Before Enron's board of directors granted CFO Andrew Fastow carte blanche to dabble in creative financing, before WorldCom honchos hid $7 billion of company debt, before Tyco bought CEO Dennis Kozlowski a $17 million Manhattan pad, before many of the recent examples of corporate malfeasance saw the light of day, a few shareholders had already been demanding more corporate accountability.

The International Brotherhood of Electrical Workers pension fund was one of them. In 1998, the fund, which held 39,200 shares of Tyco, submitted a shareholder proposal that called for a more independent board of directors. "We screened for boards with too many insiders, and Tyco's name came up," says spokesman James Voye. The majority of shareholders and Tyco's board--the proposition would have sent several directors packing--nixed the proposal. But what really steams some investors is that Fidelity Investments, the largest Tyco shareholder at the time and thus the one with the biggest say in the matter, voted against the measure.

That's no surprise. Critics say Fidelity and other mutual fund firms routinely vote with management--and against shareholders--to preserve lucrative business relationships they have with the companies. Fidelity, for example, collected about $1.8 million in fees from Tyco in 1998-99 for running the firm's retirement plans. Overall, Fidelity administers more than 9,900 corporate retirement plans.

Out in the cold. Managing the 401(k) plans of corporations is a major revenue generator for many fund companies, and therein, say critics, lies the problem. "There's a lot of pressure, real or imagined, to vote the way management would like you to," says John Bogle, founder of the fund giant Vanguard Group. Vanguard and many other fund companies work for both management and shareholders, a conflict of interest that investor advocates say typically results in shareholders' being left out in the cold.

The fund companies' dual roles, say critics, can often sting investors--and these days, it's not hard to find examples. Revelations of executive misconduct at Tyco and cozy relationships between board members and management helped send the price of Tyco shares plummeting 78 percent so far this year, costing shareholders some $93 billion. Fidelity fund holders alone have lost $4.4 billion. "If the shareholder proposal had passed, and the Tyco board had begun in 1999 to effectively question what management was doing, there probably would have been a different bottom line for shareholders," says Bill Patterson, director of the office of investment at the AFL-CIO.

For its part, Fidelity says there is absolutely no conflict of interest. "When we vote our proxies, we only consider our mutual fund shareholders' interests," says spokesman Vin Loporchio. But a 1998 AFL-CIO survey showed that Fidelity voted against corporate governance measures--as determined by the union at selected companies--more than 75 percent of the time that year. (Fidelity doesn't ordinarily disclose its votes but responded to the survey.) And the pro-management stance continues, says Patterson. "This proxy season we saw them on the opposite side of the fence on virtually every vote where there was a challenge to CEO excess or CEO entrenchment."

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