I received an email from Vanguard asking me to vote on some proxy proposals. As a responsible shareholder I read the proxy statement and I cast my votes. I’m recording my votes here for future reference. I’m not trying to influence your votes. I trust you will read the materials and make your own decisions.
I also own Vanguard ETFs in other brokerage accounts. I expect to receive similar voting invitations shortly.
Board of Trustees
The first proposal is a list of 12 trustees. Trustees are ultimately responsible for the funds. However, these same 12 people serve as trustees on all 195 Vanguard funds. It would be a good challenge for any one of them to write down the names of all 195 funds they are responsible for. It’s just impossible for them to be involved very much at any particular fund except the very high level policies.
The board has the current Vanguard CEO as the chair. Presumably the recently announced successor CEO will become chair as well. While I’d like to see an independent board member serve as the chair, if only as a matter of gesture, I don’t know how much difference it makes in practice.
I have nothing against any of the trustees. I voted for all of them.
Proposal 2: Manager of Managers Arrangement
This proposal applies to some actively managed funds. Although I don’t own any of the funds affected I would vote for it if I did.
Proposal 3: Manager of Manages With Vanguard Subsidiary
This one says Vanguard wants to be allowed to take a fund or a part of a fund in house. It’s a good backup for 3rd party managers. I voted for it.
Proposal 4: Investment Objective of the REIT Index Fund
This says Vanguard wants to be able to expand the REIT index fund to include other real estate related investments. It will also change the index the fund follows. The new index will include additional 3% of these other real estate related investments. 3% doesn’t sound like big deal one way or the other. I don’t understand why they can’t leave good enough alone.
Although I don’t own the REIT Index Fund I would’ve voted against it if I did.
Proposal 5: Reclassify the REIT Index Fund as Nondiversified
This will reclassify the Vanguard REIT Index Fund as nondiversified. Diversified and nondiversified have legal definitions. If the fund’s index becomes nondiversified the fund will have to follow if it still wants to match the index.
Although I don’t own the REIT Index Fund I would’ve voted for it if I did.
Proposal 6: Service Agreement for Institutional Index Fund
I’m not an institution. Even the minimum for one fund is lowered from $100 million to $5 million, it still has nothing to do with me. I guess it’s OK?
Proposal 7: Genocide-Free Investing
I think it’s very hard to judge which company contributes to genocide to what extent. Index funds should just follow the index. Actively managed funds should let the managers decide.
I voted against this proposal as the trustees recommended.
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Fiby says
I voted against proposal 7, and really hope that doesn’t pass. As you say, the index is the index. Just follow it.
Furthermore, Vanguard already has the FTSE Social Index Fund for those who care about this sort of thing. https://personal.vanguard.com/us/funds/snapshot?FundId=0213&FundIntExt=INT
If investors want it, they should go get that fund. Don’t mess with my index funds!
Ray says
Those who care about “this sort of thing” – GENOCIDE????
cato says
I received a similar proxy. I voted much the same as you. I pondered #7, then voted as you for the same reasons. I do not want my investments to be convoluted.
iceport says
Proposal 7: I am strongly leaning in favor of this proposal. I understand the arguments against it, but I do not find them persuasive. Yes, there is an issue of precedence to be concerned about. And there is no way I would support an index fund becoming a version of a socially responsible fund.
However, I also believe there are a precious few issues that are simply too grave to ignore, and that doing so amounts to an abdication of moral responsibility.
Given the slim odds this narrowly focused proposal has of passing, the odds of passing broader proposals, or numerous similarly focused proposals, seems even slimmer.
Fiby says
Divestment fundamentally has no direct financial impact on a company.
“An example: suppose that the market price for a share in ExxonMobil is ten dollars, and that, as a result of a divestment campaign, a university decides to divest from ExxonMobil, and it sells the shares for nine dollars each. What happens then?
Well, what happens is that someone who doesn’t have ethical concerns will snap up the bargain. They’ll buy the shares for nine dollars apiece, and then sell them for ten dollars to one of the other thousands of investors who don’t share the university’s moral scruples. The market price stays the same; the company loses no money and notices no difference. As long as there are economic incentives to invest in a certain stock, there will be individuals and groups—most of whom are not under any pressure to act in a socially responsible way—willing to jump on the opportunity. These people will undo the good that socially conscious investors are trying to do.”
