Banks are not only some of Canada’s largest public companies; they also own many of Canada’s largest mutual funds. So when shareholders asked to have a say on executive pay at the big banks, it’s interesting to look at how the banks’ own mutual funds cast their votes.

Bank-owned mutual funds own millions of bank shares and, as shareholders, each year vote millions of proxies on these shares. Since 2006, Canadian mutual fund companies have been legally obliged to report how they vote the shares owned by their funds. The reports for the past year have recently been released, and show some curious results.

Here, we take a look at how mutual funds owned by five Canadian banks voted proxies on a shareholder proposal that was on each bank’s ballot in 2008.

Meritas Financial Inc. filed a proposal that shareholders voted on asking the banks (CIBC, Bank of Montreal, Royal Bank, TD, and Bank of Nova Scotia) to allow their shareholders an annual, advisory vote on executive compensation. Although management of each bank recommended that shareholders vote ‘AGAINST’ the proposal, it garnered significant support from shareholders at each bank. The overall average vote ‘FOR’ the proposal was 40.5%.

We were curious to see the extent to which - if any - bank mutual funds were among the shareholders that voted ‘FOR’ this proposal.

Two Mutual Funds owned by the Bank of Montreal (BMO), the BMO Canadian Equity Class Fund and the BMO Equity Fund, found advisory vote resolutions on their CIBC, Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD) proxies this year. The voting record indicates that the two BMO funds voted FOR the advisory vote resolution on each of the six proxy ballots.

Bank stocks were voted in a total of 12 Scotia Mutual Funds in 2008. Ballots were voted FOR the advisory vote resolution on 46 of 51 occasions. Just two of the 12 funds reported any votes AGAINST this proposal: the Scotia Canadian Index Fund rejected the proposal on its BMO proxy while supporting it when voting its shares of each of the other four banks, including Bank of Nova Scotia (BNS). The Pinnacle Strategic Balanced Fund voted AGAINST the proposal on each of four ballots. The fund did not hold any BNS shares.

The proposal also proved popular with CIBC’s Mutual Funds. Two funds voted the proposal, with the CIBC Balanced Index Fund and CIBC Canadian Index Fund reporting votes FOR the advisory vote proposal on the ballots for all banks except BNS.

Voting records for the RBC Mutual Funds we examined indicate that of eight funds that voted on at least one advisory vote shareholder resolution, all but one voted AGAINST it. The RBC Canadian Index Fund supported the proposal in voting at BNS, TD, CIBC and, interestingly, Royal Bank while voting AGAINST it only at BMO.

Finally, six TD mutual funds held TD Bank shares and elected to ABSTAIN from voting on all issues, including the advisory vote proposal. Of 21 votes cast on proxies for the other four banks, the proposal received support in just one instance: the TD Canadian Index Fund reportedly voted FOR the proposal on its BNS ballot, but rejected the proposal when CIBC, RBC and BMO shares were voted.

It is not surprising to find that different funds within a large family voted differently on the advisory vote. This is because all of the funds may not have the same ultimate decision maker. However, it is more difficult to figure out why, as noted in several cases above, a single fund would vote the same governance issue differently from bank to bank.

Furthermore, although the advisory vote proposal was not well received by the management of each bank where it was filed, some bank mutual funds indicated solid support for the idea. TD and RBC funds voted ‘AGAINST’ at almost every opportunity, but BMO Mutual Funds voted all shares ‘FOR’ the proposal, Scotia funds voted 90% of their proxies in favour of the advisory vote and CIBC funds provided support for it with over 70% of proxies voted.
 
SHARE recently co-published the first multi-year report on Proxy Voting by Canadian Mutual Funds, which examined the proxy voting records over 2006 and 2007 of 175 funds from 21 Canadian mutual fund families.