Management opposes first resolution in the sector on Sudan genocide

By James C. Hyatt

Fidelity Investments finds itself facing the mutual fund industry’s first shareholder resolution campaign, a drive generating a lot of heated rhetoric and investor protests.

The objective: a demand to drop investments in companies that, “in the judgment of the (fund) Board, substantially contribute to genocide, patterns of extraordinary and egregious violations of human rights, or crimes against humanity.”

The Investors Against Genocide campaign asserts that two Chinese oil companies, PetroChina and its parent China National Petroleum Co., by doing business with Sudan, are providing funding that the Sudanese government uses to “conduct genocide in Darfur.” (Two other companies, ONGC of India and Petronas of Malaysia, also help provide oil money that supports Sudan, the campaign asserts.)

The campaign notes that 24 states and 60 colleges already have made a decision to divest investments in companies operating in Sudan, and that 200,000 people have “registered complaints against Fidelity for investing in genocide.”

Congress last year passed, and President Bush signed, the Sudan Accountability and Divestment Act, which limits penalties against a registered investment company that divests itself of investments in companies doing business in Sudan.

And the SEC, effective April 30, requires investment companies to disclose such divestments. Social policy resolutions, of course, are nothing new for public companies.

But the Investors Against Genocide campaign is unique for the mutual fund industry, and Fidelity’s handling of the issue is certain to be drawing close attention from its competitors, who can expect to face the same issue sooner or later. Fidelity manages more than $1.5 trillion.

Unlike public companies, mutual funds don’t necessarily have to have annual meetings, and typically solicit proxies only when investor approval is needed to elect a new director or make a change in fund rules.

Although no meetings are scheduled, there are 19 such proposals “already waiting at Vanguard,” the big Pennsylvania fund company, says Eric Cohen, chair of the campaign, as well as others at Franklin Templeton and TIAA-CREF. In some instances, he concedes, “it might take years” before some funds hold shareholder meetings.

Fidelity last fall asked the SEC to permit it to exclude the proposal under proxy rules, but the SEC staff rejected that request.

Fidelity’s votes are spread out over several months, in part because some meetings have had to be adjourned for lack of a quorum.

In the dozen or so meetings completed so far, support for the proposal has ranged from 20 percent to 31 percent. Fidelity management has opposed the resolution and urged shareholders to vote against it, arguing that the investments are legal and that investors can always invest elsewhere if they so choose. (Many socially responsible investment funds don’t invest in companies operating in Sudan.)

Cohen says management’s opposition influences institutional investors to vote against the proposal. “The biggest single problem facing us is that ordinary investors, when they get these things (proxy statements) throw them away and just don’t look at them”--the same reason Fidelity often can’t get a quorum.

He has urged Fidelity to at least consider taking a neutral position on the proposal, a suggestion officials have said they’d discuss. “It would be very significant if they were to go neutral,” Mr. Cohen says.

And, he insists, Fidelity faces the possibility that if another major fund company endorses the genocide investment resolution “the competitive landscape will start to change… When it comes to genocide, people don’t want to have their savings, their pensions, their families connected.”

Cohen told a Fidelity meeting on May 14 “You have the power to turn a serious business problem into a competitive advantage. If you embrace genocide-free investing, rather than actively opposing it, then you will reap the benefits of being a leader among the major mutual funds. By drawing the line at investing in genocide, you will set a standard that your competitors will either meet or suffer losing customers to you. So I ask Fidelity, will you make a commitment to genocide-free investing? If you are not yet prepared to take the bolder, right step forward, then I ask, will you at least become neutral on the proposal and let your customers tell you the right thing to do?”