According to a press release, researchers Michael Ostrovsky, Stanford Business School assistant professor of economics, and Harvard Business School doctoral student Gregor Matvos analyzed more than 3 million votes by 3,600 mutual funds from 2003 to 2005 and found that, while certain mutual fund companies exhibited a pattern of withholding votes on board candidates, others sided with a company’s proposed slate much more often. Additionally, those funds that did withhold votes tended to do so in a group.
Explaining why some fund managers or proxy oversight committees generally voted in passive agreement with corporate management’s choices of board candidates and why, when they did not, they tended to do so in a huddle with other nay-saying funds, Ostrovsky said, “Suppose I dislike a director but I know he’ll be voted for by everyone else. I can withhold my vote, but I’ll be sticking my neck out by doing so. Essentially, because that information is now public, I’m showing the management of that company that I’m, in some sense, ‘against’ them.”
Ostrovsky explained further in the release that firms that are unhappy with a mutual fund company could withhold information needed for trading or deny it future pension plan or investment banking business. For these reasons, mutual funds who dislike a candidate may first find out how other stakeholders are going to vote before casting their vote. By withholding a vote rather than saying nay, a mutual fund can avoid being singled out for negative treatment.
New disclosure rules by the Securities and Exchange Commission helped Ostrovsky and Matvos with their research. “Thanks to the SEC’s disclosure mandate in 2003, for the first time we have fantastic data on mutual fund voting in companies in which they hold shares,” said Ostrovsky in the press release.
More information can be found at http://www.gsb.stanford.edu/news/knowledgebase.html.
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