Why is Vanguard listed as an executive pay enabler?

[pcola2234]

This study that was published by the AFSCME public employees union on executive pay by mutual fund companies has been bothering me lately.

In it is says "The mutual fund industry's four greatest "Pay Enablers," reported as most consistently enabling runaway CEO pay, were Vanguard, BlackRock, ING and Lord Abbett."

And furthermore states "Dimensional, Dreyfus, Oppenheimer and Wells Fargo were the fund families most likely to vote to rein in pay. "

The methodology used in the study assumes that percentage of times the Board votes on management's side in questions of executive pay determines how much the company is letting executive pay run wild. This makes NO sense. Vanguard is likely on the bottom of the list in executive compensation in absolute dollar figures. Did the AFSCME union just not understand that their study implies an incorrect conclusion that DFA, Dreyfus, and Wells are hawks on paying execs lower wages when they are 10 times the salaries of Vanguard execs?
This seems to be a case where if Vanguard would at least release a range of values where their execs pay falls then that would silence groups like the AFSCME that dont have any idea what they're talking about, I hope.

[pcola2234]

and the article i got the quotes from is

http://www.prnewswire.com/news-releases ... 86333.html

google vanguard excessive executive compensation to find more

[randomwalk]

This is not a study about the compensation of the mutual fund executives. It is about the way the different mutual fund companies use their proxy votes regarding the compensation of executives at the companies in which the mutual funds invest. The various Vanguard funds, apparently, tend to vote in support of proposals for "excessive" executive compensation at those companies (at least as "excessive" is defined in this study).

Just because Vanguard executives may not themselves be highly compensated does not mean that the Vanguard funds are wielding their power as investors/owners responsibly.

FYI, here is the study:

http://www.fundvotes.com/downloads/Tipp ... Report.pdf

And here is the summary re: Vanguard:

Vanguard falls squarely in the “Pay Enabler” quadrant, among the most likely to support management proposals and least likely to support shareholder proposals, and has been named one of this year’s four “Pay Enablers.” It ranked 22nd last year, but its ranking has dropped to 26th, last place among all the fund families studied. There is no real change in its voting pattern – high support for management proposals and directors
and virtually no support for shareholder proposals.

• High support for management proposals, ranking 23rd at 90 percent support. Vanguard’s rate of support for management proposals increased slightly from 2009.
• Next to no support for shareholder proposals, ranking 26th at 2 percent support.
• High support for directors, ranking 23rd with 95 percent support, which is an improvement from 2009 when it supported all directors.
• Critical compensation votes – supported management eight out of ten times. Vanguard is the only fund family to support the MSOPs at Occidental and Motorola. For these reviewed votes, no other fund supported management as many times as Vanguard.
• As the largest of the “Big Three,” with 25.1 percent of AUM reviewed, Vanguard has the greatest ability to influence compensation; however, it is a “Pay Enabler” across the board in every category.

[pcola2234]

Do u think that the directors trust vanguard employees to be fair? Could that b a reason the directors agree w pay proposals so much

[Carl53]

Good article!

Just because Vanguard executives may not themselves be highly compensated does not mean that the Vanguard funds are wielding their power as investors/owners responsibly.

FYI, here is the study:

http://www.fundvotes.com/downloads/Tipp ... Report.pdf

Vanguard falls squarely in the “Pay Enabler” quadrant, among the most likely to support management proposals and least likely to support shareholder proposals, and has been named one of this year’s four “Pay Enablers.” It ranked 22nd last year, but its ranking has dropped to 26th, last place among all the fund families studied. There is no real change in its voting pattern – high support for management proposals and directors
and virtually no support for shareholder proposals.

• High support for management proposals, ranking 23rd at 90 percent support. Vanguard’s rate of support for management proposals increased slightly from 2009.
• Next to no support for shareholder proposals, ranking 26th at 2 percent support.
• High support for directors, ranking 23rd with 95 percent support, which is an improvement from 2009 when it supported all directors.
• Critical compensation votes – supported management eight out of ten times. Vanguard is the only fund family to support the MSOPs at Occidental and Motorola. For these reviewed votes, no other fund supported management as many times as Vanguard.
• As the largest of the “Big Three,” with 25.1 percent of AUM reviewed, Vanguard has the greatest ability to influence compensation; however, it is a “Pay Enabler” across the board in every category.

