(PUB) Investing 2016

Vanguard’s internal profit-sharing mechanism, designed to reward all employees, from top management to phone operators, with profits the low-cost fund provider generates each year. Based on rolling three-year peri- ods, and in large measure focused on assets under management rather than fund performance, and factoring in the “cost savings” that accrues by com- paring Vanguard’s average operating expense ratio to industry averages, the Partnership Plan pays out many mil- lions of dollars a year to Vanguard’s top dogs. The rest of Vanguard’s employees also get a dividend calculated using a tricky set of variables related to their job “grade” and tenure to determine the ultimate payout. The 2015 numbers won’t be released to Vanguard’s crew until June, but the 2014 dividend for the Partnership Plan was $165.57, up 48-fold since inception. Compare that to an investment in the flagship fund 500 Index over the same period, which is up only half as much. While Vanguard no longer discloses data that allows us to calculate top exec- utives’ compensation (even though you and I are shareholders), Dan and I have done some calculations based on disclo- sures made years ago about Vanguard’s payments to both Jack Bogle and Jack Brennan, who succeeded Bogle and pre- ceded current Chairman Bill McNabb. If Jack Bogle were still chairman today, he’d be bringing down about $17 mil- lion a year. It’s a good bet that the current chair is taking home something close to that. So yes, Vanguard is a very, very profitable enterprise, despite its claims of being something akin to a non-profit. I don’t believe too many non-profits pay their execs compensation in the eight-figure range. 3. Vanguard’s independent directors are paid hundreds of thousands of dollars a year to keep tabs on more than 100 Vanguard funds, but most don’t invest in more than a handful of them. Disclosure of mutual fund board members’ ownership is one area where the entire fund industry, not

A Well-Paid Board

— FUND OWNERSHIP LEVELS —

Minimum Invested

Over $100,000

$50,001- $100,000

$10,000- $50,000

$1- $10,000

Total Funds

Started Total Comp.

Peter F. Volanakis William McNabb Amy Gutmann Mark Loughridge F. Joseph Loughrey

2008 $1.5 million $2.2 million — — $2.2 million 2006 $1.9 million $1.4 million 2012 $870,000 $1.4 million 2009 $1.4 million $1.2 million 2001 $2.4 million $1.0 million

22 21 16 13 14 11 10

0 1 0 2 0 1 0 0 4 0

1 3 2 1 0 0 0 3 1 1

0 1 3 0 0 0 0 0 0 2

23 26 21 16 14 12 10 12 11

JoAnn Heffernen Heisen 1998 $2.7 million $1.6 million

Rajiv L. Gupta

Emerson U. Fullwood 2008 $1.7 million $930,000

9 6 1

Scott C. Malpass André F. Perold

2012 $840,000

$810,000

2004 $2.1 million $110,000

4

investors. Volanakis holds positions of $100,000 or more in 22 different funds, and also owns one other fund on top of that. Even Chairman McNabb isn’t keeping pace—he has “over $100,000” positions in 21 funds. (By the way, this data is constantly being updated as pro- spectuses are issued, so the numbers will almost certainly be changing.) On the other end of the scale is André Perold, who despite having been paid more than $2 million in fees since joining Vanguard’s board in 2004, is, at last count, only invested in four Vanguard funds: Less than $10,000 in two money market funds, under $50,000 in Convertible Securities and over $100,000 in 500 Index . It’s not a strong showing for someone who is supposed to be providing strong, inde- pendent oversight over billions of dol- lars. If I were a board member, I’d have lots more than that invested in the funds I was overseeing. Former SEC chairman Arthur Levitt once said, “Being on a mutual fund board is the most comfortable position in corporate America.” And he wasn’t talking about the leather boardroom chairs. It’s time that Vanguard took a leadership position in its industry and paid directors in shares of the funds they oversee, rather than in cash— something this newsletter has advo- cated forever, but which gets no trac- tion in the halls of fund-dom. Public companies pay their directors in stock. Is it too much to ask that directors’ financial interests (and I’m not talking about just their annual fees) be aligned with those of investors in the funds they purport to keep watch over? >

just Vanguard, could be much more transparent. Ownership is reported in just four categories: $1–$10,000, $10,001–$50,000, $50,001–$100,000 and over $100,000. And Vanguard is only required to report these amounts annually, whenever prospectuses are reviewed and renewed. Compiling this data is labor intensive and tedious, but I’ve done the legwork for you, and the table above summariz- es the directors overseeing Vanguard’s funds, how much they have been paid in compensation, how many funds they own and the minimum each has invest- ed in Vanguard funds. I say minimum because I assumed each director was at the low end of the stated range for every one of their holdings. For those with “over $100,000” invested, I assumed $100,001 as the minimum. So, how are Vanguard’s directors’ portfolios stacking up? Well, if you view this from 30,000 feet up, you might say that a board with invest- ments in more than 60 funds isn’t making too terrible a showing. But consider that we really don’t know how big a commitment the directors have made, since the required disclosures are so minimal. Plus, that leaves over 100 funds with no director dollars in the mix. And there are only six funds where at least half the board is invested alongside shareholders. As far as I’m concerned, the director with the best record of investing along- side shareholders is Peter Volanakis, former president and CEO of Corning. He owns a large number of Vanguard funds, meaning his fortunes, to a great- er or lesser extent, ride alongside fellow

The Independent Adviser for Vanguard Investors • May 2016 • 15

FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641