Every shareholder in a public company gets to vote on how that business is run. The more shares you own, the more votes you get. Unfortunately, the mutual funds that often own huge chunks of prominent companies have amassed a history of embarrassingly bad votes on important issues.
Bad votes
To demonstrate just how big these funds' holdings can be, I'll look at the top two "volume leaders" per Yahoo! Finance at the moment that I'm writing this: Citigroup and Sprint Nextel. Mutual funds and institutions own 34% percent of Citigroup's shares, and 90% of Sprint's. Alas, despite their massive voting power, these funds have too often proved themselves asleep at the wheel.
For one thing, mutual funds generally vote in favor of the kinds of lavish CEO compensation packages that sicken most shareholders. A recently released report found that in 2008, mutual funds voted in accord with management 84% of the time on executive-compensation matters.
Despite their healthy performance and reasonable fees, these otherwise tempting funds have a spotty history of voting against bloated pay for the top brass:
|
Mutual Fund
|
Percent of Compensation-Related Proposals Where Fund Votes Against Management
|
|
Fidelity Contrafund (FCNTX)
|
20%
|
|
Neuberger Berman Genesis (NBGNX)
|
58%
|
|
Vanguard S&P 500 Index (VFINX)
|
10%
|
|
Schwab S&P 500 Index (SWPPX)
|
35%
|
Source: ProxyDemocracy.com.
In 2007, a shareholder proposal at Nabors Industries aimed "to permit shareholders to vote on an advisory resolution to ratify the compensation of the named executive officers of the company" -- in other words, to give shareholders a say on pay. The enormous Vanguard S&P 500 index fund cast its massive bloc of votes against the proposal, though the Schwab S&P 500 index fund voted for it. In 2008, Nabors CEO Eugene Isenberg's total compensation reached nearly $60 million.
Poor performance
It's disappointing when funds vote in support of hefty compensation packages, because high pay doesn't necessarily lead to strong performance. As a recent Wall Street Journal article noted about the past decade: "Oracle (Nasdaq: ORCL ) shareholders saw the value of their stock triple, while shareholders of Apple (Nasdaq: AAPL ) saw their stock soar nearly 12 times over. But shareholders of another tech giant, Dell, lost 66% of the value of their stock during the decade, while CEO Michael Dell, who launched the computer maker in his dorm room in the 1980s, brought home $454 million."
In fact, high CEO pay has been linked to poorer performance. Many CEOs have collected hefty paychecks while their companies languish. Here are a few examples from the AFL-CIO's database of the 100 top-compensated executives:
|
Company
|
CEO
|
2009 CEO Compensation
|
2-Year Avg. Annual Return
|
5-Year Avg. Annual Return
|
|
MEMC Electronic Materials (NYSE: WFR )
|
Ahmad Chatila
|
$16.8 million
|
(49.2%)
|
(7.7%)
|
|
Dow Chemical (NYSE: DOW )
|
Andrew Liveris
|
$18.3 million
|
(5.2%)
|
(6.9%)
|
|
Goodyear Tire & Rubber (NYSE: GT )
|
Robert Keegan
|
$17.2 million
|
(20.9%)
|
(6.7%)
|
|
Boston Scientific (NYSE: BSX )
|
J. Raymond Elliott
|
$33.5 million
|
(30.1%)
|
(27.2%)
|
|
Clearwire (Nasdaq: CLWR )
|
Benjamin Wolff
|
$21.2 million
|
(14.4%)
|
(38.2%)*
|
Source: Yahoo! Finance, AFL-CIO.
*Three-year average.
As investors, we don't have to close our eyes when our mutual funds support ridiculous pay packages. Look up how your funds are voting on all kinds of matters at proxydemocracy.com. If they're embarrassing themselves, let them know -- or move your money into a more responsible fund.
Learn how Warren Buffett, a frequent opponent of lavish CEO pay, destroyed the market.
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