The Fund Industry: How Your Money is Managed, 2nd Edition

CHAPTER 10

Mutual Funds as Stockholders

Because of their extensive stock ownership, mutual funds have a significant influence over the management of public companies. Their decisions can determine if a company moves forward with a proposed merger or if a particular slate of candidates is elected to a company's board. Whether mutual funds use that potential influence effectively is the subject of debate among regulators, academics, corporate executives, and fund managers themselves.

In this chapter, we focus on a mutual fund's investments in the stock of other companies—ownership that comes with both rights and responsibilities. As we discussed in Chapter 2, mutual funds themselves have shareholders, namely the investors in the fund. While those investors enjoy ownership rights in the fund, they are not the topic of discussion here. When we use the terms stockholder and shareholder throughout this chapter, we refer to the fund's ownership of shares in operating companies and not to ownership of the fund's shares by investors.

This chapter reviews:

• The powers of stockholders in the governance of corporations.
• How mutual funds exercise those powers.
• Shareholder activism.
• The role that social issues play in mutual fund investment and proxy voting decisions.
• The challenges facing mutual funds in exercising their rights as shareholders outside the United States.

MUTUAL FUNDS AND THE PROXY VOTING PROCESS

Mutual funds are major investors in stocks. The Investment Company Institute calculates ...