Funds take nuanced approached to proxy voting, ICI study finds

By Lene Powell, J.D.

In a new study, the Investment Company Institute (ICI) found that funds reach diverse outcomes in proxy voting, reflecting detailed consideration of varying investment objectives. Despite the attention that controversial shareholder proposals receive, most proxy votes involve uncontroversial management proposals, which accounted for 98 percent of all proposals in 2017. According to ICI, whether initiated by management or shareholders, funds carefully consider proposals and generally favor those that improve their rights as shareholders in companies.

“ICI’s report shows that fund advisers do not mechanically vote or take a one-size-fits-all approach toward voting. Instead, they consider their voting guidelines and take into account many different factors to ensure their decisions advance shareholders’ interests,” said ICI Chief Economist Sean Collins.

By the numbers. The report, Proxy Voting by Registered Investment Companies, 2017, shows that funds vote on a large number of proposals every year.

• In the 2017 proxy season, funds cast more than 7.6 million votes. The average mutual fund voted on about 1,500 separate proxy proposals.
• Fund votes do not necessarily determine vote outcomes. This may reflect that regulated funds hold less than one-third of the overall share of US corporate equity (31 percent in 2017), while other institutional and retail investors account for more than two-thirds. 

Shareholder vs. management proposals. While shareholder proposals receive the lion’s share of attention, as debated by staunch opponents and advocates in an SEC roundtable last year, most votes involve uncontroversial management proposals.

• Management proposals accounted for 98 percent of proxy proposals in 2017, and funds voted in favor of those proposals 94 percent of the time.
• Most management proposals were not contentious, for example relating to uncontested election of company directors and ratification of company audit firms.
• Shareholder proposals accounted for only about 2 percent of all proxy proposals from 2011 to 2017. Funds voted for them 35 percent of the time.
• Most shareholder proposals are sponsored by a relatively small number of proponents. In 2017, 43.6 percent of shareholder proposals were sponsored by just 10 proponents, and the three most active proponents alone accounted for 26.4 percent of all proposals. Of the remaining shareholder proponents, 130 other shareholders on average sponsored 2.3 proposals each.
• About half of all submitted shareholder proposals actually end up on proxy statements. In 2017, 54 percent of the proposals initially submitted by shareholders were included on proxy statements, while 23 percent were omitted. 18 percent of proposals were withdrawn, in some cases because the company agreed to undertake the changes the shareholder proposal was requesting. 4 percent of shareholder proposals were not brought to a vote for various reasons, for example because the shareholder did not hold the necessary number of shares.
• About half of shareholder proposals in 2017 (235 out of 465) concerned social and environmental issues. Of these, 144 were social-related proposals involving issues like workforce diversity, human rights, animal welfare, and even “fake news” (two proposals). 60 proposals related to environmental issues. 31 proposals (“other”) had both social and environmental aspects, such as proposals concerning product toxicity or genetically modified organisms (GMOs).
• The number of shareholder proposals relating to compensation has declined significantly since 2010, in part due to passage of the Dodd-Frank Act, which required companies to begin offering advisory say-on-pay proposals. 5 percent of proposals in 2017 involved compensation issues. 

Overall, in 2017, funds voted on average about 25 percent in favor of social and environmental proposals. In contrast, funds voted nearly 50 percent of the time “For” shareholder proposals related to shareholder rights or antitakeover measures. According to ICI, this illustrates that funds tend to support proposals likely to increase their rights as company shareholders, regardless whether they are offered by management or shareholders.

Nuanced voting. In case studies looking at environmental proposals, the report concluded that broad characterizations of funds’ voting patterns fail to capture important nuance.

For example, for “2 degree Celsius scenario” proposals, which ask companies to report on the risk of transition to a lower carbon economy, support varied across the 16 different energy companies despite very similar proposal language. Funds voted 45 percent in favor of the proposal at Noble Energy, where the proposal failed, but 71 percent for the proposal at ExxonMobil, where the proposal passed. And, funds may change their votes from one year to the next. Some funds voted against 2 degree Celsius proposals in 2016, but changed their votes in 2017 to “For.” This may have reflected funds’ view that the companies in question made inadequate progress toward providing information about the financial risks related to climate change, said ICI.

Conclusion. The report demonstrates that only a small percentage of proxy votes involve controversial shareholder proposals; that funds do not vote in a lockstep way; and that funds’ votes can change depending on companies’ responses to proposals. While the report provides valuable data in the ongoing debate regarding regulation of proxy voting, perspectives will no doubt vary as to what the data suggests for best policies.