The growth of CEO pay and the mutual fund industry may not be a coincidence. Today’s mutual funds are some of the largest institutional investors, with more than $9 trillion in assets in the United States. Mutual fund assets have grown as many companies switched their pensions into 401(k) plans that use mutual funds. At the same time, today’s CEOs make 411 times the average worker’s pay.
As major shareholders, mutual funds often cast a deciding vote on executive pay proposals, compensation committee director elections and equity compensation plans. While mutual funds have a legal duty to cast these votes in the best interests of their investors, mutual fund firms can have an economic interest in voting with management even if such votes may not be in the interest of fund investors.
This conflict of interest stems from mutual fund firms’ desire to sell lucrative 401(k) management and other financial services to the same companies at which they vote proxies on behalf of mutual fund investors. A recent University of Michigan study documents that the more business a mutual fund family conducts with corporate pension plans, the more likely it will vote with management.
Because of a new U.S. Securities and Exchange Commission rule that went into effect in 2004, mutual funds must now disclose their proxy votes to investors. The good news is America’s working families now have the right to know how their mutual funds are voting on their behalf on important corporate governance issues, including executive pay. The bad news is many mutual funds have been supporting runaway CEO pay.
According to a new report by AFSCME, a nationwide union for public employees, and The Corporate Library, many mutual fund companies have been enabling companies to offer extravagant CEO salaries. Perhaps, not surprisingly, the mutual fund family with the worst track record in the report, Morgan Stanley, also gave its former CEO William Purcell a controversial $44 million golden parachute.
As an individual investor concerned about executive pay, you can choose which mutual funds you invest your personal savings. However, 401(k) plan participants usually are limited to the mutual fund firm selected by their employer. If you participate in a 401(k) plan, consider urging your 401(k) plan trustees or Human Resources department to take proxy voting into consideration in the selection of your 401(k) plan’s mutual fund family.
Read the full report, Enablers of Excess, Mutual Funds & the Overpaid American CEO: How Morgan Stanley, AIM, Dreyfus, Alliance, Oppenheimer and large mutual fund families are shirking their responsibility and selling out shareholders.
[1] Executive Excess 2006, Sarah Anderson and John Cavanagh, Institute for Policy Studies, Chuck Collins and Eric Benjamin, United for a Fair Economy, Aug. 30, 2006.
