No, he isn’t dead but he might as well be as far as his ability to influence Vanguard, the giant mutual fund he founded. John Bogle wants funds to introduce resolutions at companies requiring a 75% shareowner vote in order to make political contributions. Yet, Vanguard has never introduced a single shareowner resolution anywhere that I know of. Bogle believes funds should vote in the interest of their shareowners, not their managers. We see no evidence of that at Vanguard. Corporations, he says, shouldn’t be controlled by their agents. Yet, Vanguard topped the list of “pay enablers” in a recent study prepared by Jackie Cook, John Keenan and Beth Young, sponsored by AFSCME and researched by FundVotes.com. (Tipping the balance? Large mutual funds’ influence upon executive compensation. See AFSCME press release.)
The report looked at the voting records of the 26 larges mainstream mutual funds on executive compensation-related proposals. Fund families were ranked according to how often they supported three types of proposals:
- Compensation-related proposals made by company management, such as equity compensation plans, bonus plan performance criteria, management advisory vote on executive compensation or “Say on Pay” proposals and option exchanges;
- Certain categories of shareholder proposals dealing with exec compensation; and
- The election of specific directors of S&P 500 companies where 30% or more of shares were withheld from or voted against one or more directors for reasons related to concern over executive pay and where proxy advisory services specifically recommended voting against the selected directors for pay concerns.
The survey found decreased support for management proposals (still 80%); decreased support for shareowner proposals (at 48%, down sharply from 56% in 2009); and increased support for directors (55%, up from 50%). Generally, the larger the fund, the more likely they were to support management. TIAA-Cref, which was a “pay constrainer in 2005 and 2006 has fallen to the middle of the pack, or lower on some issues. I say it is time professors got off the dime and started getting better control of their fund. This isn’t just an academic exercise.
Misaligned compensation incentives too often rewarded for the quick deal, the short-term — without proper consideration of long-term consequences, according to the Financial Crisis Inquiry Commission. A 2010 study by the IRRC Institute and PROXY Governance Inc. found “no meaningful correlation between higher relative pay and higher relative returns.” Management guru Peter Drucker recommended the pay ratio or CEO to average worker shouldn’t exceed 20- or 25-1 or else teamwork and trust will be lacking.
Yet, CEO influence over director nominations, the complexity of pay plans, reliance on consultants and collegiality have created an ever-widening gap between the stagnant pay of workers and the ever-rising pay of CEOs. Even though 61% of corporate directors think CEO pay is too high, they continue to see their own CEO as above average. Votes do count.
A 2008 study cited in the report found that lower votes for compensation committee members led to lower CEO compensation in the following year. Although funds have long been required to be managed in the interest of their shareowners and they are now required to report their votes (since 2003), we’ve seen more pay-enablers than pay-restrainers in the years since AFSCME has been doing these studies.
A 2009 study by Rasha Ashraf and two co-authors found mutual funds with business ties were more likely to vote against shareowner proposals, especially when the vote really counts.
This year, the top Pay Constrainers were Dimensional, Dreyfus, Oppenheimer and Wells Fargo. The top Pay Enablers were Vanguard, BlackRock, ING and Lord Abbett.
Use the study to help you pick out funds to invest in that are pay constrainers and to learn more about executive pay and mutual funds. If you are concerned about executive pay, I urge you to also check out and please comment on the draft “say-on-pay” guidelines at USPX.
Before you invest, also take a look at the mutual fund profiles at ProxyDemocracy (PD). While reports their aren’t nearly as thorough as Jackie Cook’s, Proxy Democracy doesn’t limit itself to the top 25 and it doesn’t exclude SRI funds.
While the AFSCME Report is great for explaining the issues and pointing to the bad guys, PD may be more useful in choosing the funds most aligned with your values. When PD looks at executive compensation the top five funds and their scores are:
- Green Century Equity Fund 80.6
- AFSCME Employees Pension Plan 75.9
- Florida SBA 71.7
- Trillium Asset Management 69.5
- Sentinel Sustainable Core Opportunities Fund 69.1
While the bottom five are:
- Vanguard Windsor 0.6
- Dodge & Cox Stock Fund 0.0
- Dodge & Cox Balanced Fund 0.0
- Ariel Fund 0.0
- Ariel Appreciation Fund 0.0
PD doesn’t limit itself to the pay issue, ranking:
- Director elections: who will represent shareholders
- Executive compensation: how (and how much) the CEO will be paid
- Corporate governance: how the company will be run
- Corporate impact: how the company interacts with its workers, the environment, and the rest of the world
One last point, AFSCME has not only taken the lead by issuing this report on “pay enablers” for years, they were also critical in the battle for proxy access. While several shareowners may have noticed the fact that the SEC began denying proposals on future elections after shareowners began winning proposals, only AFSCME was willing to go to court to protect the rights of all. AFSCME v AIG was a real landmark and the union is to be congratulated for its continued involvement in making corporate governance more democratic. Teaming up Jackie Cook on this excellent project is further evidence of their commitment to a facts-based approach.