[randomwalk]

Do u think that the directors trust vanguard employees to be fair? Could that b a reason the directors agree w pay proposals so much

I genuinely don't know what you mean. It's not about trusting Vanguard employees. It has nothing to do with Vanguard employees. The Vanguard funds have proxy votes at each of the thousands of companies that the funds invest in. For example, the two votes by Vanguard that apparently most disturbed the AFSCME were related to executive compensation plans at Occidental and Motorola. Vanguard funds voted in support of both proposals at these companies, even though some other fund families did not. That is the behavior the AFSCME is focused on.

For what it's worth, here is what Vanguard has to say about their proxy voting practices:

https://personal.vanguard.com/us/content/Home/WhyVanguard/AboutVanguardProxyVotingGuidelinesContent.jsp

[pcola2234]

Ooooh, wow I misread the report , thanks for clarifying, I wonder why they dont push harder then

[thirdman]

This has also been puzzling me. I have reviewed how Vanguard has voted in quite a few stockholders meetings, and they have supported very high executive compensation. See how they voted at Wells Fargo's meeting. Also, Vanguard has not voted to separate management and the board, even though this is one of their stated proxy voting policies. Once again see Wells Fargo as an example.

This makes me wonder about the wisdom of holding shares in Vanguard funds. Is Vanguard representing my interests? Since I do not own shares in individual companies, I lose my right to vote stockholder proxies.

Vanguard has also consistently voted against stockholder proposals to disclose contributions to political candidates and parties. I would think that this information should see the light of day, since the Supreme Court made these contributions legal.

See my previous post.

How much power do Vangurad investors collectively have?

I also wonder how much influence we have, as to how Vanguard acts. For some time I have been concerned about executive compensation and it's effect on corporate profits and return on our investment. I have reviewed how Vanguard votes at the shareholder meetings. Vanguard consistently votes in favor of executive compensation proposals. I wonder if this is in the best of interest of the shareholders? Can we influence how Vanguard votes?

You can view for yourself how Vanguard votes:

Personal Investors > About Vanguard > Proxy Voting > Proxy Voting Reports

If this post is too political, then maybe someone could couch it in terms related to investing.

[ilmartello]

Short answer, because they are. Since Vanguard is merely managing our investments, I always thought it was stupid that mutual fund companies could vote. The votes ought to pass on to the actual owners, us. No company is perfect, however the expenses ratios and management at Vanguard outweighs their poor voting practices.

[Beagler]

How do Occupy Valley Forge and Occupy Malvern feel about this?

[KyleAAA]

I wonder if anybody at Vanguard even reads most of the proxy statements they receive on our behalf. Probably not.

[Wagnerjb]

Short answer, because they are. Since Vanguard is merely managing our investments, I always thought it was stupid that mutual fund companies could vote. The votes ought to pass on to the actual owners, us. No company is perfect, however the expenses ratios and management at Vanguard outweighs their poor voting practices.

I agree, but I am not sure that I know enough to consider Vanguard's voting practices as poor. I might prefer they vote one way, you may prefer they vote another...whether it is executive comp or environmental issues or employee issues....whatever.

If you feel very strongly about these issues, buy your own individual stocks and vote yourself. That's what I do (although I buy individual stocks for reasons other than voting rights).

Best wishes.

[Alan S.]

A few years ago, I seem to recall that Fidelity was at or near the top of the fund companies voting against shareholder pay proposals. It was not clear whether those votes were based on the subject or whether they just voted against all shareholder proposals not wanting to encourage dissidents. In any event, Vanguard seems to have supplanted FIdelity in this area, and that is somewhat more surprising when you compare Vanguard's ownership structure vrs other fund companies.

Perhaps one reason for this is the sheer number of holdings in index funds at Vanguard compared to other companies. Funds that hold concentrated positions in certain stocks might be more inclined toward voting in favor of higher earnings instead of higher expenses for their holdings.

[Index Fan]

Having been an AFSCME member many years ago and without getting into details, I'd trust Vanguard much more than I'd trust AFSCME on such things as executive pay and representing their membership/shareholders (among other things).

