NEW YORK (CNN) - The head of the Vanguard group of mutual funds is telling the chief executives of Corporate America that the powerful institutional investor community is expecting them to shape up their corporate governance act.
Jack Brennan, Vanguard's CEO, is head of the nation's second largest manager of mutual funds, so when he speaks, publicly traded companies better listen. Last week, he sent a letter to hundreds of companies in which the Vanguard funds have substantial stock holdings, telling them that despite recent improvements, they still have a long way to go in improving their corporate governance.
I think this is a major breakthrough for the cause of proper corporate governance by corporate America.
For some time now, I've been harping on the theme that the big financial institutions -- mutual funds, pension plans, banks and insurance companies -- have let down all of us individual investors by not flexing their investment muscles on behalf of good corporate behavior. All too often, they went along with management, or -- if they really got fed up -- just walked away and sold the stock. Ordinary investors were usually left in the dark.
Now Brennan has told those CEOs whose companies' stock Vanguard owns that his funds have become a lot more active on corporate governance issues and are likely to be even more so in the future. For example, he noted that during the first six months of this year, only 29 percent of the time did those funds vote for the entire management slate of proposed directors. That contrasts with 90 percent in the same period the year before. And on ratification of auditors, the vote dropped to 79 percent from 100 percent.
In respect to board structure and oversight, Brennan said, "We support, and expect to see, increased independence on the part of boards of directors. And, importantly, we expect the nominating, compensation and audit committee of boards to consist entirely of independent directors."
He also wants tighter control of compensation programs, including the expensing of stock options; increased independence of auditing relationships, and more voting rights for shareholders..
The most important thing about Brennan's letter is that it serves as a signal that institutional investors are ready to play a more active role. Those CEOs may not listen to ordinary investors, but they have to pay attention to such investment powers as Vanguard.
Now let's see whether other mutual fund companies raise their voices as well. They should do so, and do it quickly and forecefully. Corporate America will ignore them at its own risk. I don't think it will be be foolish enough to do that.
Myron Kandel is CNN Financial Editor and appears daily on CNN and CNNfn.
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