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4 • 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.”
—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.
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
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.
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,
$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
VANGUARD DIRECTORS
Nibbling at Their Cooking
Nothing motivates a director to pay attention to
a fund like having an ownership stake in it.
Unfortunately, most don’t.