Last year shareholder activists released the first major report on how mutual funds vote their proxies on executive compensation issues. The conclusion: Morgan Stanley Investment Management had by far “the worst pay-enabling proxy voting record” for 2005 of the 18 fund complexes surveyed. Scrambling to defend its reputation, the money management operation hired a new executive director of corporate governance, Kenneth Bertsch, from ratings agency Moody’s Investors Service.
Just a few months into his new job, Bertsch’s assessment of Morgan Stanley’s voting practices is far more sanguine than the scathing report that helped get him hired. “I have been very impressed with the quality and the integrity of the decision-making processes here,” he tells Institutional Investor in an interview. “People are concerned about the impact of how they are voting.”
Critics of MSIM’s record beg to differ. The March 2006 report by activists, titled “Enablers of Excess,” focused on executive compensation issues in the 2005 proxy season, the first period of available data in the wake of the Securities and Exchange Commission’s decision to require funds to publicly disclose how they vote. Compiled by the American Federation of State, County and Municipal Employees (Afscme), part of labor union AFL-CIO, and the Corporate Library, a governance watchdog organization, the analysis found that Morgan Stanley voted in support of management’s recommendations nearly 95 percent of the time.
At Morgan Stanley, which manages $483 billion in institutional and retail assets, portfolio managers have traditionally decided how to vote their proxies, an approach Bertsch supports. One of his first moves at MSIM was to reconstitute the firm’s proxy voting committee, adding five members to an existing seven-member committee and chairing regular meetings. The point of the committee, the new governance chief says, is to create a forum for resolving differences in the interpretation of MSIM’s proxy policy and thus help maintain a more consistent approach. (Bertsch declined to provide examples.)
This decentralized model is the exception, not the rule, among U.S. money management firms, which typically employ a chief compliance officer to vote on all proxies and ensure that they match the proxy policy.
A case in point is American Century Investment Management, the Kansas City, Missouri firm that manages $100 billion and earned the highest marks in the “Enablers of Excess” report. Ward Stauffer, the firm’s general counsel, says he works with the boards of his funds and applies a single policy to each vote, which he casts himself. “We’ve never thought of doing it any other way,” he says.
Bertsch dismisses this voting model and insists that the best way to serve shareholders’ interests is to educate portfolio managers and empower them to use their own judgment. “I was brought in as a policy person to take a different approach” than other fund companies, he says.
Bertsch also rejects a key premise of the “Enablers of Excess” report — one that Afscme and the Corporate Library acknowledge: that any vote cast against a shareholder-sponsored pay proposal is automatically deemed to be against shareholders’ interests. For example, he says MSIM portfolio managers will continue to oppose proposals requiring executives to be paid in indexed stock options, a compensation method that his firm views as unlikely to attract talent because the plans aren’t widely used. “We would be more concerned about tying the hands of company managers,” says Bertsch.
This proxy season, MSIM’s corporate governance chief says he is working with portfolio managers to prioritize several hot-button issues, such as making sure shareholders get a fair deal in buyout transactions and ensuring that executive compensation plans with a stock component don’t dilute shareholders.
Bertsch also appears to be taking a page from the playbook of Hassan Elmasry, the London-based MSIM portfolio manager who is trying to bolster New York Times Co.’s flagging stock by pressuring its board for governance reforms and other changes — and is expected to withhold votes for Times directors at the company’s April 24 shareholder meeting. Although he won’t comment on the effort, Bertsch says he plans to “reeducate” portfolio managers about what makes an effective board.
Bertsch’s approach to corporate governance has been shaped by a career that has spanned activism and money management. From 1980 to 1999 he worked at the Investor Responsibility Research Center, but he eventually concluded that shareholder watchdogs oversimplified complex issues.
He left IRRC to join TIAA-CREF, where as director of corporate governance he began experimenting with nonconfrontational tactics, such as negotiating changes in the composition of corporate boards through confidential talks with company directors. In 2002, Bertsch joined Moody’s and created a new department that measured the impact of companies’ corporate governance policies on their creditworthiness.
Early indications suggest that the pressure will ease when Afscme and the Corporate Library issue their report later this year on the results of the 2006 annual meetings. According to the Corporate Library senior research associate Beth Young, MSIM “will not be an outlier” and should fall “fairly comfortably in the middle,” compared with other firms surveyed, largely because the universe of proxy issues was markedly different from that of the previous year.
Although the link between proxy voting and fund performance is still unproven, Bertsch says he operates on the assumption that each vote matters. Shareholders of Morgan Stanley’s mutual funds would gladly take any edge they can get: According to Morningstar, MSIM’s two fund families, Morgan Stanley and Van Kampen, have been laggards, ranking in the middle of the mutual fund pack for the past decade.