[Steelersfan]

The logistics for Vanguard to solicit and collect shareholder votes for proxies would be astounding.

Since I can't (or don't have the time to get) actual figures, here are (wild) approximations.

Let's say Vanguard has 1,000,000 customers who own their funds.

Let's say the average customer holds 5 stock or mixed stock/bond funds.

Let's say on average such funds hold 100 stocks.

Let's say there's 50% overlap in stocks held by the funds a customer holds at Vanguard.

Let's say the average company has 5 issues on which to vote

Vanguard would have to solicit and collect:

1,000,000 times 5 times 100 times 5 divided by 2 = 1,250,000,000 votes every year.

IMHO, given the low number of ballot issues opposed by management that pass each year and the low percentage even Vanguard holds of any one company, it's not worth the cost, which would have to increase our E/R.

Maybe I'm just too practical.

And I'm sympathetic to some shareholder issues.



If you have better numbers than I do just plug them in and do the calculation to suit yourself.

[FNK]

The logistics for Vanguard to solicit and collect shareholder votes for proxies would be astounding.

Dang! If only there was some kind of a machine that could collect and tabulate all that data! Or maybe multiple machines, all connected!

[Steelersfan]

The logistics for Vanguard to solicit and collect shareholder votes for proxies would be astounding.

Dang! If only there was some kind of a machine that could collect and tabulate all that data! Or maybe multiple machines, all connected!

I don't know how many of Vanguard's customers are internet unfriendly or unwilling. I suspect there are quite a few.

Dealing with them requires more than machines.

They need stamps, envelopes, humans to handle the mail, etc.

I also don't think companies make their proxy material available in a totally electronic form for Vanguard to just "pass it long". Even for us internet types, we'd need all the supporting material on the issues. Human's needed there too, company by company, proxy by proxy, issue by issue.

[Sam I Am]

The logistics for Vanguard to solicit and collect shareholder votes for proxies would be astounding.

Dang! If only there was some kind of a machine that could collect and tabulate all that data! Or maybe multiple machines, all connected!

I don't know how many of Vanguard's customers are internet unfriendly or unwilling. I suspect there are quite a few.

Dealing with them requires more than machines.

They need stamps, envelopes, humans to handle the mail, etc.

I also don't think companies make their proxy material available in a totally electronic form for Vanguard to just "pass it long". Even for us internet types, we'd need all the supporting material on the issues. Human's needed there too, company by company, proxy by proxy, issue by issue.

All my stocks provide the proxy materials in electronic form. I vote all the various issues raised electronically. I'm not sure what percentage of companies provide the materials electronically, but I would think it would save them a bundle doing so.

So far as Vanguard's voting the shares the hold for us, I have no problem with them simply voting "for management" unless some unusual circumstances warrant voting against management. Frankly, I try to keep my politics and investing (and charity, for that matter) separate. I'm with Vanguard to increase my net worth, not for them to be a change agent for corporate behavior. Given the thousands of stocks involved, it would be a Herculean effort to attempt to do more than a cursory check before voting the shares, IMHO.

And, HOW should the shares be voted? I'm sure in Vanguard's client base you would find every position under the sun supported, or hated by a significant number of clients. Aiiieeeee! Seems a real difficult position to find oneself in, unable to please everyone no matter what you do.

I'll vote my choices for my individual stocks, and place no heavy burden on Vanguard to vote the shares they hold for me.

Sam I Am

[thirdman]

One can find how each Vanguard fund voted on every company in the portfolio by reviewing Vanguard's SEC FORM N-PX fillings. These are on Vanguard's website. If the logisitics of having each holder of a Vanguard fund vote on each company's proxies is too cumbersome, Vanguard could at least make an attempt to find out what Vanguard fund shareholders feel about corporate governance issues, and publish these, in the daylight so to speak. I believe it would be healthy airing these issues. How the economy does, and how our investments perform depends on good corporate governance.

Vanguard could start a fund that specifically allows the fund shareholders to vote on corporate governance issues. If this fund garnered significant assets it would be a vote that shareholders are interested and want a voice in corporate governance.

