Pax World Funds: 5 Key Votes to Watch

Investors Told How to Find Proxy Voting Information, What Issues to Watch;
Warning: Many Potentially Controversial Fund Votes Siding With Management Likely

PORTSMOUTH, N.H.///August 25, 2004///Is your mutual fund voting against efforts to reduce global warming? Are your fund shares being cast on the side of management to shield directors from the wrath of shareholders? That is the kind of eye-opening information that now will be available to mutual fund investors under a major new Securities and Exchange Commission (SEC) rule on fund proxy disclosure voting that goes into effect on August 31, 2004. To help prepare investors for the new disclosure of fund voting practices, Pax World Funds, home to America’s first socially responsible mutual fund, today issued a list of five key shareholder resolution categories that investors should follow.

Pax World Funds Vice President for Social Research Anita Green said: “The disclosure of how mutual fund companies vote their shares on major social and bottom-line issues – including board accountability, separation of chairman and CEO duties, global warming and diversity – is going to be a real gut check for many investors, who may find what they learn to be extremely unsettling. Mutual fund shareholders should take the time to find out how their mutual fund is voting and then ask themselves some hard questions: Is this mutual fund representing my values and financial concerns? How can I make sure my mutual fund takes into consideration my personal views? Are there other mutual funds out there that will vote on these important issues in a way that better suits me?”

Green said that most mutual funds are likely to adopt a “go ahead slow” approach and vote with management, even on high-profile controversial issues (such as global warming and board diversity) that could engender a backlash among shareholders. The Pax World Funds official said that investors should take the time to acquaint themselves with their mutual funds’ guidelines for voting on proxies, as well as the individual votes that are taken. Even though mutual fund companies now are obligated to provide the proxy fund disclosures at no cost to shareholders, some reluctant fund companies most likely will make the information difficult to obtain. Investors who are unable to find the guidelines and voting information on their fund’s Web site should go to the Securities and Exchange Commission Web site (http://www.sec.gov), look up their mutual fund and go to Form NPX, Green said. You can find an example of how one mutual fund reports its guidelines and proxy votes in detail at http://www.paxworld.com/.

Throughout 2003, Pax World Funds was active in the original push to persuade the SEC to pass a proposed rule that would require mutual funds to disclose their proxy voting policies and procedures, and make public their record of votes on proxies of the portfolio companies.  The socially responsible fund company launched a Web site called MutualFundProxyVotes.com for investors to submit comment letters to the SEC, resulting in well over 1,000 comment letter emails reaching the agency – a major share of the total volume of input received by the SEC.
 

FIVE ISSUES TO WATCH

In terms of shareholder proxy votes that should be of particular interest to mutual fund investors, Pax World Funds highlighted the following five topics:

* Annual election of directors. Every member of a publicly traded company’s board of directors must stand for re-election. The two most popular approaches to this process are classified boards (with votes on individual directors every three years) and annual election. Directors are the shareholders’ representatives, acting on their behalf in meetings with management. If directors are standing for election each year, it increases their accountability. If a director is not doing his or her job, the individual can be removed more quickly under an annual-election system. This is an issue on which shareholder pressure can make a big difference. Consider the case of Avon: a shareholder resolution filed in 2003 asked for the board to be elected annually. Despite getting 80.5 percent backing from shareholders, management ignored the vote. In 2004, Pax World Funds co-filed the same resolution. Three days before annual meeting, Avon’s board changed course and decided to go with annual elections. Pax World Funds joined Walden Asset Management in withdrawing the resolution and declaring victory for its shareholders. Other recent votes were held at SBC Communications, Gillette Company, and Procter & Gamble.

* Separation of chairman of the board and CEO positions. The CEO is management’s top representative. The chairman of a board is supposed to be the ultimate shareholder representative. So, there is an inherent conflict of interest when the positions are combined. In some smaller corporations, it may be done effectively, but the larger the company, the greater the need for two different people in the jobs. This is an increasingly important and high-visibility issue when it comes to responsiveness to shareholder needs. In 2004, the most famous battle of this sort occurred at Disney, where dissident shareholders convinced the board to strip CEO Michael Eisner of his title of chairman. This division of duty recently also happened at Dell, but it is extremely rare in the absence of intense pressure from
shareholders. Such resolutions have been considered recently at Long’s Drug Stores, General Electric, Citigroup, ExxonMobil, and Safeway.

* Risks associated with global warming. Experts agree that global warming is real and that means companies have to start dealing with a host of financial risks associated with climate change. Reinsurers already have indicated that they are not prepared to pay claims related to litigation concerning global warming. Recent regulatory and state legal actions – including carbon rules and lawsuits filed by state attorneys general – also create an uncertain situation in which companies that fail to adopt global warming strategies, including reduced use of fossil fuels, development of cleaner alternative energy sources, etc., put shareholder value at risk.ExxonMobil is just one of more than a dozen large and small energy industry companies that have faced such resolutions in recent years. In a major breakthrough this year, a number of leading U.S. utilities bowed to pressure from shareholders and agreed to take initial steps to address the impact of global warming on shareholders. Look for even wider support for global warming proxy resolutions in 2005 from state treasurers, pension fund managers and other institutional investors, as major players in the market demand. Major resolutions have been filed recently at Ford Motor, General Motors, American Electric Power, TXU, Xcel Energy, Cinergy Corporation, ExxonMobil, Southern Company, Anadarko Petroleum, Unocal, Apache Corporation, and Chubb Corporation.

* Independent auditors. Shareholders need an unbiased party to scrutinize and report on management’s books. With the rise of tax consulting, auditors now find that their loyalties are torn by competitive pressures. The guideline used by Pax World Funds is that if more than 25 percent of revenue from clients at an audit firm comes from non-audit activities, then the independence of the firm is suspect. Investors should be concerned about this issue because the absence of an independence auditor means an important check and balance on management is missing from the system. Resolutions calling for independent auditors have been filed recently at JP Morgan Chase, Lockheed Martin, and American Electric Power.

* Board diversity. The narrowing of perspectives in corporate America can lead to a “groupthink” atmosphere in which major opportunities are missed to avoid problems and to increase shareholder value. The reality is that there are far too few women and minorities represented on the boards of America’s corporations. The board of directors should reflect employees, shareholders, stakeholders and community in which the company is operating. Resolutions calling for enhanced board diversity have been filed recently at FMC Technologies, Danaher Corp, Grant Prideco, Kinder Morgan, North Fork Bancorporation, Skywest, Smith International and Werner Enterprises.

ABOUT PAX WORLD FUNDS
 
Pax World Funds seek to enable persons of conscience to invest in keeping with their ethical values and to challenge corporations to establish and meet certain ethical standards. The Funds invest in companies that produce goods and services that improve the quality of life such as health care, technology, housing, food, education, pollution control, utilities, and leisure-time activities. The Funds do not invest in companies that make defense or weapons-related products or that derive revenue from the manufacture of tobacco, alcohol, or gambling products.
 
CONTACT: Stephanie Kendall, (703) 276-3254 or skendall@hastingsgroup.com.