Mutual Fund Voting of Portfolio Shares: Why Not Disclose?

Abstract

U.S. mutual funds control nearly one-third of U.S. equity voting power, yet they exercise their voting/governance power in obscurity. No rules (private or public) compel disclosure of the methods, policies and practices of mutual fund voting of portfolio shares. Why not disclose? Mutual funds are financial intermediaries that make diversification, asset allocation and risk management available to individual investors. As financial intermediaries, they are heavily regulated. Federal law specifies the governance structure and diversification levels of publicly-sold mutual funds, and mandates detailed information about fund investment policies, risk profiles, securities holdings and fees charged. Absent, however, is any mandate to disclose voting of portfolio shares and other corporate governance activities. Mutual funds have become the swing vote in U.S. corporate governance. Operating within fund families or in coordination with proxy service firms, principally Institutional Shareholder Services, mutual funds have lately been pivotal in shareholder voting. But mutual fund voting of portfolio shares is regulated only if the fund seeks control or concentrates its holdings in any one issuer. In the 1970s the SEC twice considered mandating disclosure of mutual fund voting policies and practices, but each time abandoned the project. The article outlines a proposal for the mandatory disclosure by mutual funds of their voting and governance activities. It considers possible arguments against such a regime. Perhaps existing price disclosure and redemption liquidity, combined with apparent apathy of mutual fund investors, render voting disclosure unnecessary. Perhaps greater transparency would undermine the current effectiveness of behind-the-scenes mutual fund voting/governance activities. Or perhaps it would create perverse incentives for mutual fund managers to politicize the voting function. These concerns, however, are belied by the handful of funds that disclose their voting policies and activities. On inspection, transparency - touted by the mutual fund industry with respect to portfolio companies - offers many potential benefits at relatively low cost.