If this is touching too much on politics for this site, I understand, but I feel this is a real investment issue for several reasons. One, corporate profits are affected by expenses including salaries. Two, corporations are now throwing their hats into the political arena, and the owners of the corporation should have a say in this. There is a great shift of wealth from many to a few, and this affects all of us, the economy, and the return on our investments.

I have written to and spoken with Vanguard about this. I was politely referred to their Personal Investors » About Vanguard » Proxy Voting website.

If I find a mutual fund company with low fees and good management that offers a fund that I can help determine proxy voting, then I will invest with this fund. Is anyone aware of such a fund?

[wesgreen]

pcola2234, thank you for bringing this to my attention! I would love to hear Mr.Bogle comment on this.

[jmg229]

I am glad that this was posted, because it is an issue with vanguard that I was previously unaware of. Perhaps I'm just young and naive, but I agree that it should have impacts on our investments for the reasons thirdman mentioned. I understand the complications that would result from trying to pass through all of those votes (though I'd love to see someone try), but voting primarily with the management as Sam I Am suggests seems to not be an ideal situation either. As pointed out, Vanguard fund holders are likely to share a wide range of opinions on just about every issue, which to me is a reason for Vanguard to not regularly throw all their weight behind one position, as it would regularly do injustice to the wishes of some segment of mutual fund owners.

Also, I'd like to take it one step further and think about what we are really saying by being okay with Vanguard voting for mutual fund owners. If standard Boglehead philosophy is that it is wisest for most to hold only index funds as opposed to concentrating risk in individual stock holdings, and we preach this viewpoint to those willing to listen, aren't we in essence advocating for a reduction in shareholder voice by advocating for a situation where mutual fund companies vote for a larger and larger share of us wise, sensible Bogleheads?

I'm speaking somewhat tongue-in-cheek, but also do actually wonder a bit about the wider implications of this. Perhaps it doesn't matter big picture and all this Occupy stuff is just getting the feisty anti-"the man" parts of me going, but now I am quite curious to learn more.

[jidina80]

I pleased to log on today and see this great discussion about Vanguard's failure to look out for investor's interests in their corporate voting, and a failure to take a leadership roll in Jack Bogle's push to return power from corporate management to shareholders (You and I). A big 'Thank You' is deserved for fundvotes.com for allowing us to see the bigger picture that we don't see from Vanguard.

This topic has been discussed before, and I recommend that those with a few minutes of spare time review these previous threads:

Who really owns and controls Vanguard? http://www.bogleheads.org/forum/viewtopic.php?t=66226
Don't you wish Vanguard would.... http://www.bogleheads.org/forum/viewtopic.php?f=10&t=78346&start=50 (quarter way down the page)

Hopefully Vanguard will take notice of shareholder discontent, and vote with the owners instead of the managers before the situation gets worse.

Just.

[bottlecap]

Please consider that the source is completely self-interested. The article is essentially a political advertisement.

JT

[ilmartello]

I don't think it's exactly controversial that Vanguard always votes with management for higher exec. salaries.

[jidina80]

I don't think it's exactly controversial that Vanguard always votes with management for higher exec. salaries.

Huh? Please elaborate, 'exactly'.

[ilmartello]

In the age of computers and electronic proxy voting that must of us are already aware of, don't give me this argument about practicality.
Let me reiterate, if you're looking at costs, ethics, and standard practices, Vanguard does miles better than the competition.
But when Vanguard does something --vulgarity deleted--, I'll call it like it is.

[jidina80]

Please consider that the source is completely self-interested. The article is essentially a political advertisement.

JT

Are you implying that the study was biased? If so, please present your evidence.

[jidina80]

In the age of computers and electronic proxy voting that must of us are already aware of, don't give me this argument about practicality.
Let me reiterate, if you're looking at costs, ethics, and standard practices, Vanguard does miles better than the competition.
But when Vanguard does something --vulgarity deleted--, I'll call it like it is.

If you are justifying Vanguard's history of voting 'with' management on executive pay and share dilutions, please provide some substance to your postion.
Just.

[Langkawi]

Are you implying that the study was biased? If so, please present your evidence.

It was published AFSCME. Case closed.

