Fidelity is Too Conflicted Allege NY Times, B-Week
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Monday, October 9, 2006

Fidelity is Too Conflicted Allege NY Times, B-Week

Those in the fund industry who worried that their proxy votes would become fodder for reporters seeking to cast dispersion on fund firms may want to consider their predictions as come true. This weekend both the New York Times [subscription only] and BusinessWeek took shots at Fidelity's voting of its proxies and raised questions about the firm's integrity.

Common to both articles is the allegation that Fidelity's leadership in the 401(k) market is causing it to cast proxy votes in favor of company managements. The alleged quid pro quo would include those managements throwing mandates Fidelity's way in exchange for the favor. The allegations were first raised by the AFL-CIO when it was pressing the SEC to pass the rule calling for the disclosure of proxy votes nearly three years ago.

Still, despite the dated nature of the allegations, neither report offers any hard proof that Fidelity does indeed partake in such an exchange of favors.

The only evidence offered is Fidelity's track record of voting with management more than 90 percent of the time. According to the NY Times' Gretchen Morgenstern:

Alas, data for the 12 months ended June 30 show that Fidelity likes things just the way they are: cozy, with no apple carts tipped. Fidelity sided with corporate management and directors in 92.5 percent of its votes and supported 99 percent of the directors whom management nominated. On shareholder proposals intended to give investors more say in board elections or to limit executive or director pay, Fidelity repeatedly voted "no."

Meanwhile BusinessWeek found:

Taken in isolation, Fidelity's record doesn't illuminate much; the act of buying a stock, and holding on to it, is inherently a vote of confidence. But in the context of its peers, Fidelity's votes seem disproportionately pro-company.

The BusinessWeek piece goes on to detail Fidelity's multiple relationships with Analog Devices Inc. and Tyco International, raising the possibility that its 401(k) related business affected its votes. Interestingly, the article does point out that Fidelity voted the proxies in the index funds it manages for Analog's 401(k) plan against the company board (but adds that the vote was recommended by an outside service).

It also offers some Fidelity insiders making a rebuttal to its headline case. Stephen P. Jonas, executive director of Fidelity Management & Research Co., is quoted as saying that "The sole beneficiaries of publicly disclosed proxy votes are special interest groups with axes to grind with companies."

"There's no way a portfolio manager will vote for something that's bad for [his or her] fund so that another department's client isn't annoyed," adds Robert McCormick. His quote is especially noteworthy as he has left his post as director of investment proxy research at Fidelity and is now at Glass, Lewis & Co., a San Francisco proxy advisor.

The Times' Morgenstern makes less of an effort to get Fidelity's view point into print, though she does cite Glass, Lewis & Co. as a proxy firm making recommendations that are contrary to Fidelity's voting record.

She also indirectly raises questions about the integrity of Fidelity funds' independent board chair Robert Gates, noting that he "monitors 328 funds and was paid $373,000 last year, according to regulatory documents" and that "He juggles fund oversight with his job as president of Texas A&M University" and is "a director at Nacco Industries Parker Drilling and Brinker International" and a past director of the Central Intelligence Agency.

She even takes a shot at the Johnson's for being too wealthy:

And even though escalating executive compensation disturbs many shareholders, it may not concern Fidelity's well-paid fund managers and wealthy executives. With a net worth of $7.5 billion as estimated by Forbes magazine, Edward C. Johnson III, Fidelity's chief executive, may not be as worried as other Americans about outsized executive pay reducing his retirement account returns. Nevertheless, Fidelity's pro-management stance troubles some who say the firm is abdicating a crucial watchdog role in boardrooms and corner offices across America.

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