The Big Double Cross

 

Today, AFSCME, the American Federation of State County and Municipal Employees, which represents the average Americans who clean our streets and schools, nurse us back to health and many other important jobs,  has just released a report documenting a double cross perpetuated by some of the nation’s largest mutual funds on those who invest through them every year."Bart Naylor" "Financial policy"

Tipping the Balance? Large Mutual Funds’ Influence upon Executive Compensation,” released today by AFSCME analyzed 26 of the largest mutual fund families’ voting patterns on compensation proposals in 2010.

For the first time, a report looks at voting weighted by the assets under management of each fund family, to illustrate their overall ability to influence compensation practices at U.S. corporations.  AFSCME looked at ten selected votes where there was a consensus of investor concern over pay.

“As two of the largest mutual funds, Vanguard and BlackRock have the opportunity to make a real difference in reforming CEO pay, but have chosen to continue the status quo,” said AFSCME International President Gerald W. McEntee. “They owe their clients an explanation for why their assets are being used for CEO pay that does not always match the companies’ performance levels.”

Analyzing fund influence based upon assets under management, the report found that the three largest fund families — Vanguard, Fidelity and American — control 59 percent of the assets reviewed for a total over $1.2 trillion. The other 23 fund families controlled 41 percent, or approximately $800 billion.

The large mutual funds dress up their product as a vehicle for the little guy. Vanguard declares: “Consider a Vanguard mutual fund account for investing beyond your IRA or 401(k). You’ll be able to invest in funds that fit your needs, no matter what you’re striving for financially.” And Fidelity says: “For over 60 years, through all kinds of markets, Fidelity has been helping people like you pursue their financial goals.”

But what the mutual funds don’t say is that they also have corporate clients, where they manage their retirement plans. Those corporate clients might notice if Fidelity or Vanguard votes against a management position at the shareholder meeting, and take their business to another investment firm. Small investors don’t notice.  That’s why the AFSCME report is so important.

“Year after year, mutual funds on the whole remained supportive of management positions,” noted Beth Young, one of the report’s authors.

These votes are critical. Corporate decisions weigh more critically in the destiny of America than those of many city councils, or even state legislatures. Consider British Petroleum’s decisions on safety measures for its oil rigs. Yet even this year, mutual funds voted against proposals to improve safety at Exxon and other American oil companies.

Angry with these results?  Call your investment advisor and let him or her know you don’t appreciate their vote to overpay the CEO while Main Street struggles.