[ilmartello]

In the age of computers and electronic proxy voting that must of us are already aware of, don't give me this argument about practicality.
Let me reiterate, if you're looking at costs, ethics, and standard practices, Vanguard does miles better than the competition.
But when Vanguard does something --vulgarity deleted--, I'll call it like it is.

If you are justifying Vanguard's history of voting 'with' management on executive pay and share dilutions, please provide some substance to your postion.
Just.

not justifying it

[jidina80]

Are you implying that the study was biased? If so, please present your evidence.

It was published AFSCME. Case closed.

NOT closed. If you are implying that this organization is picking on one mutual fund company over another, please be more explicit. I see no reason why they would be biased against Vanguard versus, say, Fidelity of DFA. Speak up if you know something.

Just.

[thirdman]

As I mentioned above, you can review how Vanguard has voted your proxies. Some executive compensation is 600 times the median of the company's employees. If you invest in the Index 500 Fund, you can go in descending order by market cap and sample Vanguard's votes. You do not have to rely on a study, if you feel the study is biased. I am concerned that Vanguard is not following it's own guidelines on corporate governance, including "sensible compensation tied to performance."

https://personal.vanguard.com/us/conten ... ontent.jsp

[thirdman]

Here is the website of the source of the OP's study.

http://fundvotes.com/index.php

[Wagnerjb]

I am concerned that Vanguard is not following it's own guidelines on corporate governance, including "sensible compensation tied to performance."

Vanguard doesn't own the shares - you and I do. They have no right to vote as they see fit.

[Steelersfan]

I am concerned that Vanguard is not following it's own guidelines on corporate governance, including "sensible compensation tied to performance."

Vanguard doesn't own the shares - you and I do. They have no right to vote as they see fit.

Well, actually, Vanguard is the registered owner of the shares and only they can vote them.

What process they use and how they decide how to vote the shares (and they would have to vote them in their entirety one way or the other, by fund) is up to them.

[bottlecap]

I don't think it's exactly controversial that Vanguard always votes with management for higher exec. salaries.

Huh? Please elaborate, 'exactly'.

See that big ad at the bottom of the page for AFSCME in the link? See that the "analysis" was done by AFSCME, an organization that specifically promotes the transfer of wealth from management to unions? That is your first couple of clues.

As to the article.

See that Vanguard votes with management 90% of the time? Is that a big deal? Management is hired to manage. If Vanguard voted against management proposals more than 10 or 15% of the time, you'd have to question the competence of the managers they helped hire. That's a common sense response to the "analysis."

See that Vanguard votes with shareholder proposals "only" 7% of the time? Do you know how many crackpot proposals are raised by small shareholders that know little about the realities a company faces? I bet shareholder proposals outnumber management proposals by multiples of hundreds, maybe thousands. But that statistic was included to mislead you. That's another clue.

The bottom line is that the study takes statistics (which may or may not be correct themselves) and extrapolates them into a political statement about being a "pay enabler." The reality of the situation is that Vanguard should largely vote for manager proposals. The managers know the business and the market and the shareholders (directly or indirectly) appoint them to manage, in theory, because they know what they're doing. If they don't know what they were doing, then that is a bigger problem.

All of this assumes a) that executive pay is a "problem" and b) Vanguard voted in each of these cases for executive compensation that far exceeded what other companies were paying their executives. Neither of these premises have been proven by AFSCME or are even addressed in this "analysis." They are presumed.

None of this a surprise to AFSCME, but AFSCME hopes it is a surprise to you and that you'll make assumptions without thinking.

Again, all I'm asking is that you consider the source. You obviously question the motives behind manager compensation proposals, but not of a union that seeks transfer "excessive" manager compensation not to the consumers, but to the unions?

JT

[Midpack]

See that Vanguard votes with management 90% of the time? Is that a big deal?

Maybe they are representating individual shareholders, I doubt most even bother with proxy votes. While Googling for stats on that, I found this - sort of ties several of the thoughts in this thread. Hmmmmmmm...maybe someone more knowledgeable has an insight?

