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Arpad Benedek

Canada's mainstream mutual funds have had a reputation as the most passive of institutional investors, rarely publicly objecting to companies' activities and seldom taking the lead to vote against unpopular proposals.

But signs of activism are emerging in that conservative realm.

Mutual funds are now outpacing the broader pack of shareholders in voting against management compensation proposals, and in supporting resolutions from activist investors, according to a new study to be released this week.

The report on mutual fund voting behaviour by the Vancouver-based Shareholder Association for Research & Education (SHARE) found mutual funds' support for shareholder resolutions climbed from 3.2 per cent in 2006 to 21.1 per cent in 2009.

And support for management proposals on compensation - most involving approvals for new stock option grants - slipped from 81 per cent to 75 per cent in the same period.

The review looked at the voting records of 21 major mutual fund families, including the 10 largest fund companies which account for 79 per cent of all mutual fund assets under management in Canada.

"Taken as a group, mutual funds are definitely looking at management proposals and recommendations with an increasingly critical eye," says Laura O'Neill, director of law and policy at SHARE.

"We do not see evidence that governance in Canada is getting worse over time - we think in fact it's slowly improving - so fewer votes in favour [of management proposals]strongly point to higher standards for approval from mutual funds."

Indeed, mutual funds appear to be more critical than shareholders in general on some key issues. Management compensation proposals, for example, drew 83 per cent support from shareholders in general last year, but just 75 per cent support from mutual funds.

Investors broadly voted 15 per cent in favour of resolutions submitted by shareholders for a vote at annual meetings last year, while mutual funds gave the measures 21 per cent support.

The report does not examine voting by other types of institutional shareholders such as pension funds, which have tended to be far more vocal about criticizing corporate actions. But Ms. O'Neill said the numbers show mutual funds can no longer be considered the passive partners.

"It turns out that's no longer the case, as a group," she said.

One factor changing voting patterns is a new rule introduced by regulators in 2004 requiring mutual funds to begin publicly disclosing their voting records on an annual basis. Ms. O'Neill said SHARE believes some funds decided to "pick up their socks" and vote with greater consideration of the issues, knowing that investors would be able to monitor their behaviour.

She said she also believes new disclosure rules for companies, especially in the area of compensation, have spurred voting changes because investors are now given more detailed information about practices.

"Increased disclosure from issuers will provide some investors with more things to object to," Ms. O'Neill said.

Two hot-button issues also appear to have played a role in spurring greater voting activism.

A flood of shareholder resolutions asking companies to give investors an annual advisory vote on executive compensation practices - known as say on pay - have attracted broad shareholder support in the past two years, boosting overall support for shareholder resolutions across the ranks of investors. Say on pay proposals submitted at Canada's biggest banks garnered 63 per cent support from mutual funds in 2008 and 74 per cent in 2009.

Mutual funds have also begun to much more widely support shareholder resolutions on environmental and social issues.

Mutual fund companies voted 37 per cent in favour of shareholder resolutions involving environmental and social proposals in 2009, up from 19 per cent in 2008, SHARE said.

Ms. O'Neill said on some environmental and social issues, investors have been ahead of companies on identifying potential problems and urging companies to address them.

"After what we've been through recently, risk has got a big capital R and people are really attentive to new areas that they hadn't thought of before," she said.

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