August 20, 2006
Let us now praise a mutual fund company that actually voted in its customers' interests when casting annual proxy votes this spring. And let us now rebuke the corporate executives who didn't bother responding to letters from the fund company's chairman detailing its views.
August is the month when mutual fund organizations file their proxy votes with the Securities and Exchange Commission. These votes reveal whether fund organizations are putting their own interests ahead of their clients' by supporting company practices that are shareholder-unfriendly.
Not all fund companies have filed their votes yet. One group that has is Putnam Funds, the big fund company that is a unit of Marsh & McLennan. Putnam's independent trustees, headed by John A. Hill, have analyzed their funds' votes at 1,150 annual meetings held by United States companies this year. They opposed directors in 16 percent of elections and voted against 64 percent of proposals by these companies to adopt or amend stock option or restricted stock plans for company executives or directors.
Putnam's board, in other words, did the right thing for its shareholders. And it did so regardless of whether the votes jeopardized other money management services, like 401(k) administration, that Putnam provided to the companies whose plans or directors they opposed.
"The trustees are dedicated to promoting strong corporate governance practices and responsible corporate action at companies in which the Putnam Funds invest," Mr. Hill said. "I don't think institutions and funds have been aggressive enough on this. I think the culture is changing and we are a part of the change."
Putnam has seen its share of problems and questionable practices in the past, including improper trading by some of its own fund managers. Taking a pro-shareholder approach, Mr. Hill is earning back investor trust.
The policy and nominating committee of the Putnam Funds' board devoted a good deal of time to developing its governance criteria and applying them to proxy votes, Mr. Hill said. Putnam's focus has been on director independence, executive compensation, and shareholder proposals that have been approved by a majority of owners but have still not been put into effect by companies.
On compensation, Putnam's trustees study each company in which its funds own shares; if a proposed stock option or restricted share plan would add more than 1.67 percent to a company's existing shareholder base, they vote against it.
This benchmark is far lower than that of other major fund companies. Proxy voting guidelines at Fidelity, for example, state that it will vote against stock plans that would dilute existing shareholders' stakes by more than 10 percent at big companies and by more than 15 percent at smaller ones.
"People in corporations think ours is an overly tight restriction," Mr. Hill said, "but we continue to think it makes sense."
This year, Putnam's board also began writing letters to companies, explaining why it viewed their compensation policies as inappropriate. Representing the board, Mr. Hill wrote to the chief executives of Countrywide Financial, the big lending concern; Herley Industries, a military contractor that was indicted earlier this year by the Justice Department, accused of overcharging the government; Home Depot, the home improvement retailer; Jones Apparel, a clothing maker; and Pfizer, the nation's largest drug company.
Mr. Hill sent the letters in May, June and July, after voting. He said the board wanted the executives to understand the fund company's stance and to engage them in dialogue. "I thought we would hear from all of them," he said.
Dream on. Until last Thursday, Mr. Hill had yet to receive a single response. Not one of the five hired hands at the companies wrote back to an entity that represents thousands of their hard-working, hoping-to-retire-someday owners.
It has become clear in recent years that many companies care little about their shareholders. But disdain? That's a new one.
So what happened on Thursday? This reporter began asking all five companies why their chief executives had not responded to Mr. Hill's letters. Immediately, Mr. Hill's phone began ringing off the hook.
An investor-relations official at Home Depot called Mr. Hill's assistant to say that she was not aware that a response to the letter was expected. But at 8:18 a.m. Friday, Robert L. Nardelli, Home Depot's chief executive, called Mr. Hill to apologize for not responding to his letter and for having to learn from a reporter that he had not responded.
Another Home Depot spokesman said that company officials met with Putnam portfolio managers in June and discussed corporate governance. The funds did not voice concern over Mr. Nardelli's failure to respond to Mr. Hill's letter, the spokesman said.
And at Pfizer, officials said a response to Mr. Hill was drawn up, reviewed by Pfizer management and approved by the board. It was "prepared for mailing and we believed the letter had been sent," a spokesman said on Friday. The company also said it apologized to Putnam and has "now sent the letter."
A Jones Apparel spokeswoman said the company had no record of having received a letter from Putnam. Now that it has been brought to the company's attention, she said, it plans to answer it.
Officials at Countrywide and Herley did not return phone calls.
Shareholders are accustomed to getting the silent treatment from United States companies, said Colin S. Melvin, director of corporate governance for the Hermes Group, which manages Britain's largest pension and has $100 billion in assets. His organization votes proxies at 3,500 companies worldwide. "In all cases where we oppose resolutions proposed by company management we contact the company to let them know what we're doing," he said.
Companies based in Britain "will invariably answer letters we send to them and seek out our opinions ahead of time," he added. And in the United States? "We do from time to time hear back," he said, "but they are generally less responsive."
MR. MELVIN said that United States laws and practices made it more difficult for shareholders to work with companies to improve governance. First, shareholder proposals that win a majority of support at British companies must be put into effect; such proposals in the United States can be - and are - routinely ignored by management. And directors can actually lose elections in Britain, which they cannot do here.
"Globally, the U.S. is probably one of the most difficult environments to work in," Mr. Melvin said.
But companies care about their shareholders, we are told. Ours is the ownership society, after all.
Sure. And the customer always comes first. And your call is important to us.
US: Belated Apologies in Proxy Land
August 20, 2006