Is Vanguard the Mutual Fund Industry's Greatest Enabler of Excessive Executive Pay?

In a new study that cannot please Vanguard founder, Jack Bogle, the American Federation of State County and Municipal Employees (AFSCME) reports that Vanguard is the chief enabler among mutual fund companies of excessive executive pay.

Bogle has long pounded the drum over the role mutual funds should play in corporate governance and lamented their lax attitude in rubber-stamping management's proposals, with little thought to the linkage between the impact of their votes and the long-term creation of corporate value.

Mutual funds today own approximately one quarter of all publically traded shares, overseeing and manageding those shares on behalf of the investors in their funds. Bogle believes that mutual fund managers have a duty to vote their shares based on the long-term interests of those investors. Unfortunately, the evidence in this new study shows that this is all-too-rare an occurance for mutual funds.

With CEO pay continuing to reach all-time highs, the AFSCME report examined the proxy votes of the 26 largest mutual fund managers on a selection of corporate compensation-related proposals. The report found that the fund managers supported management-sponsored compensation packages 80 percent of the time, voted against shareholder proposals to rein in pay 52 percent of the time, and voted in favor of directors who failed to gain “significant voting support by shareholders” for compensation-related reasons 55 percent of the time.

The three largest mutual fund managers, Vanguard, Fidelity, and American Funds, who oversee nearly 60 percent of the assets of all 26 firms in the study, were much more likely to vote against shareholder proposals and in favor of the directors. The report found that Vanguard was the biggest “pay enabler,” voting with management in 90 percent of the votes examined, followed by BlackRock and ING. On the flip side, Dimensional Fund Advisors, Dreyfus, and Oppenheimer were the biggest “pay constrainers” of the firms included in the study.

What can investors do? Make sure mutual fund managers know you’re monitoring their approach to corporate governance. Fund managers are required to disclose on their websites how they voted every proxy in every firm they own. And encourage people like John Bogle and others to continue to hold fund managers‘ accountable to their shareholders best interests, not the CEOs and other corporate officers.