The creator of low-cost indexing warns his invention may have grown too powerful.
Vanguard founder John Bogle penned an opinion piece for the Wall Street Journal (paywall if you click) offering potential guardrails against the ever-growing power of institutional index fund managers — including his own firm Vanguard, plus State Street, and BlackRock.
Bogle sounds the alarm that the "share of corporate ownership by index funds will continue to grow over the next decade" and warns it's "only a matter of time until index mutual funds cross the 50 percent mark. If that were to happen, the Big Three [Vanguard, State Street and BlackRock] might own 30 percent or more of the U.S. stock market — effective [voting] control. I do not believe that such concentration would serve the national interest."
Those are harsh words coming from the man who invented index funds and launched Vanguard's first effort in 1976. With more than $5 trillion in assets today, and a flood of investor money into low-cost index funds, Vanguard is often the largest shareholder in S&P 500-stock index companies.
Bogle quotes Professor John C. Coates of Harvard Law School who wrote that we are nearing a tipping point where the voting power will be "controlled by a small number of individuals" who can exercise "practical power over the majority of U.S. public companies."
So what is to be done?
Bogle offers a few government-sponsored solutions — none of which are likely to pass the GOP-controlled senate.
But two of his suggestions, including a sunshine provision and voting rights control, may get wider backing. Bogle proposes:
Timely and full public disclosure by index funds of their voting policies and public documentation of each engagement with corporate managers. This would take today's transparent and constructive governance practices several steps further.
Limiting voting power of corporate shares held by index managers.
After years of public silence, or generally voting in line with corporate boards and management, Vanguard in 2017 began speaking out more on Corporate America's proxies, social, governance, and environmental issues.
Vanguard Group last year voted against three directors at Wells Fargo & Co., including chairman Stephen Sanger. Vanguard was the bank's second-largest shareholder.
Also in 2017, Vanguard joined the 30% Club, a global organization that advocates for greater representation of women in boardrooms and leadership roles. The club draws its name from the initial aspiration for women to hold 30 percent of public-company board seats — first in the United Kingdom and now in major markets around the world.
Curiously, Vanguard also explicitly said it is examining and supporting some climate-change initiatives in Corporate America, which Vanguard categorized under "risks."
"This year, for the first time, our funds supported a number of climate-related shareholder resolutions opposed by company management. We are also discussing climate risk with company management and boards more than ever before," Vanguard wrote in its 2017 stewardship report.
In particular, the $5-trillion asset manager is pushing companies to more fully disclose risks related to climate change, no matter the industry. Vanguard voted with the majority for ExxonMobil to conduct a "2-degree" scenario climate-change analysis for the first time ever.
Bogle's warning out loud what everybody else on Wall Street is thinking — but doesn't dare say. So once again, he's ahead of the crowd.