Fund houses are divided over the issue of exercising their voting rights.
Should fund houses merely move out of stocks if they disagree with certain decisions taken by their investee companies which are against the shareholders interests?
While one camp of experts believes that fund houses should not get involved too much in monitoring the day to day activities of companies, others feel that fund houses should be more active in ensuring good corporate governance.
“We invest in stocks after thorough research. Why should it matter to us if the CEO or Director of the investee company increases his salary as long as the stock is giving good returns? If we are not happy with the company it is better we exit the stock. At every AGM a company has minimum of 20 resolutions. On an average each mutual fund has exposure to 200 companies. There is no point is disclosing the rationale of casting vote for or against for hundreds of resolutions,” argues the CEO of a public sector fund house.
Further, fund officials say that it is a costly affair to vote in all resolutions of companies and thus they don’t actively participate in exercising their proxy votes.
Some say that since companies invest in debt funds, fund houses don’t want to rub the company’s management wrong way by voting against their resolutions. Bangalore based company In Govern research study shows that only 1.5% of total resolutions put forth by investee companies have been voted ‘AGAINST’ by mutual funds in FY12-13. Mutual funds voted ‘FOR’ in 47.0% of the resolutions and abstained from voting in 51.5% of the resolutions.
Some fund experts say that mutual funds are still very small shareholders in companies considering the overall market capitalization of the market.
Some say that SEBI’s intent is in the right direction. “Mutual funds should become more active in ensuring good corporate governance. It is the beginning. Merely selling stocks if we are not comfortable with corporate governance is not an option. Mutual funds should take a tough stand in order to improve governance,” says G Pradeepkumar, CEO, Union KBC Mutual Fund.
Shriram Subramanian, Founder & Managing Director, InGovern Research Services says merely moving out of stocks is not advisable. He says that mutual funds have fiduciary responsibility towards its unit holders and thus they should work to improve the corporate governance of companies. “A mutual fund can’t move out of every stock just because they don’t agree with the management. People invest in mutual funds because they can’t manage money on their own. They have to take a stand and improve the corporate governance. For instance Infosys and Maruti are market leaders in their segment. One can’t ignore these companies and sell out.”
Disclosure
So far, fund houses have been disclosing the details of votes cast ‘in favour’ or ‘against’ in resolutions put forth by companies. SEBI has now asked fund houses to also share the rationale behind their votes. “Disclosing voting pattern is a very narrow parameter of ascertaining whether mutual funds are actively participating in good corporate governance. Auditors just document whether votes have been cast or not. Take for instance the case of Maruti. Fund houses met the management but there was no voting on that issue. Investors came to know about the issue because of the media coverage of the issue,” observes the CEO of a private sector fund house.
How fund houses vote?
Fund house disclose their general policy relating to proxy voting policy on their website.
While some fund houses have appointed proxy voting agencies to cast votes on their behalf, others have given this mandate to their custodians. Custodians appoint agents to cast votes on behalf of mutual funds. They don’t provide recommendation on resolutions.
On the other hand, proxy voting services provide recommendation and cast votes on behalf of mutual funds. Even if fund houses get voting recommendations from these agencies, they can take a decision at their own discretion.
