in

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In the report “Compensation Accomplices: Mutual Funds and the Overpaid American CEO,” the American Federation of State, County and Municipal Employees (AFSCME), The Corporate Library and the Shareowner Education Network (SEN) analyzed mutual fund voting patterns on compensation issues in 2007 and 2008.

The report found that mutual funds are increasingly supportive, as a group, of management positions on proposals dealing with executive pay.

The mutual fund industry’s four consistently worst “pay enablers,” judged most complicit in consistently enabling runaway CEO pay, are AllianceBernstein, Ameriprise Financial, Barclays Global Investors and Columbia Management. According to the AFSCME/The Corporate Library/Shareholder Education Network analysis, AllianceBernstein was the worst offender, supporting management compensation proposals over 90% of the time while its support for shareholder proposals decreased to 2%.

Templeton, T. Rowe Price and Schwab consistently came out at the top of the ratings as most likely to vote to constrain pay. These funds voted for shareholder proposals designed to constrain executive compensation at an average of 78%. They also voted against directors on compensation committees at pay offending companies at a higher rate than other funds.

The report found that the average level of support for management proposals on compensation issues was 82% in 2007 and 84% in 2008, a steady increase from 75.8% in 2006. The average level of support for the categories of compensation-related shareholder proposals was 42% in 2007 and 40% in 2008, a significant decrease from the 46.5% in 2006. Mutual funds did show they were more willing to withhold votes from directors over compensation issues, increasing the average level of withheld support for certain directors from 42% in 2007 to 52% in 2008.

The report used data that the mutual funds are required to disclose to the Securities and Exchange Commission in their N-PX filing. The report ranked the fund families according to how they voted in director elections, on management compensation proposals, and on shareholder compensation-related proposals in several different categories including performance-based equity compensation, shareholder advisory votes on CEO pay, and caps on severance payments.

The Report offers four action recommendations:

-Mutual funds that are the “pay enablers” should revise their proxy voting policies to ensure that they promote responsible compensation programs.

-Mutual funds should have clear mechanisms for establishing and communicating their view of pay to compensation committee directors.

-Retail investors in mutual funds should evaluate how their mutual funds vote on pay issues and hold those funds accountable for votes that enable pay abuses.-The SEC should require funds to distribute a Plain English report on proxy voting to their investors and revise and improve the N-PX data disclosure.

“Given the performance of many companies, investors in mutual funds should be outraged that their assets are being used to prop up CEO pay that is too often undeserved and unearned,” says Gerald W. McEnteem, president, AFSCME International. “The worst ranked funds are accomplices in the overpayment of CEOs. They should be protecting the assets of their clients by demanding that CEOs get paid for performance, rather than supporting runaway pay.”

“The mutual fund industry plays a critical role in protecting the retirement security of America’s citizens,” says John Wilcox, director, Shareowner Education Network. “Retail investors choosing mutual funds for their 401Ks and pension assets need to understand how these assets are being affected by mutual fund policies and proxy voting decisions. One of the first projects we are undertaking for the SEN website is to give public access to the proxy voting records of mutual funds on CEO pay and provide a link to register concerns.”

An interactive copy of the report is available on SEN’s website.