Get Out The Vote

After reading and listening for the past several months to the pundits and commentators bashing greedy corporate executives, unscrupulous auditors, obviously conflicted sell side analysts and investment bankers, and unfettered capitalism in general, I am struck by how easy those in the money management industry have had it. This is particularly shocking, since it is those same mutual fund and institutional money managers, and in the final analysis only they, who have had it in their power all along to rein in many of the abuses that are now so widely scorned. How? By voting their proxies.

Every year managers receive, along with the annual reports they should be reading, a proxy statement which details, among other useful information, management and director compensation and shareholdings, stock option incentive plans, directors coming up for reelection, composition of board committees (including the audit and compensation committees), stockholder proposals, authorization to increase shares outstanding, proposals for poison pills and other management entrenchment devices. In addition, large shareholdings by institutional investors are also disclosed. This wealth of information isn’t provided to satisfy idle curiosity. It is the law to make it available to shareholders and their representatives, the portfolio managers, to allow these fiduciaries to make an informed vote. But, do they?

Each year at Tocqueville, we vote for shareholder proposals that empower stockholders but against dozens of others that would dilute current shareholders. This includes stock option plans. We vote against management entrenchment actions, like staggered boards, poison pills, and super majority clauses. We vote against board members on compensation committees if we find executive compensation too rich. We vote against inside directors (other than the CEO). We vote against tracking stocks, and most merger proposals (unless we are voting on behalf of the acquired company).

The right to vote on these issues is a powerful tool, yet the overwhelming majority of managers, and, I daresay, individual shareholders, either forsake the franchise, or blithely assign their proxies to management. How do I know this? Because year after year the very same proposals I vote against are passed by overwhelming majorities.

It is human nature to seek scapegoats, and never has that been more evident than in the past several months. When stock prices were going up, investors turned a blind eye to most of the abuses they now lament. Clearly, it is the stock market losses, not the abuses themselves, which so outrage the masses. But the abuses are real and most of them were out in the open and preventable. The largest institutional money managers and mutual fund companies were in a position to vote against board members and proposals that were not in the best interests of shareholders. They didn’t. They were in a position to use their financial resources to solicit proxies from individual shareholders to support their views. Again, they didn't. Instead, they consistently voted in managements' best interests. By and measure, this was a violation of their fiduciary duties.

Human greed is not a new development. For all the recent abuses, it is doubtful that the executives at Enron et al. are much greedier than the rest of humanity. The difference is they were allowed to get away with schemes that fed their greed. Most, if not all, of these self enrichment plans were advertised once a year in the proxy statements. Incredibly they all passed with huge majorities. Who is to blame for that?

Robert W. Kleinschmidt

July 24, 2002

^© Tocqueville Asset Management L.P.