(PUB) Investing 2016

The Independent Adviser for Vanguard Investors

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May 2016

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800-211-7641

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

William McNabb

— — $2.2 million

JoAnn Heffernen Heisen 1998 $2.7 million $1.6 million

Amy Gutmann

2006 $1.9 million $1.4 million

Mark Loughridge

2012 $870,000 $1.4 million

F. Joseph Loughrey

2009 $1.4 million $1.2 million

Rajiv L. Gupta

2001 $2.4 million $1.0 million

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

Scott C. Malpass

2012 $840,000

$810,000

André F. Perold

2004 $2.1 million $110,000