(PUB) Investing 2016

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As far as I’m concerned, the direc- tor with the best record of the bunch is Peter Volanakis, former president and CEO of Corning. He owns a lot of Vanguard funds, meaning his for- tunes, to a greater or lesser extent, ride alongside those of fellow shareholders. Volanakis holds positions of $100,000 or more in 25 different funds, and also owns four other funds on top of that. Even Chairman McNabb isn’t keeping pace—he has “over $100,000” posi- tions in 22 funds. On the other end of the scale is André Perold, who, despite having been paid more than $2.1 million in fees since joining Vanguard’s board in 2004, has only invested in four Vanguard funds, with over $100,000 in 500 Index, $10,001–$50,000 in Convertible Securities , and then two tiny positions of $10,000 or less in Treasury Money Market and Prime Money Market —a truly terrible show- ing and, in my view, an embarrassment. Show Us the Money Why the focus on directors and their holdings? According to some at Vanguard, this kind of deep dive into how the directors invest is the stuff of tabloid journalism. It’s no one’s busi- ness but the board members’, they’d say. But is it, really? In a SmartMoney interview, former SEC chairmanArthur Levitt said, “Being on a mutual fund board is the most comfortable posi- tion in corporate America.” Maybe a little discomfort and disclosure is what Vanguard’s board—and all boards— need. If all of Vanguard’s funds were producing tip-top returns, I’d back off. But they aren’t. Multimanaged funds are a mixed bag, at their best. And who’s in charge of all that? The directors. As I have argued many times, Vanguard’s directors need to do a bet- ter job of eating their own cooking if we’re to believe they have sharehold- ers’ best interests at the top of their minds. How is it, for instance, that the directors took so long to final- ly boot AllianceBernstein from U.S. Growth , or Turner Investments from Growth Equity , two woeful dogs of

Directors’ Commitment to Vanguard Funds Total Funds

Owned Over $100,000 $50,001–100,000 $10,001–50,000

$1–10,000

Volanakis McNabb* Gutmann Rankin Malpass Loughrey Fullwood Loughridge Heisen Gupta

29 26 19 16 12 10 11 13 14 9

25 22 16 13 11 10 10 6

2 0 0 1 1 2 0 1 0 0 0

1 3 2 2 0 0 0 0 3 0 1

1 1 1 0 0 1 0 0 1 0 2

9

14

Perold

4

1

*Vanguard Chairman. Note: Indicates all funds reportedly owned at the end of 2015. There has been no disclosure of 2015 holdings for three taxable money market funds, Explorer Value, International Growth, U.S. Growth and Social Index.

(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? Again, Peter Volanakis is the kind of director all fund boards should be seeking, as his investments in Vanguard funds far exceed the amount he’s been paid in fees—the only one of two directors to have done so, based on my calculations. Ask yourself, are Vanguard’s direc- tors eating their own cooking, or simply dining on a few funds while serving up a broad menu of which they’ve never taken a taste? Former Vanguard chairman Jack Brennan, while writing of ways to improve corporate boards of directors, wrote, “Paying directors predominant- ly in equity aligns the interests of the board to those of the permanent share- holders. I would suggest that every director of a public company should be required to hold a minimum of, say, five years’ worth of his board pay in the form of company stock from the first day he joins the board and hold those shares until he or she leaves the board. An alternative would be for all com- pensation to be paid in stock (no cash) and required to be held until a director reaches the target ownership level.” Of course, Brennan made these com- ments after leaving Vanguard and didn’t apply these kinds of rules when he led the company. Funny how opinions and perspective changes when you are no longer held accountable. n

funds that had virtually zero representa- tion in the board’s personal portfolios? Would greater ownership in Windsor II have led to a revamping of the man- agers there sooner? Why is Chairman McNabb the only director shareholder of Morgan Growth , and why is his stake of between $10,001 and $50,000 one he purchased only after the fund’s final director shareholder sold out? Or how about those woeful Managed Payout funds? Not a single director owned shares there, and none owns a share of the remaining fund, either. Would the directors have acted sooner to recast the funds if personal money had been at stake? Did the directors take their eyes off the ball? Not being privy to board minutes, I can’t say. But had their own fortunes at least been subject to some of the long periods of underperformance or horrendous losses these funds pro- duced, maybe they wouldn’t have taken so long to make changes. While we’re on the subject, it’s also time that Vanguard take a leadership position in its industry and pay direc- tors in shares of the funds they oversee, rather than in cash—something I’ve advocated forever, but which gets no traction in a fund industry that would rather hide behind the banner of per- sonal privacy than fly the flag of full disclosure. Public companies do it. In fact, they often pay directors and execu- tives more in their own shares than they do in cold, hard cash. Is it too much to ask that directors’ financial interests

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