It's time to remind clients to vote their proxies
April 10, 2011

The peak of the corporate proxy season is at hand, and advisers should remind their stock-owning clients to vote their proxies. While in most large public companies the majority of shares are owned by institutions — mutual funds, pension funds, sovereign-wealth funds, hedge funds, endowments and foundations — voting by individuals has the potential to swing the pendulum on important issues.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 increased the importance of votes by individual shareholders by forbidding brokers from voting the shares without instructions from the beneficial owners in matters relating to executive compensation.

That will likely reduce the number of votes cast not only on the compensation issue but on other issues as well. That's because many brokers lacking specific instructions from their clients will likely forgo voting on those proxies altogether.

This year, executive compensation is a key issue. Dodd-Frank requires companies to allow a non-binding “say on pay” every one, two or three years — depending on shareholders' preference.

http://www.investmentnews.com/article/20110410/REG/304109995

[KyleAAA]

See that big ad at the bottom of the page for AFSCME in the link? See that the "analysis" was done by AFSCME, an organization that specifically promotes the transfer of wealth from management to unions? That is your first couple of clues.

Perhaps they do have an agenda, but that doesn't negate the value of their data or analysis.

See that Vanguard votes with management 90% of the time? Is that a big deal? Management is hired to manage. If Vanguard voted against management proposals more than 10 or 15% of the time, you'd have to question the competence of the managers they helped hire.

Not necessarily. I don't see why how you can set a specific number on this.

See that Vanguard votes with shareholder proposals "only" 7% of the time? Do you know how many crackpot proposals are raised by small shareholders that know little about the realities a company faces?

Yeah, but almost none of those proposals makes it to a VOTE, which is what this measures. The SEC gives permission for boards to dismiss the vast majority of shareholder proposals without a vote. Otherwise, shareholder meetings would take weeks.

The reality of the situation is that Vanguard should largely vote for manager proposals.

When it comes to operational problems, yes. Not when it comes to executive pay. There is a mountain of evidence that most boards don't even attempt to reign in executive pay, probably because it doesn't come out of their pocket. There's a clear conflict of interests.

All of this assumes a) that executive pay is a "problem"

I personally don't see how there's even any argument. Of course it is.

and b) Vanguard voted in each of these cases for executive compensation that far exceeded what other companies were paying their executives.

Due to the well-documented racheting effect, even this would not be acceptable or in the best interests of investors.

Again, all I'm asking is that you consider the source.

The source of an argument has no bearing on whether or not their results or reasoning is correct. It would be best if you didn't even know who the source was.

[thirdman]

How about this for a proposal.

Vanguard can start an Index 500 Fund that allows the holders of shares in the fund to vote the proxies, or at least set the policy for proxies. For example, Vanguard could introduce motions at the annual meetings for full disclosure of lobbying and political contributions; disclosure of how subsidiaries and contracting entities are tied to management, the board, and offshore entities; introduce motions to require an independent board chairman; require disclosure of all perks for management, such as suites at the Waldorf Towers; etc. There could be a blog on Vanguard's website where the investors in the fund discussed issues related to voting the proxies, and those with information on companies could share it with other investors.

If a majority of the fund shareholders voted a certain way on the proposals for a certain company, then Vanguard would vote it's proxies that way.

Investors in Vanguard funds could then choose the investor directed Index 500 Fund or the regular Index 500 Fund. This would let Vanguard clients decide whether they want a voice. The fund with the most assets would be an indication of where investors interests lie.

[Midpack]

How about this for a proposal.

Vanguard can start an Index 500 Fund that allows the holders of shares in the fund to vote the proxies, or at least set the policy for proxies. For example, Vanguard could introduce motions at the annual meetings for full disclosure of lobbying and political contributions; disclosure of how subsidiaries and contracting entities are tied to management, the board, and offshore entities; introduce motions to require an independent board chairman; require disclosure of all perks for management, such as suites at the Waldorf Towers; etc. There could be a blog on Vanguard's website where the investors in the fund discussed issues related to voting the proxies, and those with information on companies could share it with other investors.

If a majority of the fund shareholders voted a certain way on the proposals for a certain company, then Vanguard would vote it's proxies that way.

Investors in Vanguard funds could then choose the investor directed Index 500 Fund or the regular Index 500 Fund. This would let Vanguard clients decide whether they want a voice. The fund with the most assets would be an indication of where investors interests lie.

