Voting disclosure too much of a good thing?

Pension funds would seem to be the archetypal investor in equity markets. They hold assets for long periods and look for sustainable investments, and they are thus the natural partners for strategic conversations with corporate management. Mutual funds, by contrast, are vehicles for shorter term performance, and mutual fund managers become obsessed by – because their clients obsess about – the latest quarterly fund performance metrics. They are natural shareholder activists, demanding that corporate management stays on its toes, delivering the numbers every three months. But there's a problem, one long noted among both theoreticians and policy-makers: Mutual fund managers often administer corporate pension funds. There's a danger they will tone down their activism for the sake of winning and retaining pension fund business, and use their proxy votes in a pro-management manner, thus hindering shareholder value. Such concerns led the US Securities and Exchange Commission to require that mutual funds disclose their proxy votes, starting in 2003.

A study at the London School of Economics has come up with a model of mutual fund proxy voting in the presence of potential business ties, suggesting how funds would vote both prior and subsequent to mandatory disclosure. It claims to "demonstrate that mandatory disclosure is not a panacea". Moreover, the strategic interaction between multiple mutual funds holding blocks of shares of comparable size can generate counterintuitive relationships.

"These findings raise the question of whether disclosure is a desirable regulation, even from the perspective of those in support of shareholder activism," they suggest.

Source document: The working paper "Delegated Activism and Disclosure, by Amil Dasgupta and Konstantinos Zachariadis of the London School of Economics, is a 38-page pdf file.