Mutual Fund Companies Have Significant Power to Increase Corporate Transparency

Rachel Curley is Democracy Associate for Public Citizen’s Congress Watch Division. This post is based on a Public Citizen publication. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson (discussed on the Forum here and here), and Corporate Politics, Governance, and Value Before and after Citizens United by John C. Coates.

A new report released by Public Citizen in its capacity as one of the chairs of the Corporate Reform Coalition shows the significant power mutual fund companies have to increase corporate transparency. The report illustrates what would happen if major mutual fund companies like The Vanguard Group, BlackRock Inc., and Fidelity Investments used the significant number of shares they invest in America’s largest companies to push those companies to be more transparent about how they spend money to influence politics.

Examining major mutual fund companies that own more than 5 percent of common stock in public companies where shareholders filed political spending disclosure resolutions in 2016, this report projects what would have happened if these mutual fund companies used their shares to support these resolutions instead of abstaining from voting or voting against them, which is what these fund families typically do.

The findings show that 64 percent of political spending disclosure shareholder resolutions would have received majority support in 2016 if those mutual funds had voted their shares in support the resolutions. This amounts to 16 out of the 25 proposals at companies that had political spending disclosure shareholder proposals up for a vote. This total is up 15 proposals from the one that actually received majority support in 2016 using the methods of calculation in the report.

Major mutual fund companies can have a profound impact on the outcome of corporate elections because of the significant number of votes they control. This is particularly true of Vanguard, which owns more than 5 percent of every company covered in this report except one. The mutual fund giant manages $4 trillion in global assets with more than 20 million investors around the world.

Vanguard has signed on to the United Nations Principles for Responsible Investment (PRI), which is a set of principles that when followed are designed to create a more sustainable global financial system. By signing on, Vanguard committed to “seeking appropriate disclosure on [environmental, social, and governance] issues by the entities in which you invest,” including “supporting shareholder initiatives and resolutions promoting ESG disclosure.” Therefore, by not supporting political spending disclosure, Vanguard is not living up to its PRI commitment.

Because of its significant ownership stakes, the way Vanguard votes its shares is critically important. For example, if just Vanguard changed the way it voted its shares on the political spending disclosure shareholder resolutions at NextEra Energy Inc. and NRG Energy Inc. in 2016 the proposals would have reached majority support (51.8 percent and 51.0 percent, respectively).

Vanguard’s proxy voting record presents a pattern of defaulting to management on disclosure. In 2016, Vanguard voted against or abstained from voting on every single political spending disclosure shareholder proposal examined in this report. Companies have different policies for counting abstentions and at companies where abstentions counted as votes “against,” Vanguard abstained on political spending disclosure proposals. At companies where abstentions did not count at all, Vanguard voted against these proposals, thereby presenting a consistent pattern of opposition. As one of the largest managers of retirement savings in the country, Vanguard should support shareholders who are calling for big companies to disclose their political spending.

Although majority support for a shareholder proposal is not a legally binding directive to management to change the company’s policies, it is a key guide post. Corporate executives typically take shareholders’ views very seriously, and it is not a good practice for executives to disregard shareholders’ call for reform. Despite how critically important information on a company’s political spending is to investors, proponents are sometimes met with the argument that low shareholder support for this disclosure is indicative of lack of shareholder interest. This report shows that this argument does not tell the whole story since the major mutual fund companies control such a significant portion of voting shares at major companies, and they typically have not supported increased political spending disclosure.

Rather than stand in the way of progress on disclosure, mutual fund companies should be leaders in encouraging political spending transparency so that they can better understand the market and invest more strategically for their retail investor clients.

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