Vanguard turning activist on proxy issues

Critics call new policy limited in scope, however

August 22, 2002|By Josh Friedman | Josh Friedman,SPECIAL TO THE SUN

Vanguard Group may be best known for its "passive," index-style investing, but the mutual fund giant said it will take a more activist role on issues of corporate governance: The firm has revamped the standards it will follow in proxy voting, putting companies on notice about key governance issues.

Yesterday, longtime activist investors representing pension funds hailed the move by the second-largest mutual fund company, but some governance experts called Vanguard's new policies limited in scope.

Valley Forge, Pa.-based Vanguard, whose funds hold about $300 billion in stocks, posted a letter on its Web site Tuesday night that was recently sent by Chairman John J. Brennan to leaders of companies in which Vanguard holds a major stake. The letter addresses Vanguard's standards in such areas as director independence and stock option programs.

"We've always been active in corporate governance, but we're imposing stricter guidelines in light of recent events," Vanguard spokesman John Demming said yesterday, referring to the spate of financial scandals that have shaken investor confidence.

The mutual fund industry, which controls about $3 trillion in stock, has drawn criticism this year for failing to join the efforts of pension funds and other historically activist investors in pressing companies to change their conduct.

Most fund companies have long been reluctant to get involved in such campaigns, preferring instead to simply jettison shares of companies that are performing poorly or whose policies stoke shareholder ire.

Among the governance issues Vanguard addressed in its letter:

Director independence. Vanguard said it will withhold votes for nonindependent directors who serve on audit, compensation or nominating committees of a board, and it won't vote for any directors whose election would make insiders the majority of a company's board.

Auditor independence. The fund company will vote against proposed auditors if nonaudit fees make up more than half the total fees paid by the company to the auditing firm.

Stock option plans. Vanguard said that it supports option plans in principle but that it generally will vote against plans if potential dilution from options exceeds 15 percent of shares outstanding, or if annual option grants have exceeded 2 percent of shares outstanding.

"We've been asking mutual fund companies for years to come forth and do their part for corporate governance," said Peg O'Hara, managing director of the Council of Institutional Investors. "I can only hope this is the beginning of a row of dominoes in the fund industry."

David Nygren, San Francisco-based partner at Mercer Delta, a consulting firm that works with boards and senior executives, said Vanguard "should be applauded for stepping up."

But, he said, "They focus on the material relationship, the financial issue, but not the matter of competence" of directors. "This will result in more independence, but not necessarily improved performance."

Jack Bogle, Vanguard's founder and retired chairman, helped organize this year an informal coalition of fund managers, including Legg Mason's William Miller, to push for corporate reform. But the group still is discussing issues and hasn't issued formal proposals on corporate governance.

Josh Friedman is a reporter for the Los Angeles Times, a Tribune Publishing newspaper.

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