Fidelity shareholders lose bid for divestment

Vote was rare opportunity for activist investors

That quietest of financial rituals, the mutual fund shareholder meeting, is becoming a forum for social activism.

At a gathering that fund giant Fidelity Investments held yesterday in Boston, shareholder proposals that would bar it from holding assets in companies tied to genocide were defeated.

Fidelity's fund trustees had opposed the measures, part of a wider campaign by activists seeking to bring attention to atrocities in Sudan they say are funded indirectly by Chinese oil companies in which Fidelity holds stakes.

Both the trustees and Fidelity's management say investment decisions should lie with fund managers.

But while the vote went in Fidelity's favor, activists said their measures received an unusually high number of votes compared with proxy campaigns on social and environmental causes elsewhere. They predicted similar measures would receive a rising level of support as they seek changes at other firms, including Vanguard Group Inc. and American Funds, and in other Fidelity fund votes scheduled for later this spring.

"We expected to lose, but by a much wider margin," said Eric Cohen, chairman of Investors Against Genocide, one of the groups that had backed the measure. Others included Physicians for Human Rights of Cambridge and the Unitarian Universalist Association.

Unlike publicly traded companies with regular annual meetings, privately held Fidelity rarely holds open forums during which fund shareholders have the chance to question senior leaders such as chief executive Edward C. Johnson III.

Further, most mutual funds aren't required to hold annual meetings. Yesterday's meeting was held to gain shareholder approvals for changes such as new personnel Fidelity is adding to its board that oversees the funds, chaired by Johnson. Fidelity had sought to leave the Sudan question off the ballot for the meeting, but allowed the vote after an Securities and Exchange Commission ruling.

The result turned yesterday's gathering, at a company building adjacent to South Station, into an unusual back-and-forth between Cohen with other activists and a pair of Fidelity officials, general counsel Eric Roiter and fund trustee Dennis J. Dirks. They were put in the rare position of explaining the company's conduct and listening to complaints from activists like Tim Smith of Walden Asset Management in Boston, who said the lack of other trustees at the meeting didn't meet good corporate-governance practices.

Dirks responded that traditionally just one trustee attends such meetings and briefs other trustees. "The point is well taken," Dirks said. "I would point out, as you know, often there are few shareholders in attendance" at the fund meetings.

The specific issue at hand was Fidelity's investments in a pair of Chinese oil companies - China Petroleum and Chemical Corp. (better known as Sinopec) and PetroChina Co. Many Western governments blame both for royalties paid to Sudan's rulers whose human rights abuses in the country's western Darfur region have been termed "genocide" by the White House and others.

Fidelity previously had disclosed in filings that its managers had sold the majority of shares they once held in these companies, though it said the decisions were by individual managers. Citing its most recent filings, for instance, a Fidelity spokeswoman said it now holds 0.4 percent of PetroChina's tradable shares, down from 2.5 percent of them at the end of 2006.

Dirks and Roiter said the issue has been widely discussed internally, but said management must respect the wishes of all fund shareholders based on voting. The investments are allowed under US laws, Roiter said, noting that the political risk surrounding the companies creates much the same pressure the activists seek.

At the meeting, the proposal to bar such investments received 27 percent of votes cast among holders of Fidelity's Capital & Income fund and 28 percent of votes cast among holders of Fidelity Select Health Care Portfolio fund. But voting results for other funds, including Fidelity's well-known Contrafund, were postponed as not enough votes were cast, executives said. Cohen said the delays will give his group more time to lobby for votes - to be held at future meetings.

Ross Kerber can be reached at kerber@globe.com.