Is Your Mutual Fund Really Your Friend?

Before Tyco bought former CEO Dennis Kozlowski a $17 million Manhattan pad, a few shareholders had already been demanding more corporate accountability. One of them, the International Brotherhood of Electrical Workers pension fund, submitted a shareholder proposal to the Tyco board that called for a more independent board of directors. However, the majority of shareholders and Tyco's board killed the proposal.

But what really steams some investors is that Fidelity Investments, the largest Tyco shareholder at the time and thus the one with the biggest say in the matter, voted against the measure.

That should come as no surprise however, because Fidelity, as well as other mutual fund firms, routinely vote with management - and against shareholders - to preserve lucrative business relationships they have with the companies. Fidelity, for example, collected about $1.8 million in fees from Tyco in 1998-99 for running the firm's retirement plans.

"There's a lot of pressure, real or imagined, to vote the way management would like you to," says John Bogle, founder of the Vanguard Group. Vanguard and many other fund companies work for both management and shareholders, a conflict of interest that investor advocates say typically results in shareholders' being left out in the cold.

The fund companies' dual roles can often sting investors, and it's not hard to find examples. Revelations of executive misconduct at Tyco and cozy relationships between board members and management helped send the price of Tyco shares plummeting 78 pecent, costing shareholders some $93 billion.

For its part, Fidelity says there is absolutely no conflict of interest. "When we vote our proxies, we only consider our mutual fund shareholders' interests," saya a Fidelity spokesman. But an AFL-CIO survey showed that Fidelity voted against corporate governance measures - as determined by the union at selected companies - more than 75 percent of the time. And, the pro-management stance continues!

Fidelity and other fund companies say they work more effectively in private, meeting face to face with company directors and executives to negotiate changes. But the proof isn't in the pudding, respond critics. Mutual funds hold about 21 percent of all U.S. stocks. That's a lot of muscle to rally behind calls for independent audit committees and reasonable executive pay.

A big part of the problem is that no one really knows how funds like Fidelity and Vanguard are voting all the shares they hold. The Securities and Exchange Commission, which regulates mutual funds, does not require firms to disclose how they vote - not even to individual shareholders - so they don't. "Their general attitude is that it's none of fund holders' business how they vote," says Mercer Bullard, former assistant chief counsel at the SEC and founder of Fund Democracy, a mutual fund advocacy group.

Traditionally, the fund industry has stubbornly resisted disclosure. According to the Investment Company Institute, which represents the mutual fund industry, confidential voting is a better solution. If the vote is secret, the company doesn't know how the fund has voted, thus management cannot reward or penalize a fund for its votes by awarding or withdrawing business. Currently, few companies use secret ballots in proxy votes.

But that misses the point because investors in mutual funds are entitled to a level of awareness as to how their shares are being voted. And thanks to the shenanigans of the likes of Enron, WorldCom and Tyco, fund shareholders may get their wish.

* * * * *