Rasha Ashraf of the Department of Finance at Georgia State University, Narayanan Jayaraman at the Georgia Institute of Technology, and Harley Ryan of the Department of Finance at Georgia State University have released a draft of a paper looking at whether mutual funds' pension-related business ties influence how the fund families vote their proxies. The finance professors use shareholder proposals regarding executive compensation as their yardstick for measuring whether mutual funds complexes with pension fund management business are voting their proxies in a way that protects that business, rather than in the best interests of the funds and of fund shareholders.
Shareholder proposals that relate to executive compensation provide an excellent arena in which to examine the influence of pension-related business ties, since these proposals can directly affect the pay and benefits of managers with influence over which fund families receive pension business.
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Shareholder proposals provide one mechanism via which mutual funds can influence firm policies to benefit shareholders. However, mutual funds benefit when they receive pension fund business from firms, which creates a potential conflict of interest that creates an incentive for fund managers to support firm management and to vote against shareholder proposals.
In short, the finance professors conclude that pension-related business ties influence how fund families vote at all firms. Though the professors' findings highlight a potential conflict of interest on the part of mutual funds with pension business, they are not clear that voting in way that would tend to protect fund complexes' pension fund business harms shareholders.
We cannot directly conclude from our findings that shareholders are harmed by the tendency of mutual funds with pension-related business ties to support management on shareholder-sponsored executive compensation proposals. However, it appears that "management friendly" fund families get most pension fund management business. This finding suggests that agency problems are likely prevalent among firm managers who choose the pension fund manager as well as in the fund family.
The forthcoming paper raises interesting proxy voting questions for mutual funds, fund shareholders, as well as the shareholders of companies whose proxies are being voted. The paper acknowledges that efforts by the SEC to increase the amount of disclosure regarding these potential voting conflicts may mitigate the conflicts to some extent; however the professors do not measure to what extent the new disclosure has been successful.
Our results also shed some light on the usefulness of recently implemented disclosure policies to mitigate potential conflicts of interests in mutual funds. Although we cannot compare the influence of business ties after the implementation of the disclosure rule to the influence of business ties prior to implementation, our results confirm that conflicts of interest persist in the post-disclosure era.
A working draft of the paper, "Do Pension-Related Business Ties Influence Mutual Fund Proxy Voting? Evidence from Shareholder Proposals on Executive Compensation," is available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1351966