London School of Economics: Voting disclosure 'not a panacea'

GLOBAL - Requiring fund managers to disclose how they vote on management proposals does not make them less likely to vote for management - they will do it anyway, according to new research.

In the US, the SEC mandated disclosure amid widespread concern that fund managers were more likely to vote with management - even if the proposal was likely to damage the interests of investors - to gain lucrative pension fund contracts.

Yet, in a paper published this week, Amil Dasgupta and Konstantinos Zachariadis of the London School of Economics claim fund managers in the US vote identically across firms regardless of their business links - even though well-connected fund managers should, in theory, be less activist.

Although the two economists did not rule out poor practice as a result of competition for pension management fees, they did say fund managers simply lacked the appetite to vote against management.

Describing the effect of disclosure as "ambiguous", they found "no difference whatsoever" for very weak and very strong shareholder proposals. 

The only difference appears in intermediate proposals.

For those with low intermediate value, disclosure has decreased activism, with funds that would only have voted with the management where there was an existing business relationship now voting with management regardless.

In contrast, for 'high intermediate value' proposals, disclosure has resulted in more activism, with fund managers voting against management regardless of existing relationships.

The researchers also found that corporate managers were more likely to hire large, pro-management managers for pensions contracts.

Unsurprisingly, fund managers with more business relationships calibrated their activism at a lower level.

In the absence of pivotal funds - even in aggregate - large funds exercise less activism.

Dasgupta and Zachariadis identified increased activism among smaller funds, where no single fund is a pivotal block holder, as a potential mitigant to a largely pro-management bias.

Fund managers without overwhelming voting power, they said, can vote pro-management confidently and retain pension management contracts without ruling out the value gains delivered by activist shareholders.