ACTIVIST INVESTING
Vanguard CEO William McNabb is making it plain that he wants the many public companies in which the world’s second-largest fund management firm owns significant minority stakes to take Vanguard as seriously as they take activist investors. After saying in a speech at the University of Delaware on October 30 that the independent directors of corporate boards should create “shareholder relations committees” to exchange information with Vanguard, he told the Financial Times in early December that he will propose his plan in letters to those corporations.
“We don’t buy companies with the intention of running them,” explains Glenn Booraem, a principal at Vanguard in Valley Forge, Pennsylvania. “But we want to make sure the board, which is responsible for hiring and firing the CEO and setting incentives and all those kinds of things, brings to the task the appropriate perspectives—and is open to input.”
Michael Rosen, principal and chief investment officer at Angeles Investment Advisors, which invests in Vanguard’s index funds on behalf of its clients, says he expects McNabb to downplay the importance of short-term concerns like quarterly earnings while emphasizing long-term value creation, even if “it may have a short-term negative effect on earnings.”
“If companies heard more of that from their shareholder base, they might engage in those kinds of programs,” adds Rosen.
But not everyone approves. “I think it’s a bad idea. It seems like an invitation for US companies to be sued by the US Securities & Exchange Commission for violating Regulation FD,” says Jonathan Macey, a professor of corporate law at Yale University, referring to an SEC rule that requires public corporations to inform the market of material statements—and forbids selective disclosure. “As a consequence of that, it puts independent directors at risk.”
McNabb may find a warmer welcome for his initiative outside the US—particularly in emerging markets, where investors’ communications with public companies are less regulated, Macey notes. Demand looks high in India, where minority shareholders were recently emboldened by new capital market rules to reject management proposals at distillery Diageo, carmaker Tata Motors and engineering giant Siemens.
