The Independent Adviser for Vanguard Investors
•
May 2016
•
15
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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
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
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?
>
A Well-Paid Board
— FUND OWNERSHIP LEVELS —
Started Total Comp.
Minimum
Invested
Over
$100,000
$50,001-
$100,000
$10,000-
$50,000
$1-
$10,000
Total
Funds
Peter F. Volanakis
2008 $1.5 million $2.2 million
22
0
1
0
23
William McNabb
— — $2.2 million
21
1
3
1
26
JoAnn Heffernen Heisen 1998 $2.7 million $1.6 million
16
0
2
3
21
Amy Gutmann
2006 $1.9 million $1.4 million
13
2
1
0
16
Mark Loughridge
2012 $870,000 $1.4 million
14
0
0
0
14
F. Joseph Loughrey
2009 $1.4 million $1.2 million
11
1
0
0
12
Rajiv L. Gupta
2001 $2.4 million $1.0 million
10
0
0
0
10
Emerson U. Fullwood 2008 $1.7 million $930,000
9
0
3
0
12
Scott C. Malpass
2012 $840,000
$810,000
6
4
1
0
11
André F. Perold
2004 $2.1 million $110,000
1
0
1
2
4