CASE STUDY Fund Voting in a Proxy Fight Institutional activism takes many forms,

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CASE STUDY

Fund Voting in a Proxy Fight

Institutional activism takes many forms, as we have seen. In most situations, mutual funds are drawn into the fray by the actions of others. Company management may put forward a proposal or initiate a structural change, or an opposition group may propose to buy the company or change the company‘s business strategy. This case study presents such a situation where mutual funds and other institutional investors were drawn into a battle between an insurgent group and company management.

This case study involves two related initiatives by an insurgent group in relation to RJR Nabisco. RJR Nabisco is a conglomerate with both a tobacco business (RJR) and a food business (Nabisco). The tobacco business was subject to a broad range of legal suits along with other tobacco companies. The insurgent group, led by Bennett LeBow and Carl Icahn, owned slightly less than 5 percent of the voting stock of RJR Nabisco. The remainder of the stock was heavily concentrated in the hands of mutual funds and other institutional investors.

In the first initiative (First Act), the insurgent group put forth two shareholder proposals: to spin off the Nabisco food business from the tobacco business and to restore the right of shareholders to call a special shareholders‘ meeting. Subsequently, in a second initiative (Second Act), the insurgent group proposed a slate of directors to replace the incumbent directors of RJR Nabisco.

In reviewing this case study and Exhibit 3, What Burns Holes in LeBow‘s Pockets? assume that you are the manager of two mutual funds—Growth Fund and Environmental Growth Fund—each owning 1 percent of outstanding common stock of RJR Nabisco, which is trading at $30 per share. The Growth Fund is a $10 billion fund, and the Environmental Growth Fund is a $1 billion fund. The investment objective of the Growth Fund is to seek capital appreciation over the long term, and the investment objective of the Environmental Growth Fund is the same, while taking into account all aspects of environmental concerns.

Discussion Questions

You have been asked to vote shares of the two mutual funds on the above two shareholder resolutions and the election of directors. For each fund, please answer the following questions:

How will you vote? Will you vote the same for each fund?

What is the rationale for your vote? What is the difference between voting on shareholder resolutions and voting on director elections?

How would you evaluate the potential and probable benefits to your fund from engaging in shareholder activism on these votes? Quantify your answer to the extent feasible.

What strategies or tactics would you utilize in support of your position? Would you talk to the insurgents, company management and/or other institutional investors? Would you be prepared to solicit proxies or participate in any group actions?

Explanation / Answer

Socially responsible mutual funds hold securities in companies which follow social, moral, or environmental beliefs. To make sure the stocks selected have values that coincide with the fund's beliefs, companies undergo a careful screening process. As persons
hold such a wide variety values and beliefs, fund managers face a challenge in determining the stocks that reflect the optimal combination of values for attracting investors. The specific criteria utilized while screening for stocks all depend on the values and goals of the fund.

Several socially responsible mutual funds also partition a part of their portfolios for community investments. A misconception is that these investments are donations. This is not the true. These investments enable investors to give to a community in need while making a return on their investment. Many community investments are put toward community development banks in developing nations or in low-income areas in the U. S. for affordable housing and venture capital.

Shareholder activism is one of the most essential issues for socially responsible funds. SRI funds utilize their ownership rights to influence management through policy change suggestions. This advocacy is obtained by attending shareholder meetings, filing proposals, writing letters to management and exercising voting rights.

As it is tough for fund shareholders to exercise their votes, voting is achieved by proxy; fund shareholders assign management to vote on their behalf. Majority of socially responsible mutual funds have a strict policy to maintain transparency in their decisions and disclose all proxy voting policies to their shareholders.

Proof that individuals can make a difference is depicted by the proposal the Securities and Exchange Commission (SEC) passed in 2003, which explains that all mutual fund companies must disclose proxy voting policies and procedures and the actual votes to their shareholders. The SEC's decision was brought about by the many proposal requests sent to them by socially responsible investors.

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