How would the expense ratio for your proposed fund compare to the current Index 500 fund? Surely the additional admin expenses would be charged to the proposed fund, and not spread to other funds.

[bottlecap]

All of this assumes a) that executive pay is a "problem"

I personally don't see how there's even any argument. Of course it is.

Can you tell me what the problem is, aside from "I think executives make too much"? There's little sense in debating this, but the obvious question then is how much should they make and who decides how much they should make?

and b) Vanguard voted in each of these cases for executive compensation that far exceeded what other companies were paying their executives.

Due to the well-documented racheting effect, even this would not be acceptable or in the best interests of investors.

By "ratcheting effect", do you mean the increased compensation received by executives thought to be caused by compensation disclosures required by law in the 1990s? Don't markets work more efficiently with full disclosure? Doesn't this suggest that executives were underpaid prior to the law (which, ironically, was designed to limit executive pay)?

What you're really saying here is that paying the market rate isn't in the best interest of investors. If you can back that up, great. But on its face, it makes little sense.

Again, all I'm asking is that you consider the source.

The source of an argument has no bearing on whether or not their results or reasoning is correct. It would be best if you didn't even know who the source was.

In an ideal world, this is true. But this is not an ideal world and it assumes that our time has no value. I can consider the author of an article's motives so as to investigate the areas where he might be glossing over weaknesses in his argument or, as in this case, making questionable assumptions. If I find these weaknesses and flaws, there is no reason for me to make outraged posts concerning his conclusions.

This is the same reason that I don't post every time someone tells me that costs don't matter because they've found a way to beat the market or that their fund managers are better than average. I don't have to investigate their theories in full because I know that their assumptions or sample size is flawed. It's commons sense.

JT

[thirdman]

How about this for a proposal.

Vanguard can start an Index 500 Fund that allows the holders of shares in the fund to vote the proxies, or at least set the policy for proxies. For example, Vanguard could introduce motions at the annual meetings for full disclosure of lobbying and political contributions; disclosure of how subsidiaries and contracting entities are tied to management, the board, and offshore entities; introduce motions to require an independent board chairman; require disclosure of all perks for management, such as suites at the Waldorf Towers; etc. There could be a blog on Vanguard's website where the investors in the fund discussed issues related to voting the proxies, and those with information on companies could share it with other investors.

If a majority of the fund shareholders voted a certain way on the proposals for a certain company, then Vanguard would vote it's proxies that way.

Investors in Vanguard funds could then choose the investor directed Index 500 Fund or the regular Index 500 Fund. This would let Vanguard clients decide whether they want a voice. The fund with the most assets would be an indication of where investors interests lie.

How would the expense ratio for your proposed fund compare to the current Index 500 fund? Surely the additional admin expenses would be charged to the proposed fund, and not spread to other funds.

I don't know what the expenses of the fund would be. Investors would take that into consideration. If it involved only allowing holders of the fund to vote on the proxies, I expect the cost would be minimal. For example, investors in the fund could vote for on proxies for as many companies as they are interested in. Maybe an individual would vote proxies for only ten companies, such as Bank of America, ExxonMobil, and Wells Fargo.

If Vanguard sponsored shareholder proposals, then the cost may be greater. The Vanguard Index 500 Fund has over $100 billion in assets.

[ilmartello]

This is not political, but observational. Ceo's in America make much more than W. European and Japaneese CEO'S, the other two developed regions of the world. Does anything about the last decade say that is justified?

[Sam I Am]

This is not political, but observational. Ceo's in America make much more than W. European and Japaneese CEO'S, the other two developed regions of the world. Does anything about the last decade say that is justified?

On other boards, I have suggested that since firms were so eager to outsource rank and file workers, why not outsource the executive board as well? Certainly there are very large European and Asian firms headed by very competent CEOs. Seems there would be a pretty good talent pool to draw upon.

Somehow, I don't think my idea will be embraced by any company.

Sam I Am

[KyleAAA]

By "ratcheting effect", do you mean the increased compensation received by executives thought to be caused by compensation disclosures required by law in the 1990s?

Correct.

