Why mutual funds rarely vote against the management

Mutual funds may be flexing their financial muscle at the bourses these days but they are still very reluctant to take on the management of the companies they invest in.

BusinessLine combed through voting decisions in over 18,000 resolutions of the top mutual funds (by size) in the country. The results show that fund houses almost never vote against a resolution proposed by company management, be it on appointments to the board, financial decisions or related-party transactions.

Till the end of December this fiscal, ICICI Prudential Mutual Fund — the country’s largest fund house — had voted only against one proposal of an investee company out of the 2,426 proposals that it had a vote on. It voted against paying a non-compete fee of ₹850 crore to the promoters of Max Financial Services after its merger with HDFC Life Insurance.

While the bulk of voting decisions presented to an investor tend to be routine in nature, many still require a more considered view by investors. Of the 1,333 voting proposals that HDFC Mutual Fund had a call on, the fund house went against the management only eight times.

Birla Sun Life Mutual Fund, the fourth-largest fund house by assets, is yet to go against a management resolution this fiscal in the companies it invests in. Instead, the fund house abstained from voting on 285 of the 2,574 resolutions that it could have voted on.

Abstaining from a vote, in fact, seems to be a fund house’s way to tacitly disagree with the company management if the proposal is contentious. Take, for example, last December’s spree of shareholder meetings by Tata group companies to remove Cyrus Mistry as Chairman and Nusli Wadia as independent director. All of the top five fund houses voted in favour of the management’s proposal to remove Mistry from the group companies.

In December 2015, four of the five top fund houses (SBI Mutual Fund being the exception) abstained from voting from Maruti’s related-party transaction with its Japanese parent Suzuki, a restructuring that independent advisors had vehemently opposed.

Fund houses are reluctant to step on the toes of companies that bring it business in other ways, according to Shriram Subramanian, MD, InGovern, a Bengaluru-based proxy advisor. “Mutual funds are beholden to corporate India for business; very few fund houses in India are truly independent.”

“Look at the ownership of fund houses to understand this,” he continues. “The biggest are owned by banks or corporate houses that also have lending businesses. If my mutual fund votes against a company management’s proposal, and this company has a lot of surplus cash, it may choose not to invest in my fund house’s debt or liquid schemes. And these debt and liquid schemes account for the bulk of a fund house’s assets under management.”

In the Maruti case, for example, mutual funds were unwilling to tick off a large corporate house by voting against it.

This conflict of interest that Subramanian refers to becomes clearer if you look at the voting pattern of Franklin Templeton Mutual Fund (the Indian subsidiary of the US-based Franklin Templeton Investments) in India.

The parent company has no business in India apart from the mutual fund, which happens to be a vocal opponent of several proposals of the boards of corporate India. Of the 7,239 proposals that the fund house had a call on, it went against the management in 543 and abstained from just 23.

Four of the top five fund houses declined to comment for this story or did not reply to emails requesting comment.

Navneet Munot, Chief Investment Officer, SBI Mutual Fund, explained the asset manager’s voting rationale: “We look at several aspects of a resolution before taking a decision, be it on the environmental impact, the social angle or on corporate governance.”

Fund houses need to remember that their fiduciary responsibility is to their unit-holders, Subramanian concluded. “They should have a clear voting policy with rules and they must adhere to this, regardless of which company’s proposal the fund house is voting on.”

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