(July 28, 2004) Mutual fund companies have a fiduciary obligation to disclose their proxy voting record to investors as a means to preventing corporate malfeasance, according to The Ethical Funds Company.

The company, which made its name — literally — on socially responsible investing (SRI), is calling on securities regulators to make such disclosure a mandatory requirement.

“We believe proxy voting can and should be used to improve corporate and market integrity,” says Robert Walker, vice president, SRI policy and research for The Ethical Funds Company. “With proxy voting disclosure, mutual funds will be less likely to rubberstamp corporate management’s proposals and more likely to take an independent view of what is in the best interests of shareholders.”

The company points out that in this regard, the Canadian industry actually lags behind the U.S., which has made proxy voting disclosure mandatory after the mutual fund scandals of 2003. The Ethical Funds call comes in response to the Canadian Securities Administrators’ request for comments on new mutual fund proxy voting rules, as laid out in National Instrument 81-106.

“Recent corporate governance scandals have underscored the need for mutual funds and other institutional investors to play a more active role in corporate governance,” says Walker. “Mutual funds have an obligation to advance integrity in capital markets if for no other reason than it is in our industry’s and our unitholders’ best financial interest.”

But some fund managers may prefer to avoid airing their differences in public, even if they are protecting their unitholders. News of a disagreement could become blown out of proportion, causing unnecessary harm to the fund’s holding in the company in question.

“The thing is that many fund managers prefer to flex their ‘shareholder activist muscle’ behind the scenes. And it makes sense that doing so would be more effective than going public every time a fund manager didn’t see eye-to-eye with management on issues up for vote,” says Dan Hallett, president of fund analysis firm Dan Hallett & Associates Inc.

“At the same time, fund investors want constantly more reassurance that their money is truly being managed for their benefit so it’s natural for them to want greater accountability in the form of proxy voting disclosure,” he says. “This reassurance is demanded more in the current context of U.S. mutual fund scandals and concerns of similar activity in Canada.”

Hallett is in favour of more disclosure, though, as it should ensure fund managers act in the best interests of their unitholders on every vote.

“I think many managers are opposed to this but not so much out of fear but out of a dislike for a highly regulated industry continuing to face increasing regulations,” he says. “I admit to having doubts about some high turnover managers and whether they vote at all on issues requiring shareholder vote. There are surely some managers afraid of this proposed disclosure but the funds — read unitholders — would probably pay for the cost of such an initiative anyway.”

Hallett says the costs of such rigorous disclosure need not be high, however, as publishing voting records on the Internet is relatively cheap and tends to meet the minimum regulatory requirement for other forms of disclosure.

“Sunlight is the best disinfectant,” says Walker. “By requiring mutual funds to disclose their proxy voting guidelines and actual voting activity, the public can be sure that mutual funds are voting proxies in a manner that serves investors, the corporation, and market integrity.”