Though he did not get much credit for it, one of Harvey Pitt’s last acts as SEC chairman was to hand a tremendous victory over the mutual-fund industry to the AFL-CIO. The SEC commissioners decreed that mutual funds must henceforth disclose how they cast their proxy votes on such corporate-governance issues as executive pay and dodging taxes by reincorporating in Bermuda. The end of secrecy will put managers of major mutual funds in the cross-hairs of investor controversy, because the funds have routinely voted their massive holdings with the corporate managements and against the interests of ordinary investors, including the workers whose savings and pensions are invested in the funds.
The decision was a man-bites-dog story that got scant notice, but shareholder activists celebrated because it represents another critical step toward reining in unaccountable corporations and out-of-control CEOs–the concentrated insider power that produced Enron and the many other scandals. Mutual funds collectively own around 23 percent of all publicly traded companies, so how they vote their shareholdings is often decisive. Their cozy alliances with CEOs are one reason labor, environmentalists and religious groups seldom prevail in shareholder challenges aimed at cleaning up a company’s behavior.
The CEO can count on the big funds’ support in these fights because the CEO gives them a ton of business managing corporate-controlled investments. You don’t vote with the CEO, you lose his business. In a financial system always boasting about its transparency, this profound conflict of interest has been protected by secrecy–a contradiction that even Pitt couldn’t abide in the present climate of skepticism toward Wall Street. It perhaps also helped that Pitt received some 7,000 supporting comments from investors, thanks to efforts by the AFL’s unions and other shareholder activists.
“This is our money, they’re managing it and they are in the pockets of industry,” said Ron Blackwell, corporate affairs director at the labor federation. “And this is how we got into this corporate mess in the first place. The mutual-fund industry is riddled with conflicts of interest, and it is essentially an unregulated industry. In particular, they manage money for these companies that they also own as shareholders [on behalf of the mutual-fund investors], and so they vote with the management on the corporate-governance issues. If the company gives its business to Fidelity–managing 401(k) money or pension plans–then Fidelity votes with the management. That’s the deal. So we are rolling back the rock and forcing them into the sunshine. That’s the predicate for holding these fiduciary institutions accountable.”
The AFL’s campaign singled out Fidelity Investments, based in Boston, the country’s largest mutual fund, among many thousands. Fidelity predictably rejected demands for voluntary disclosure. Among many issues, the one that really ignited public anger and built political support was the decision of Stanley Works, a venerable tool manufacturer in New Britain, Connecticut, to turn itself into a Bermuda corporation to avoid $30 million in US taxes. The company needed shareholder approval and won the first vote, but the results were set aside after Connecticut Attorney General Richard Blumenthal alleged irregularities. Organized labor mobilized potent demonstrations against the company in New Britain and also against Fidelity (which itself is organized as a Bermuda corporation) at its Boston headquarters. Stanley canceled its trip to Bermuda. The second shareholder vote was abandoned.