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Mutual Funds and Say on Pay for CEOs

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Shareholders of publicly traded companies have an important job of providing a system of checks and balances on the company's corporate governance, including executive pay plans. Agents of the company (executives) have an inherent conflict of interest in maximizing their own wealth versus maximizing the wealth of the principals (shareholders). You can look back to 2008 and come up with a slew of examples illustrating this principal-agent problem, which in part provided the impetus for the 2010 "Say on Pay" rules in the Dodd Frank Act.

Bloomberg recently had an intriguing article showing how the largest shareholders of publicly traded companies -- mutual funds -- generally fall in line with corporate boards for executive pay decisions but some notable outliers exist, having a more discriminating view of these pay plans and advocating for shareholder interests.

The "most agreeable" of the mutual fund giants voted with directors on executive pay plans 97 percent of the time last year, according to a report by shareholder advocacy group As You Sow. These fund giants included Vanguard Group, BlackRock Inc., and TIAA CREF.

Dimensional Fund Advisors backed only 54 percent of pay proposals and the California Public Employees’ Retirement System opposed 47 percent of pay plans, As You Sow said.

"We take corporate governance very seriously," said Joseph Chi, co-head of portfolio management at Dimensional, which had $388 billion in assets as of Dec 31. "We continue to press on this issue because it is important to shareholders."

Dimensional’s corporate governance committee comprises the firm’s most senior officers and directors, including co-founder David Booth and director Eugene Fama, Chi said. It never approves of plans that allow single-trigger payouts to executives -- golden parachutes without termination -- in the event of a merger or acquisition.
 
I commend Dimensional Fund Advisors for advocating for shareholder interests and hope more fund companies do the same to maintain a better system of checks and balances.
 
 
Kevin Kroskey, CFP®, MBA

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