Mutual fund directors are either not being paid nearly enough for what they should be doing—or far too much for what they actually do.
– Jack Bogle, SmartMoney, July 2012
Imagine your friend invites you over for dinner—they’ve cooked a new dish they can’t wait for you to try. After much banging and clanging in the kitchen, your friend emerges with two plates. The new dish they put in front of you smells … different. You’re feeling a little hesitant. You glance over at your friend’s plate. What do you want to see?
Hopefully you see their plate piled high with exactly the same meal.
However, if there’s something else on their plate, say, a slice of your favorite takeaway pizza, your alarm bells should be ringing. Is it worth the nibble?
If you’re like me, you want to see your friend taking a big old mouthful of that new dish! The food might still be awful, but at least seeing your friend eating their own cooking will give you the confidence—the sense of togetherness—to tuck into the unknown.
It’s the same when it comes to investing. When we buy a mutual fund (or ETF), there’s always uncertainty—we are counting on fund companies and their managers to deliver a rewarding investment option. When putting our hard-earned money to work, we want to see that the people responsible (the managers and board of directors) are also invested in the fund or, just like the example above, eating their own cooking.
It’s only logical. They are the people in charge. But are they, in fact, feasting on the meal they’re serving up to investors? Finding out whether that is the case takes some legwork—don’t worry, I’ve done it for you. Today, I am going to put Vanguard’s board of directors—consisting of 12 individuals, including Vanguard Chairman Tim Buckley—on the spot.
(In another article, I’ll turn the spotlight on Vanguard’s portfolio managers, who are making the day-to-day investment decisions.)
Again, to restate the question I’m trying to answer: Are Vanguard’s directors, who are tasked with watching over trillions of other people’s dollars, eating their own cooking—and, even more to the point, are they even paying attention to how the meal is being prepared? Or, as Jack Bogle might ask: Are they being paid far too much for what they’re doing, or not being paid enough?
Spoiler alert: If you agree with my premise that we’re in this boat together, then you probably aren’t going to like the answer.
Let me be up front on this. Vanguard doesn’t like this kind of scrutiny. Incredibly, Vanguard is on record as having said that a requirement that directors own shares in the funds they oversee would be merely “window dressing.”
How, then, to make sure directors are doing their job? Vanguard has said it’s the responsibility of shareholders to hold directors accountable. But, of course, Vanguard’s shareholders have no say or knowledge of what directors are doing since disclosure runs from minimal to none.
Nothing motivates like money—particularly having your own money on the line. And in this case, it’s hard to know how motivated Vanguard’s directors are to make sure the bulk of Vanguard’s funds are up to snuff.
Yes, they are motivated to come to meetings and give some thought (we shareholders hope) to the decision-making process at the Vanguard Group. But don’t forget, they’re being paid to do so—to the tune of between $330,000 and $400,000 each in 2022 alone. Vanguard’s longest-tenured director, Andrè Perold, has been paid nearly $4.1 million since joining the board in 2004.
Compiling the data on Vanguard’s directors’ investments is difficult, as it is only disclosed in bits and pieces over the year. You can find the raw data in the Statement of Additional Information, a separate but component document of each fund’s prospectus. It’s complex, and it’s laborious. But, as I said, I’ve done the work for you.
Most of the data here is reported through the end of 2022, but a handful of funds are still reporting data as of 2021. Also, we don’t have any information on Vanguard’s newest board member, Grant Reid, as he only joined the board in July. So, I’ll exclude him from the analysis for now but will be on the lookout next year to see how much of Vanguard’s fixin’s he’s eating.
Based on the available information, Vanguard’s 11 individual board members (excluding Reid) own Vanguard funds totaling anywhere from as little as $100,001 to $2.8 million. These are minimums.
Why do I say these are minimums? Chalk it up to really loose disclosure requirements. Board member ownership is only required to be reported in five categories: $0, $1–$10,000, $10,001–$50,000, $50,001–$100,000 and over $100,000. Plus, Vanguard must only report these amounts annually when they review and renew their fund prospectuses, so we still don’t have all of 2022’s data because, well, Vanguard hasn’t updated all of its documents yet.
In calculating those “minimums,” I assumed that each director was at the low end of the stated range for each of their holdings. For those with between $50,001 and $100,000, I assumed $50,001 as a minimum. For holdings “over $100,000” invested, I assumed $100,001.
Before getting to the actual numbers, let me be clear: This is one area where Vanguard could step up and be an industry leader.
Vanguard discloses the information that is required of them. But why not be more transparent? Why not make this data more accessible to the individual investors and, yes, company shareholders that Vanguard claims to serve?
Vanguard always talks about how the shareholders of the funds own the firm. Why do we, the owners, have to work so hard for this information?
Spreading the Wealth?
So, what do the numbers tell us about how Vanguard’s directors invested their Vanguard money at the end of 2022?
First, it’s probably not a big surprise that the directors have focused their portfolios on index funds, not active ones. Yes, certain board members own certain active funds, but there’s little consensus. As a result, many Vanguard shareholders own Vanguard’s active funds without any director sitting at the table, eating that active cooking.
Overall, 67 funds count one or more board members as shareholders, which sounds good until you realize there are over 100 funds where directors are complete no-shows. Most of the directors’ money is concentrated in just a few funds.
You can find a detailed table showing director ownership fund by fund here.