Vanguard's New Corporate Governance
In a recent interview, Vanguard laid out its new approach to corporate -- taking a more active approach. Here are some highlights:
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 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.
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.
And if you think about the top three index fund providers, Vanguard, State Street and BlackRock, our holdings of the largest companies aggregate to somewhere in the order of 16 percent. None of us can sell, but all of us are going to vote, and those votes have implications.