Passive fund manager Vanguard turns activist in some board votes


Fund manager Vanguard Group Inc opposed the election of board members in a number of high-profile proxy contests this year, votes that help explain why directors at firms such as Hewlett-Packard Co and Occidental Petroleum Corp had a hard time getting re-elected.

While Vanguard continued to support the vast majority of directors, its votes come at a time when institutional investors, which in the past often followed management's wishes or outsourced proxy voting responsibilities, are increasingly exercising more influence.

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In the 2013 proxy season, funds run by the $2.3 trillion investment company opposed five of seven directors targeted by the AFL-CIO labor federation, according to recent filings to the U.S. Securities and Exchange Commission. The labor group had opposed six directors at other companies between 2010 and 2012 as well, but Pennsylvania-based Vanguard backed the directors in those contests.

Vanguard also switched sides at several other contested shareholder meetings flagged by proxy adviser Institutional Shareholder Services. ISS said in a report last month that fiercely contested proxy battles at companies like Hewlett-Packard and Occidental "made it the worst of times" for some directors.

Hewlett-Packard directors John Hammergren and G. Kennedy Thompson left its board in April after receiving just narrow majorities of shareholder votes. At Occidental's annual meeting in April, shareholders ousted Chairman Ray Irani and another director, Aziz Syriani, withdrew from the election.

Vanguard funds, like its $142 billion Vanguard 500 Index Fund, opposed all four after supporting them in 2012. A spokesman for Hewlett-Packard declined to comment on Vanguard's voting. A spokesman for Occidental could not be immediately reached.

The votes of managers such as Vanguard have a wide-ranging impact on U.S. companies because of the vast holdings of their funds. With about $1.4 trillion of equity assets, for instance, Vanguard is the top institutional investor in market leaders like ExxonMobil, Apple Inc and Microsoft Corp .

"You can't take them for granted," said fund industry consultant Burt Greenwald, referring to passive managers. Also, index funds can turn activist because they cannot simply sell shares of companies with which they are unhappy and take what Amy Borrus, deputy director of the Council of Institutional Investors in Washington, called "the Wall Street Walk."

"If you can't sell your shares, you look for other ways to hold portfolio companies accountable," Borrus said.

Glenn Booraem, Vanguard's head of proxy voting, declined to discuss votes at individual companies and downplayed the overall significance of the switched votes on directors. He said it "just means with the passage of an additional year of both behavior and engagement, we reached a different voting conclusion."

Booraem said he speaks with hundreds of executives every year to press Vanguard's views behind the scenes. He said he often tells them that as an index fund manager, "We're going to be practically permanent shareholders. We're not going away."

Vanguard supported 95 percent of company directors overall, up from 94 percent in 2012.

But in addition to the votes at Hewlett-Packard and Occidental, filings for Vanguard funds show they switched sides and opposed directors at other companies where board members faced criticism.

These included Cablevision, Apple Inc, Nabors Industries and Vornado Realty Trust. - the latter three of which were identified as "top meetings" by ISS, along with Hewlett-Packard and Occidental.

John Coates, a Harvard Law School professor who follows corporate governance, said Vanguard's votes are in line with a new consensus among institutional investors that voting against directors puts more pressure on companies than does voting for specific shareholder proposals.

"It's becoming conventional wisdom that's the best way to get the board's attention," Coates said.