London School of Economics Report Combats Notions Over Activism and Disclosure

(August 5, 2011) — New research by the London School of Economics asserts that requiring mutual fund managers to disclose how they vote on management proposals does not make them less likely to vote for management.

Amid growing concern that mutual fund managers are more likely to vote with management to gain lucrative pension fund contracts, the SEC has mandated disclosure in the US. However, the report asserts that fund managers in the US vote identically across firms, regardless of their business ties.

“We provide theoretical foundation for the limited activism of mutual funds and demonstrate that mandatory disclosure is not a panacea,” the report by Amil Dasgupta and Konstantinos Zachariadis states. “…Mutual funds with more business connections should be less activist. Finally we show that, when firms have multiple mutual fund blockholders of comparable sizes, rich strategic interactions arise which lead to counterintuitive empirical predictions. For example, despite the pro-management stance of mutual fund blockholders arising from business ties, our model predicts potentially non-monotone relationships between the level of mutual fund holdings and the quality of corporate governance.”

The report explains that the financial crisis has fueled a renewed interest in the role of institutional investors in corporate governance, noting that other countries may wish to emulate the US in implementing similar disclosure for mutual funds’ proxy voting. For example, the Walker Review of the UK’s regulatory environment states:

“Voting powers should be exercised, fund managers and other institutional investors should disclose their voting record, and their policies in respect of voting should be described in statements on their websites or in other publicly accessible form…”

According to the researchers, corporate managers were more likely to hire large, pro-management managers for pensions contracts. Furthermore, the report’s authors observed increased activism among smaller funds.