Mutual fund companies are selective in which portfolio holdings they conduct corporate governance research on. While this statement may not be surprising, the actual percentage may be lower than you think. A seven-year study found that, over the 80-day period preceding a holding’s annual meeting, mutual fund companies conducted proxy-related views of regulatory filings for just 10% of the companies they invested in.

The actual numbers vary by mutual fund company. For example, Vanguard looked at 57% of its holdings’ proxy-related materials, whereas Fidelity looked at just 17%. One potential reason for the discrepancy may be Vanguard’s primary focus on passive (index) funds, whereas Fidelity primarily offers active funds. Overall, however, larger mutual fund families are more likely to review proxy materials than smaller ones are.

Regarding which companies fund families spend more time investigating, portfolio position size plays a big role. Funds are 33% more likely to look at a company’s proxy filings if the company ranks among its top 10 holdings. Larger companies draw more attention as do those with higher leverage, lower price-to-book ratios and a higher proportion of intangible assets. The latter criteria are related to perceived risk.

Companies facing external pressures also receive greater attention. These are companies where proxy adviser Institutional Shareholder Services (ISS) recommends voting against management on issues such as Say-on-Pay or other shareholder proposals. These companies may also be facing challenges from activist investors who are seeking to pressure or replace board members.

Notably, companies with a CEO who has a controlling stake or with a dual class structure receive less scrutiny. The study’s authors theorize that researching the corporate governance practices of these firms might be perceived as less useful.

ISS primarily focuses on larger companies and companies that have recently performed poorly. Since ISS advises institutional clients, including mutual funds, focusing on the companies more likely to be asked about by its clients makes sense.

The companies receiving less attention tend to be smaller and have fewer institutional investors. Though the study’s authors describe this tendency as raising questions about the extent of monitoring, it does lend support to the argument of small companies receiving less attention and therefore more likely to be mispriced.

Source: “Investors’ Attention to Corporate Governance,” by Peter Iliev, Jonathan Kalodimos and Michelle Lowry; SSRN, April 13, 2018.