Vanguard Group has grown so large, it can throw its weight around in any boardroom in America.
"We own about 5 percent of every publicly traded [U.S.] company," sometimes more, chief executive F. William McNabb told a conference at the University of Delaware's John L. Weinberg Center for Corporate Governance on Oct. 30.
McNabb said he has had to educate corporate managers who think Vanguard's funds of stocks, copied from indexes such as the S&P 500, are mere "passive" investors.
"We're permanent shareholders," good times and bad, McNabb said. So Vanguard, the Malvern-based mutual fund giant that manages $3 trillion in assets, feels obliged to pressure bosses to help "create as much wealth for our investors as we can."
McNabb said that earlier this year Vanguard sent messages to 350 companies saying, "Here's something we don't like."
Vanguard likes, for example: directors who aren't company executives or their family members; "one share, one vote" rules (not the extra power given founding families at Comcast Corp. or the New York Times); merger rules that invite fat takeover offers; and "say-on-pay" votes that let shareholders slap overpaid CEOs.
About 80 companies "have already made the changes" at Vanguard's request this year, McNabb said. "A bunch more are under discussion," he added.
What leverage does Vanguard have, if it's not going to dump an indexed stock? It can back shareholder proposals that managers don't like, McNabb says. These votes become public, under Securities and Exchange Commission rules, and embarrassing, or expensive to fight.
To avoid that, some bosses call McNabb. "They want to talk it out before it gets to a vote," he explained. "Or before it gets to the press."
Vanguard sees itself as maybe less confrontational than the "activist investors" who have pressured DuPont Co., Pennsylvania Real Estate Investment Trust, Malvern Bancorp, and other local companies to sell assets, fire bosses, or undertake other radical changes this year.
McNabb said some big tech companies do get it. "Microsoft actually has created an outreach program where they use a lot of videos to talk about significant issues with their investors," McNabb said.
Vanguard has started pressuring companies to oust and replace long- serving board members. "It would be a great evolution in governance if companies would also set term limits," McNabb said. Maybe 20 years, for example.
He is also telling boards to form "Shareholder Relations Committees," which has made some CEOs "squirm."
Activists who once looked like cowboys have become more constructive, McNabb added. He cited activist William Ackman's pressure to urge the Canadian Pacific Railroad to replace key people. Vanguard joined Ackman in that effort.
McNabb was among activists that included Corvex and Related Cos. to oust the founding family at Commonwealth Real Estate Investment Trust.
Does Vanguard practice what it preaches?
McNabb noted his board replaced a string of directors starting in the late 2000s: "We were lucky" so many had reached retirement age at that time, he said.
I asked Michael L. Levin, Chicago-based publisher of the Activist Investor newsletter, about Vanguard's claims as a leader of what McNabb calls "representative democracy" in American capitalism.
"It's certainly better than the benign indifference they and most other huge institutional investors displayed for years," Levin told me.
Levin noted that Vanguard, like other investment companies, "does not always follow the good corporate governance practices" it urges on firms.
Vanguard does not report McNabb's pay, for example.