12
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Fund Family Shareholder Association
“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. … It is the highest
impertinence and presumption, there-
fore, in kings and ministers to pretend
to watch over the economy of private
people.”
—
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,
Smart Money,
July 2012
IT’S A PERENNIAL QUESTION:
Are
Vanguard’s directors eating their own
cooking—or, more to the point, are
they even paying attention to how the
meal is being prepared?
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
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 $207,600 and $250,000
each in 2013 alone.Vanguard’s longest-
tenured director, Alfred Rankin, has
been paid over $2.75 million since
joining the board in 1993, and $1.9
million over the last decade.
What I care about, though, is not so
much the internal policies of the com-
pany that is Vanguard, but the prod-
uct—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.
Instead, silence.
And simply compiling the data on
Vanguard’s directors’ investments is
difficult, as it is only disclosed in bits
and pieces over many, many months.
But based on the available information,
through the end of 2013, Vanguard’s
individual board members have each
invested a minimum of anywhere from
$110,002 to $2.1 million in Vanguard
funds.
Why do I say those are minimum
numbers? First off, let me explain
how imprecise the required disclo-
sures are. Board members’ owner-
ship is reported in just four catego-
ries: $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, when
they review and renew their fund
prospectuses. Unfortunately, the legal
team at Vanguard doesn’t always
update this data with the same zeal
as other information in the fund pro-
spectuses, and I have, on several
occasions, had to remind Vanguard
that it was not fulfilling its regula-
tory obligations. The fixes usually
come after I’ve flagged the omissions.
In calculating those “minimums,” I
assumed that 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.
Because of the varied timing of
DIRECTOR HOLDINGS
Is the Henhouse Unguarded?
Consensus Breaks Down Quickly
HELD BY 10 BOARD MEMBERS:
Total Stock Market Index
HELD BY 7 BOARD MEMBERS:
Total International Index
HELD BY 6 BOARD MEMBERS:
Emerging Markets Index, Intermediate-Term Tax-Exempt,
SmallCap Index
HELD BY 4 BOARD MEMBERS:
500 Index, High Dividend Yield Index, PRIMECAP Core,
Wellington
HELD BY 3 BOARD MEMBERS:
Capital Opportunity, Dividend Appreciation Index, Dividend
Growth, Growth Index, Health Care, Limited-Term Tax-Exempt, Short-T Inv.-Grade, SmallCap
Growth Index
HELD BY 2 BOARD MEMBERS:
Emerging Markets Select Stock, Explorer, Extended Market
Index, Global Equity, High-Yield Tax-Exempt, International Growth, LargeCap Index, MidCap
Growth, PRIMECAP, REIT Index, Short-T Bond Index, Short-Term Tax-Exempt, T-M Capital
Appreciation, Total Bond Market, Wellesley Income, Windsor II, World Ex-U.S. Index, World
Ex-U.S. SmallCap Index
HELD BY 1 BOARD MEMBER:
Capital Value, Convertible Securities, European Index, Financials
Index, High Yield Corp., Int.-T Bond Index, Int.-T Inv.-Grade, International Explorer, International
Value, MidCap Growth Index, PA Long-Term Tax-Ex., Selected Value, SmallCap Value Index,
Target 2050, T-M SmallCap, Total World Stock Index, U.S. Growth, Value Index, Windsor
Nothing motivates
like having your
own money on the line.
Few Vanguard
directors are
so motivated.
