Vanguard: Passive with investing, not governance

Vanguard Group Inc., the largest U.S. mutual fund provider, has a message for the boards of directors of America's biggest companies: It's watching how they're being run. In a Feb. 27 letter sent to 500 of Vanguard's largest holdings, Chief Executive Officer F. William McNabb laid out the principles his Valley Forge, Penn.-based firm wants to see followed when it comes to corporate governance. “In the past, some have mistakenly assumed that our predominately passive management style suggests a passive attitude with respect to corporate governance,” Mr. McNabb wrote. “Nothing could be further from the truth.” Vanguard, which has about $400 billion of its more than $3 trillion in assets in actively managed stock funds, is best known for its low-cost vehicles that mimic market indexes. Mr. McNabb's letter puts on paper some of the same ideas that BlackRock Inc., the world's biggest money manager, set down last month in its latest guidelines for proxy voting, such as shareholder responsiveness and independent oversight. (More: Vanguard tiptoes into the liquid alternatives market) Charles Elson, a professor of corporate governance at the University of Delaware, said the combined effect of the two documents is important. “These two companies carry a lot of weight,” Mr. Elson said. “This will increase board accountability to investors.” BlackRock, which is based in New York, oversees assets of about $4.7 trillion, including active as well as passive funds. 'ONE PIECE' Mr. McNabb said his goal in writing the letter was to get corporate boards to do a better job of engaging with investors. The letter doesn't necessarily mean Vanguard will be voting against management more often, according to Glenn Booraem, Vanguard's head of corporate governance. “Voting is only one piece of the relationship,” Mr. Booraem said. “We think engagement beyond the ballot is where the real value lies.” (More: Socially conscious funds ranked by one-year total return) Zach Oleksiuk, BlackRock's head of corporate governance for the Americas, had a similar message. “We do not expect to see significant changes in our voting patterns,” Mr. Oleksiuk said. BlackRock Chief Executive Officer Laurence D. Fink signaled in a 2012 letter to large companies that he wanted to use his firm's clout to encourage shareholder-friendly practices. In its new guidelines, BlackRock said it might withhold votes from some corporate directors when it is dissatisfied with a board's composition. The firm said it would watch for “evidence of board entrenchment, insufficient attention to board diversity and/or failure to promote adequate board succession.”