(PUB) Investing 2016

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6 • Fund Family Shareholder Association
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
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
(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
Directors’ Commitment to Vanguard Funds
Total Funds
Owned Over $100,000 $50,001–100,000 $10,001–50,000 $1–10,000
Volanakis 29 25 2 1 1
McNabb* 26 22 0 3 1
Heisen 19 16 0 2 1
Gutmann 16 13 1 2 0
Rankin 12 11 1 0 0
Malpass 9 6 2 0 1
Gupta 10 10 0 0 0
Loughrey 11 10 1 0 0
Fullwood 13 9 0 3 1
Loughridge 14 14 0 0 0
Perold 4 1 0 1 2
*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.
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