Family Loyalty: Mutual Fund Voting and Fiduciary Obligation

Abstract

In recent years, institutional investors have increasingly come to dominate the market for publicly-traded stock. Mutual funds have become especially important, controlling trillions of dollars of corporate equity.

The SEC has made clear that it is the fiduciary responsibility of fund administrators to vote their shares in a manner that benefits investors in the fund. Sponsoring companies have responded by creating centralized research offices that determine the voting policies across all of the funds they administer. Though there may be some variation at the individual fund level, most fund families vote as a block.

The practice of centralized voting raises the question whether each fund is promoting the best interests of its investors. For example, one fund may hold stock in an acquisition target, while another holds stock in the acquirer; one fund may hold stock in a target, while another holds debt. These funds have different interests, but voting policies rarely differentiate among them. This Essay argues that mutual fund boards should develop procedures to ensure that fund shares are voted with a view toward advancing the best interests of that particular fund. If such procedures cannot be implemented in a manner that justifies their costs, funds should refrain from voting their shares at all.

In addition to benefitting fund investors, this proposal may also have a salutary effect on portfolio firms. In recent years, commenters have expressed concern about the voting power exerted by mutual fund managers, who may pressure firms to avoid competition within an industry, or who may encourage short-term financial engineering over long-term growth. Decentralization may diminish asset managers’ power, thereby alleviating these effects.