August 14, 2009

Study: The Voting Trends of ETFs

Recently, the Investor Responsibility Research Center Institute and PROXY Governance teamed up to conduct this study about the voting policies and voting records of seven of the largest exchange-traded fund sponsors, which account for around 94% of the $500 billion ETF market. Given this large amount, ETFs can have a significant influence over corporate matters.

The study essentially found that practices were all over the map, for both the level of detail of each ETF’s voting guidelines as well as their voting philosophies and patterns. Some funds were much more likely to vote with management compared to other funds (90% of the time vs. 23%); and those funds that were less likely to vote with management relied more heavily on a proxy advisory firm for voting advice. I guess the diversity in voting practice is not too surprising, given that this is a relatively young investment product in a rapidly expanding market.

If you buy an ETF, does the ETF has the right to vote at all of the underlying companies owned by that ETF? The answer can be a little complicated in that the “ETF” term has become bastardized such that it encompasses several categories of investment structures, some of which technically aren’t ETFs. But according to the SEC’s “Q&As,” ETFs are investment companies – and therefore, the voting rights are held by the fund managers, not the fund shareholders. ETFs are not mutual funds (and cannot call themselves mutual funds).

Finally Dismissed: Oracle’s Long-Standing Insider Trading Suit

In June, a US District Court Judge dismissed an 8-year old shareholder lawsuit accusing Oracle CEO Larry Ellison of insider trading and misleading investors. The case – Nursing Home Pension Fund v. Oracle – stems from back in early ’01, when Oracle’s shares dropped 21% after the company announced that it would miss its quarterly earnings forecasts. The suit alleged that Ellison sold $900 million of Oracle stock before the announcement, knowing that there were problems with one of Oracle’s products. The company claimed Ellison sold stock to exercise options that were going to expire and had to be sold during open trading windows.

This is the same case that was dismissed in ’03 by the District Court, a decision that was reversed on appeal in ’04. Ellison donated $100 million to charities and paid $22 million to resolve a separate insider trading suit in ’05. That settlement followed the dismissal of a similar suit in Delaware against Ellison. For more on the case and its long history, see this Bloomberg article.

IFRS Study: More Trouble Than Its Worth?

The debate over IFRS continues to rage. A recent study finds that the US doesn’t have much to gain from adopting International Financial Reporting Standards. The study examines the economic consequences of mandatory IFRS reporting around the world and finds that, on average, there are several benefits to adopting IFRS, including increased market liquidity, decreased cost of capital and increased equity valuations. However, in countries like the US, where there is already a high-quality accounting infrastructure in place, there may be minimal room for improvement.

Additionally, while some argue that adopting IFRS in the US would make it easier for investors to compare compaies with those in other countries and decrease the cost of reconciliations, the study discovered “weak” evidence of any comparability benefits. You can follow the debate over IFRS in our “IFRS” Practice Area, including this Watson Wyatt article that examines a number of comment letters.

– Broc Romanek