Home' Trinidad and Tobago Guardian : November 8th 2015 Contents SBG10 STOCKS
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt NOVEMBER 8 • 2015
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
Index funds, which now control US$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 shareholder meetings.
Vanguard, the largest fund family, is begin-
ning 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
Vanguard is now sifting through data, look-
ing for companies that don t adhere to main-
stream good-governance principles and then
pressing the companies about its concerns. In
the past, Vanguard would usually speak with
companies only after a proxy advisory firm
An example of how Vanguard uses its pull:
Earlier this year, at the annual meeting for
Cheniere Energy, Vanguard s Total Stock Mar-
ket s index fund voted for a proposal that could
make it easier for some shareholders to nom-
inate directors to the board. The company
recommended investors vote against the pro-
posal, but Vanguard and other shareholders
approved it. At the same meeting, Vanguard
gave a thumb s down in a non-binding vote
on how much compensation Cheniere exec-
utives got for 2014.
Booraem recently discussed how Vanguard
does its governance work. Answers have been
edited for clarity.
Q: 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 five per cent in aggregate of
just about every company we own in the US.
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 not in the governance business. We re
not in the compensation business. But we re
in the investment business. We re doing this
because we think it supports the returns of
the companies we invest in for the long term,
companies that we can t sell.
Q: 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 five per cent
of the shares voting that way.
And if you think about the top three index
fund providers, Vanguard, State Street and
BlackRock, our holdings of the largest com-
panies aggregate to somewhere in the order
of 16 per cent. None of us can sell, but all of
us are going to vote, and those votes have
Some of your funds own thousands of
stocks. How do you keep track of them?
A: 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 bal-
lot.We ll use all of those data sources to screen
for 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 pos-
itive differentiation, or articulate a plan for
how you re going to address it.
What kinds of things are you pushing
companies to do?
A: Independent oversight is key. That goes
to independent leadership at the board level,
whether that s through an independent chair
or an independent lead director.
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. We
don t want multiple classes of shares or super-
voting shares, and (we want) minimal anti-
Sensible compensation that s tied to per-
How can Vanguard fund investors know
if you re doing a good job? Will returns
A: I don t know that you can measure it.
Some of this is based on our common sense
view, that good governance supports good
returns. I think it s hard to argue philosophically
that a better board overseeing shareholders
interests is a bad thing. It s hard for us to argue
that having pay that s reasonably aligned with
the performance your shareholders get is a
bad thing. AP's Stan Choe
can be active
Glenn Booraem, head of corporate governance efforts at Vanguard.
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.
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