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					             Conflicts of Interest and Mutual Fund Proxy Voting:
Evidence from Shareholder Proposals on Executive Compensation


                             Rasha Ashraf
                             Georgia State University

                             Narayanan Jayaraman
                             Georgia Institute of Technology
                             Harley E. Ryan, Jr.
                             Georgia State University


       For presentation at Harvard Law School: April 30, 2009
Our Research Question

  Do pension-related business ties
  between mutual funds and firms
  influence how mutual funds vote on
  shareholder executive compensation
  proposals?
Why Shareholder Compensation Proposals?


      We do not presume that all compensation proposals are desirable or
      that firms that receive compensation proposals have poor
      compensation policies

      ISS (institutional Shareholder Services) supports only 44% of these
      proposals



But, this sample provides a good laboratory to investigate potential
      conflicts of interest …
Why Shareholder Compensation Proposals?

 These proposals potentially affect the economic welfare of the very
 people who have the power to influence who manages pension plans



 High profile corporate fraud and compensation abuses have focused
 public attention on compensation issues, which put these proposals in
 the limelight.



 Voter turnout compares to that for shareholder approvals of
 acquisitions, major corporate events that have a large impact on value
DATA



  On a sample of 340 shareholder proposals on 171 firms for
  the year 2004-2006



  Over 136,000 votes about 4,000 mutual funds (143 families)
Voting Data

   Shareholder Proposals
        ISS Voting Analytics database compiled from SEC N-PX filings


        Form N-PX contains a brief identification of the matter voted on;
    •       whether the matter was proposed by the issuer or a shareholder;
    •       whether the fund voted on the matter and how the fund voted;
    •       whether the fund voted for or against management.



        ISS also provides the
    •       ISS recommendation for the proposal,
    •       the total number of shares outstanding, the total number of shares voted for
            the proposal, and outcome of the proposal.
ISS Support and Proposal Outcome


ISS support is essential to the success of a proposal.

All successful proposals are endorsed by ISS.

    However, not all proposals endorsed by ISS pass -- 37% of the proposals recommended by
    ISS fail.

No proposal that receives an unfavorable ISS recommendation passes.

ISS appears to favor proposals that target smaller firms that have experienced large
growth in equity valuations and that have fewer outsiders on the board.

Over 50% funds follow favorable ISS recommendations.
    Funds rarely support proposals when ISS recommends that the proposal be rejected.

Mutual fund support appears to be important to the success of shareholder
proposals.
    Mutual funds support 68% of the proposals that pass, but only 18% of the proposals that fail.
  Business Ties Data
Business Ties
    Hand collected from ERISA form 5500 filings for pension plans
     • Trustee or service provider.
     • Fees paid to service provider (if disclosed)
     • Dollar value of interest in registered investment companies

    Aggregate across multiple plans
    ERISA 5500 form available for 166 firms of 171 sample firms.
     • Business ties firms: 119 (72% of the sample)
     • Non-business ties firms: 47

Business ties firms:
    larger, lower past 5 year stock return, higher CEO total compensation.
Business Ties


  60 fund families have business ties and 83 fund families have no business
  ties.
      40% fund families have business ties.


  Business ties fund families tend to be larger than fund families without
  business ties.

  Average Number of Funds:
      Business Ties Families: 47
      Non-business Ties Families: 17


  Business ties fund families tend to be about 3 times larger than fund families
  without business ties.
Results
Mutual funds with pension-related business ties to a firm are more likely to vote
with management and against shareholder proposals
       • Non-BT fund support 24%
       • BT fund support: 20%
Moreover, mutual funds with business ties are more likely to vote against
shareholder proposals when the proposal receives majority approval from other
mutual funds or when ISS give favorable recommendation
 • Successful Proposals:
       • Non-BT family support 68%
       • BT family support: 47%
 • ISS support:
       • Non-BT family support 53%
       • BT family support: 39%
Funds with business ties are more likely to support shareholders when ISS does
not support the proposal and it is likely to fail
Mutual Fund Vote: Effect of Business Ties


                           Panel A: Percentage support for proposals by mutual funds
                                                 Funds with                  Funds with
                                                                                            p-value for
                                               no business ties             business ties
                                                                                            difference
                                              (Obs. = 130,081)             (Obs. = 6,414)
           All proposals                            24.3                        20.1           0.00


          Proposal passes
                                                    68.4                        47.3           0.00
          (Obs.= 16,369)
           Proposal fails
                                                    18.3                        16.5           0.00
          (Obs.= 120,126)


    ISS favorable recommendation
                                                    53.0                        39.1           0.00
           (Obs. = 57,565)
   ISS unfavorable recommendation
                                                    3.6                          4.3           0.02
           (Obs.= 78,930)



                               ISS support matters
Fees
 If the business tie results represent a conflict of interests, the fees
 earned by the fund should matter
     The larger the potential economic gain, the greater the
     potential for a conflict of interest


 We analyze the relation between mutual fund voting and fees
 earned by the fund families for the subsample of mutual funds for
 which we have fees


 Annual fees paid to mutual fund families for pension fund services
 range from as little as $1,083 to as much as $46.5 million.


 Among mutual funds with business ties, funds that receive
 larger fees are more likely to support management.
Types of Proposals

  Different types of proposals could matter for at least two
  reasons

     Some proposals could impose greater costs on
     management than other proposals

  For all different types of proposals mutual funds with business
  ties are less likely to support shareholder proposals than are
  mutual funds without any pension-related business ties to the
  firm.

     Again, we find that this effect is greatest when ISS supports a
     proposal and the likelihood that it will pass increases.
Effect of Business Ties on Types of Proposals
Overall Results

  Mutual fund with pension-related business ties to the firm
  are more likely to vote with management on shareholder
  compensation proposals than are funds without business ties

     Suggests a potential conflict of interest


  Mutual funds with business ties are more likely to support
  management when ISS supports the proposal and more
  likely to vote for the shareholder proposal when ISS does not
  support the proposal

     Suggests a pattern of strategic voting by some mutual funds, possibly to
     give the appearance of activism or a focus on shareholder desire
Contribution
 Suggests that disclosure of mutual fund proxy votes does not
 eliminate potential influence related to pension-plan business
 ties
    Possibly mitigated the problem, but this is impossible to
    test with publicly available data


 In the debate over executive compensation, it has been
 proposed that executive compensation be put to a
 shareholder vote.

    Our results raise some questions as to whether such votes would
    necessarily represent the will of the shareholders.