BIG ASSET MANAGERS FLUNK LABOR’S TEST: THEIR ‘F’ BASED ON VOTE ON 40 PENSION FUND PROXY INITIATIVES BACKED BY AFL-CIO

J.P. Morgan, Fidelity Investments, Strong Capital Management and Northern Trust are near the bottom of the money manager heap in the eyes of the AFL-CIO.

In a ranking of 106 managers based on how they voted on 40 key shareholder resolutions supported by organized labor in the 1998 proxy season, those four were among those that most often voted “nay.”

The AFL-CIO conducted a much smaller proxy voting survey last year.

Both were conducted by the Center for Working Capital, a non-profit affiliate of the AFL-CIO Office of Investment in Washington.

The results were announced at a late February meeting, drawing this response from AFL-CIO president John Sweeney: “We believe the voting of shares is central to the stewardship of working families’ assets. Providing clear, indisputable benchmarks for manager performance is one of the main goals of our capital stewardship program.”

Union pension funds have a total of $350 billion.

The shareholder proposals tracked included bread-and-butter governance issues: redeeming poison pills, declassifying boards of directors, promoting director independence, limiting executive compensation, splitting the posts of board chairman and chief executive, adopting cumulative voting and reporting soft money political contributions.

The average rating was 58.5%.

Originally, 30 money managers scored 100%. They tended to be either small firms that concentrate on managing union and public pension fund money, or the divisions of larger money management firms that oversee Taft-Hartley pensions (the Taft-Hartley Act of 1947 regulates unions).

But the AFL-CIO, in response to questions raised about large money managers that reported only their Taft-Hartley business and not how they voted on their entire assets under management, decided early in the month to revise the listings.

Companies with top tier scores that reported only their Taft-Hartley business — including Smith Barney Asset Management, Alliance Capital Management LP, Mitchell Hutchins, Lotsoff, Oppenheimer Capital, Duff & Phelps Investment Management, Stacey Braun Associates and Systematic Financial Management — will be dropped to the middle tier.

Strong Capital Management Inc. and six smaller money managers had the worst records, scoring zero.

Large money managers that scored poorly in the survey include J.P. Morgan Investment Management Inc., with a score of 18.8%; Northern Trust Corp., 7.5%; and Fidelity, 23.8%.

now play nice

Whether money managers had high or low scores, many observers believe, it is important for them and the AFL-CIO to communicate without antagonism.

“If it (the list) is used as an educational tool, it’s fine,” says Patrick McGurn, director of corporate programs for Institutional Shareholder Services in Bethesda, Md. Still, he says, it should not be used “as a retaliatory tool.”

Strong officials did not return telephone calls.

Fidelity says in a statement: “Our goal when voting proxies is to support those measures that maximize shareholder value. As a matter of policy we do not discuss how we have voted in specific situations.”

Steven Potter, director of the institutional group at Northern Trust in Chicago, says that while the bank scored poorly in its proxy voting record on labor issues, a subsidiary, Northern Trust Quantitative Advisors, has $6.3 billion in Taft-Hartley money out of $48 billion in assets under management. Alone, that unit would have scored 65%.

Northern Trust itself has $4.6 billion in Taft-Hartley assets, of its $163 billion in tax-exempt assets.

“We do have products in both (the institutional group and Quantitative Advisors) and it is important to us that we get consistency between the two. We know there’s room for improvement.”

Dennis Kass, vice chairman in J.P. Morgan’s asset management division, says Taft-Hartley business is very important to Morgan. He adds the money manager has a carefully crafted proxy voting policy that it uses to vote all shares for which it is a fiduciary, regardless of the client.

“We intend to have a discussion with representatives from the AFL-CIO and other Taft-Hartley affiliated organizations so we can better understand their (corporate) governance perspective on issues and to explain how we feel about those issues from a fiduciary point of view,” he says.

Crain News Service