Don't markets work more efficiently with full disclosure? Doesn't this suggest that executives were underpaid prior to the law (which, ironically, was designed to limit executive pay)?

No, not really. Not when there's a clear market failure involved. Since board members aren't spending their own money and aren't generally held accountable for their decisions, there is no real "market" for executives. Certainly not an efficient one. The benefits of going with the crowd outweigh the benefits of fairly compensating executives in many cases. If they pay executives too much and things work out, board members do well. If they pay executives too much and things DON'T work out, board members still do well. If they paid LESS than average and things didn't work out, they'd be screwed. The incentives are all out of whack and so the market can't function properly.

What you're really saying here is that paying the market rate isn't in the best interest of investors. If you can back that up, great. But on its face, it makes little sense.

Since I believe there is a clear market failure involved, I don't believe the term "market rate" has any meaning in this context.

[pkcrafter]

I didn't know about this, so thanks for the discussion. I have strong feelings about executive pay, corporate governance, and responsibility to shareholders. Back in the early 80s there was a big push toward quality improvement that some of you may remember. I was heavily involved in this and one of the things we noted was in Japan executive pay was about 7x the average worker's pay. By 1980, Japan had become the benchmark standard for company quality and efficiency. In the U.S. we were looking at executive pay that was 40x the average workers pay and it was a concern. Now we see executive pay running from 300x to 500x the average workers pay and I think it's way out of control.

Take a look:

http://projects.nytimes.com/executive_compensation


There is no doubt that individual shareholders are paying for this. There are only two resources for controlling executive pay, one is the board of directors and the other is the shareholders themselves. Well, I won't go into what has happened to board of directors commitment to doing their duty, but only shareholder voting power is left, which now seems to be lost to the mutual fund companies. I do not like Vanguard's position on this at all, but maybe it's explained by this from the article:

"The additional analysis of fund influence weighted by assets under management invested in securities shows that the potential for the mutual fund sector to reform executive compensation practices remains limited as long as the largest fund families passively vote with management,

Vanguard may simply be voting the suggested ticket and they probably won't change unless the fund owners let them know they want something different. Andy (above) is right, fund companies do not own the shares, but without input from those who do they are likely to simply sign off on proposals.


Paul

[natureexplorer]

The manager of an all-cap all-world fund should always vote for the lowest pay package. If they lose a good employee, another company will pick him up, but that company is just as much part of the fund.

[natureexplorer]

Vanguard may simply be voting the suggested ticket and they probably won't change unless the fund owners let them know they want something different. Andy (above) is right, fund companies do not own the shares, but without input from those who do they are likely to simply sign off on proposals.

Vanguard votes the way it believes is in the best interest of the shareholders of the fund.

Most of the time this means voting yes. Sometimes analyzing what is up for vote is not worth the cost of analyzing - such is their low-cost passive approach.
Sometimes this means voting no.
Sometimes it means different Vanguard funds voting differently.

[Steelersfan]

The peak of the corporate proxy season is at hand, and advisers should remind their stock-owning clients to vote their proxies. While in most large public companies the majority of shares are owned by institutions — mutual funds, pension funds, sovereign-wealth funds, hedge funds, endowments and foundations — voting by individuals has the potential to swing the pendulum on important issues.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 increased the importance of votes by individual shareholders by forbidding brokers from voting the shares without instructions from the beneficial owners in matters relating to executive compensation.

That will likely reduce the number of votes cast not only on the compensation issue but on other issues as well. That's because many brokers lacking specific instructions from their clients will likely forgo voting on those proxies altogether.

This year, executive compensation is a key issue. Dodd-Frank requires companies to allow a non-binding “say on pay” every one, two or three years — depending on shareholders' preference.[/i]

Vanguard is not the beneficial owner of the shares. They are the actual owner. Beneficial ownership is when a broker (or custodian) holds individual shares that you own in their street name for convenience of buying and selling.

In Vanguard's case, some custodian is the beneficial owner, holding the shares in their street name.

Vanguard seems to be very good at telling the custodian how to vote.

[pkcrafter]

Vanguard seems to be very good at telling the custodian how to vote.

And where is Vanguard getting input on telling the custodian how to vote? Enough with supporting outlandish compensation.

Paul