Published by The Economist.
Vanguard marshals the resistance
| SCOTTSDALE, ARIZONA
VANGUARD, an American fund-management giant, promises “the highest standards of ethical behaviour”. Its low fees, helpful call centres and lack of scandal give the claim credence. It is by far the largest mutual-fund group, with $4.8trn under management. It receives more than half of all the new money going into American mutual funds. Most ends up in its passively managed offerings that track indices.
So you might think its shareholder meetings would be pious celebrations. Instead, Vanguard tries to avoid them. On November 15th it held its first since 2009, to satisfy a legal requirement that two-thirds of fund directors are elected rather than appointed. It held the meeting near its Arizona satellite office, far from its Philadelphia-area headquarters. Only 200 of its 20m clients showed up, trudging through metal detectors and tight security.
Vanguard may have been pleased by the small turnout. Among those dogged 200 who attended were representatives of an activist group, Investors Against Genocide. It had submitted a motion asking Vanguard to avoid investing in companies that, “in management’s judgment, substantially contribute to genocide or crimes against humanity”. The motion cited numbers from Vanguard’s financial disclosures in April showing $1.9bn held in companies that the group said were complicit in genocidal actions by doing business in Syria, Myanmar and Sudan: China Petroleum, Kunlun (an affiliate), PetroChina, Sinopec and Petronas (from Malaysia).
Vanguard’s management opposed the motion, arguing against prescriptive constraints on a fund’s investible universe—especially index funds, which are mandated to purchase shares in every company that makes up an index. In a brief statement, the company’s outgoing chief executive, William McNabb, said there were better avenues than fund companies to pursue the ethical concerns at stake, such as diplomacy. If individuals did not like this, they need not buy a global index that included the controversial companies.
Eric Cohen of Investors Against Genocide was unswayed. He argued that Vanguard could certainly have accepted the motion for its actively managed funds; and that though it is hard to exclude a company from a narrow index, it is feasible and legal to omit a few from those, like most of Vanguard’s, with a broad mandate. Two big American investment managers, TIAA and T. Rowe Price, have begun to implement his group’s ideas, as has American Funds, a vast active manager. His arguments have also made some headway with Vanguard’s shareholders, who voted in higher proportion for the motion than in 2009.
Vanguard’s main concern may be that one shareholder motion will lead to a deluge of them. Ever more interest groups oppose different industries for different moral reasons. Vanguard has created a team to raise issues of concern with companies and to direct its votes on shareholder proposals. But that is a far cry from shunning particular shares. If it were forced to do so, the risk is that so many issues become cause for divestment that ethical concerns pose a threat to Vanguard’s business.
