(PUB) Investing 2016

VANGUARD DIRECTORS Nibbling at Their Cooking

I care less about the internal policies of the company that is Vanguard, and a whole lot more about the product—the funds that you and I invest in. And, like I said, nothing motivates a director to pay attention to a fund like having an ownership stake in it. Unfortunately, most don’t. It’s funny, but each year, as the months wind on, I hear repeated ques- tions from FFSA members, and not a few journalists as well, about just how Vanguard’s directors invest. One would think that in a company that hopes to educate its clientele, there’d be plenty of disclosure on the subject and expla- nations from the top brass about not only how they invest, but why they invest the way they do. Unfortunately, their silence is deaf- ening. Compiling the data on Vanguard directors’ investments is difficult, as it is only disclosed in bits and pieces over the year. But based on the available information, through the end of 2015, Vanguard’s individual board members have minimum holdings ranging from as little as $110,004 to $2.61 million in Vanguard funds. Why do I say those are minimum numbers? First off, let me explain how imprecise the required disclosures are. Board members’ ownership is reported in just five categories: $0, $1–$10,000,

But, of course, shareholders have no say, nor any knowledge of what direc- tors are doing, since disclosure runs from minimal to none. The single, solitary way to see if directors have at least a passing interest in the performance—the “number one” metric, according to one former board member—of Vanguard’s various funds and the managers who run them is by collecting data on directors’ holdings, or lack thereof, in those funds. As Nell Minow, an expert in the field of corporate accountability, has said about directors that don’t own shares in the companies which they oversee, “You can’t count on directors paying a lot of attention if they don’t have a financial stake.” Don’t want to listen to an industry scold? How about Warren Buffett, who wrote, “For the most part, a monkey will type out a Shakespeare play before an ‘independent’ mutual-fund director will suggest his fund look at other man- agers, even if the incumbent manager has persistently delivered substandard performance.” Nothing motivates like money—par- ticularly, having your own money on the line. And in this case, very few of Vanguard’s directors are motivated to really make sure the bulk of Vanguard’s funds are up to snuff. Yes, they are motivated to come to meetings and give some thought (we shareholders

“Being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anx- ious vigilance with which (they) watch over their own.” —Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations , 1776 “Mutual fund directors are either not being paid nearly enough for what they should be doing—or far too much for what they actually do.” —Jack Bogle, SmartMoney , July 2012 WHEN I ANALYZE mutual funds, or for that matter public companies, hedge funds, or even investment advisers and their firms, one of the first questions I ask is whether the manager is “eating his (or her) own cooking.” Does the manager put their money where their mouth is, investing in the strategies that they are responsible for? Are we in the boat together, or am I just making an assumption that they are going to look out for my best interests? Well, I also ask that question of Vanguard’s board of directors—con- sisting of 10 individuals, including Vanguard Chairman Bill McNabb— who are tasked with watching over some $3.3 trillion dollars (or $330 billion each) of your and my money. In other words, are Vanguard’s direc- tors eating their own cooking—or, even more to the point, are they even pay- ing attention to how the meal is being prepared? You probably aren’t going to like the answer. Vanguard certainly doesn’t like it. Incredibly, Vanguard is on record as having said that a requirement that directors own shares in the funds they oversee would not change behavior, and would be merely “window dress- ing.” How, then, to make sure directors are doing their job? Vanguard has said it’s the responsibility of shareholders.

Nothing motivates a director to pay attention to a fund like having an ownership stake in it. Unfortunately, most don’t.

$10,001–$50,000, $50,001–$100,000, and over $100,000. And Vanguard is only required to report these amounts annually, when they review and renew their fund prospectuses. The legal team at Vanguard doesn’t always update this data with the same zeal as other infor- mation in the fund prospectuses, and I have, on several occasions in the past, had to remind Vanguard that it

hope) to the decision-making process at the Vanguard Group. But don’t forget, they’re being paid to do so—to the tune of between $223,000 and $260,000 each in 2015 alone. Vanguard’s lon- gest-tenured director, JoAnn Heffernan Heisen, has been paid over $2.7 mil- lion since joining the board in 1998, and over $1.9 million during the last decade.

4 • Fund Family Shareholder Association

www.adviseronline.com