Think a company is paying its CEO way too much? Or that its board of directors is too full of the CEO’s cronies? If you own a broad index mutual fund, you may already be doing something about it, at least indirectly.
Index funds, which now control $3 trillion in total assets, are often among the biggest shareholders of companies from Apple to Zions Bancorp. That gives them a lot of votes on shareholder resolutions and a lot of influence at annual meetings.
Vanguard is beginning to wield that power more aggressively. It has adopted a new approach to push for improvements to compensation practices, board construction and other corporate issues, says Glenn Booraem, head of its corporate governance efforts.
Vanguard is now sifting through data, looking for companies that don’t adhere to mainstream good-governance principles and then pressing the companies about its concerns. Booraem recently discussed how Vanguard does its governance work. Answers have been edited for clarity.
Why get involved in governance issues at all? Isn’t an index fund’s job just to track the index?
Our index funds are going to own these companies, whether everyone loves them or everyone hates them. And we’re going to own them in a significant way. On average, our funds own about 5 percent in aggregate of just about every company we own in the U.S.
So we’re going to be significant holders, and we’re going to hold practically forever. We don’t have the opportunity to sell if we don’t like something that’s going on. We’re doing this because we think it supports the returns of the companies we invest in for the long term, companies we can’t sell.
If companies know you aren’t going to sell their shares, why do they need to listen to you?
If the only repercussions you care about are me selling the stock, that would be rational. But since I’m going to be here forever, I’m going to vote my shares at this annual meeting and the one after that and the one after that. If the level of dissatisfaction rises to the level where I’m voting against directors or voting against pay, you’re going to see 5 percent of the shares voting that way.
Some of your funds own thousands of stocks. How do you keep track of them?
We’ve got a team of a dozen analysts for whom corporate governance and engagement is their only job. We use data from a number of sources about performance, their governance features, proposals that may be on the ballot. We’ll use all of those data sources to screen companies that raise a particular concern, say, a company that has high pay and poor performance. We’re looking for outliers and managing the outliers. We’ll go to the board and say: Either own it and convince us why being different than everyone else we’re comparing you to is a positive differentiation, or articulate a plan for how you’re going to address it.
What kinds of things are you pushing companies to do?
Independent oversight is key. That goes to independent leadership at the board level. The second general principle is all about accountability: accountability of management to the board and the board to shareholders through annual elections by majority vote.
