AP News, April 13th, 2007
When a group of Take-Two Interactive Software Inc. shareholders staged a board coup recently, an unlikely participant was among those leading the charge: A mutual fund.
Fund managers typically aren't known for their shareholder activism. Mutual funds have long protested corporate decisions by selling their stock, not by publicly taking a stand against management.
But the Take-Two example, and others this year, may be signaling a welcome change. They may be taking the cue from activist hedge funds that increasingly are demanding changes after buying big stock stakes, including higher dividends, share buybacks or buyout offers.
In the past, mutual funds have largely sided with company-led, not shareholder-driven initiatives.
Voting records of the 29 large fund families show that they supported management-sponsored proposals 92 percent of the time during the 2006 proxy season, compared with 37 percent of those put forth by shareholders, according to The Corporate Library, a research group.
The funds have gotten lots of heat for their staunch support of management, with critics questioning if funds are upholding their legal obligations to vote in the best interest of their shareholders if they take management's side.
But some mutual funds appear to be warming up to the activist role, perhaps because of new rules that requiring fund companies to disclose how they vote in corporate elections. They also face increased competition for investors' money, especially from hedge funds.
At Take-Two, OppenheimerFunds Inc., teamed up with a group of investors, including hedge fund S.A.C. Capital, to oust five directors and the CEO on March 29, and then named its own team to the board.
That revolt followed poor results, accounting troubles and controversy surrounding the violent and sexual content of Take-Two's most popular line of games, "Grand Theft Auto." In addition, its former chairman and CEO, Ryan Brant, was the first chief executive to be convicted of falsifying business records to backdate stock-option grants.
OppenheimerFunds spokeswoman Jeaneen Pisarra said there isn't a company-wide initiative to be more active in public shareholder issues, but in the case of Take-Two, "we felt that supporting a change in management was the appropriate course for our clients and consistent with our fiduciary duties as advisers."
Also stepping up the pressure is Baltimore fund company T. Rowe Price, which has come out against a number of deals, including the management-led buyout of Laureate Education Inc. for $3.11 billion excluding debt. T. Rowe Price said in a letter to the for-profit higher education company's board last month that it will vote against the deal because it "is not in the best long-term interest of our clients."
That letter reflects a more vocal stance the fund company is now willing to take, said spokesman Steve Norwitz. He notes that a number of portfolio managers have been very public in their criticism of buyouts, including the going-private deals for Fairmont Hotels & Resorts Inc. and Education Management Inc. last year.
Fidelity Investments took a prominent role in opposing the proposed $19 billion takeover of U.S. radio broadcaster Clear Channel Communications Inc. by the private-equity firms Bain Capital Partners and Thomas H. Lee Co. Fidelity and other investors against the deal, which has yet to go to a shareholder vote, think the company is worth more than the $37.60-a-share offer.
Even though these examples suggest mutual funds are moving away from rubber-stamping management agendas, some shareholder groups say plenty more needs to be done.
CtW Investment Group _ the investment arm of the labor federation Change to Win, which is affiliated with unions that have $180 billion in pension assets _ is putting the spotlight on previous fund voting as a way to press for change in future corporate elections.
The Washington-based labor group sent letters to 14 fund companies asking them to explain why they voted for "problem" directors at companies with "egregious pay practices." It also said the "upcoming proxy season presents a key test of your commitment" to shareholders.
The next few months will show whether fund companies have made that commitment. The good news is that some already have.
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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