” Several studies have shown that, because of the pressure against investing in morally dubious companies, “unethical” investments (sometimes called “sin stocks”) produce higher financial returns for the investor than their “ethical” alternatives. The economists Harrison Hong and Marcin Kacperczyk found that sin stocks outperform other stocks by 2.5 per cent per year. This has even resulted in a niche industry: for instance, the Barrier Fund, formerly known as the Vice Fund, is a “sin-vestor” mutual fund that exclusively invests in companies that are significantly involved in alcohol, tobacco, gambling, or defense. It has beaten the S. & P. 500 by an average of nearly two percentage points per year since 2002. ”
http://www.newyorker.com/business/currency/does-divestment-work
Anon says
Fiby, the historical higher return of sin stocks is not necessarily attributable to SRI causing sin stocks to be undervalued. It could be that such stocks have higher regulatory and litigation risk, and the extra return was a risk premium.
ShadowITNinja says
I think the end of apartheid in South Aferica is an example of a situation where socially responsible investing did help. It’s not just about the affect on price, it was an expression of international disapproval of apartheid. The symbolism matters.
The Barrier Fund is an entirely different class of sin stocks. The point of that fund, actually, is to invest in assets which have inelastic demand because of their addictive potential. Such products are resistant to recessions, as are defense stocks. Also I don’t see this as the same level of sin as stocks which support genocide, even indirectly. I would have no problem owning the Barrier Fund but still vote for genocide free investing.
Fiby says
Sure, but
1) It’s amusing
2) The point that divestment has no direct financial impact on a company still stands
Jello says
I guess I should invest in genocide so that someone else doesn’t get the benefit of it!
Wisdom Seeker says
The article you quoted is a straw man fallacy. “suppose that the market price for a share in ExxonMobil is ten dollars, and that, as a result of a divestment campaign, a university decides to divest from ExxonMobil, and it sells the shares for nine dollars each.”
No one who divests sells their shares for less than the market price. Sellers of stock receive the market price less spread, commission and fees. In today’s markets anyone owning more than a few shares would receive a price within 0.5 cents/share of the market price.
The point of divestment is twofold:
(1) Increasing the supply of shares (by selling) and reducing demand (by not buying) does lead to a change in share price. This reduces returns and raises the cost of capital for the remaining owners of the company.
(2) Shareholders are legally the owners of a company, with legal authority to collectively hire and fire the board of directors and so on. This makes shareholders both legally and morally liable, collectively, for the activities of the company. Many people with vested interest in pension and mutual funds don’t want to be considered responsible for what certain companies are doing. Thus they would prefer that “their” funds not invest in such companies.
P.S. Just because most people tend to ignore (2) above doesn’t make it untrue. It does make those people somewhat immoral. Many will argue that “if I don’t make these profits, someone else will”. That’s also immoral.
KD says
I voted yes for proposal 7. Vanguard is gigantic in the investment world. It’s approach and policies shape competitive environment not just in the US but also globally. It’s leadership has impact. By taking a definitive stand, it may, I emphasize, it may shape a new dialog on investment desirability of certain companies that do business with genocidal governments and their economies, and/or benefit from arrangements with such government and their policies.
Proposal gives Vanguard the ability to come up with a policy if the proposal passes. Some on bogleheads forum balk at the broadness of the proposal. It is this very vagueness that would help Vanguard come up with a measured policy if the proposal were to pass.
Practically, I know that this proposal is doomed to fail.
Bruce Berris says
Proposal 7 is essentially a tool used by the BDS crowd to engage in anti-Israel and anti-Semitic boycotts. I’m pretty sure I know who is behind it.
Yes, no one is in favor of genocide, but in practice the only group accused of it is, ironically, the Jews.
iceport says
Do you have a link to any documentation?
Thanks.
MR says
Would definitely vote against it if that’s the case; I’m gonna look into it more
Erica says
What Bruce said. It is intended for anti-Israel efforts, since the UN labelled them as committing crimes against humanity — and Obama, after the election was over, refused to veto it.
iceport says
Erica:
How do you know who is behind Prop 7? Do you have any documentation, any evidence at all?
Bruce failed to provide the source(s) of his claim. Could you let us know how you came to the conclusion that an anti-Israel group is behind Prop 7? Do you have any links you could share?
Or is that some kind of wild guess?
Thanks.
AdamP says
The group behind Prop 7 is Investors Against Genocide:
https://www.investorsagainstgenocide.org
They are focused on the Darfur region of Sudan and foreign oil companies that do business there. They do not talk about Israel at all.
Further reading:
http://www.barrons.com/articles/vanguards-genocide-problem-1509156833
https://finance.yahoo.com/news/vanguard-genocide-18-million-campaign-get-vote-181936727.html
Bernard Zycherman says
I’m glad AdamP sent the link on who was sponsoring Proposal 7. The group of shareholders are aiming at companies doing business and investing in countries like Sudan who has led a genocidal regime over the past 20 years. I would not want to be a party to any company that would do so. Unfortunately, I share similar concerns with others who want divestitures because they disagree with a country’s policy. Currently, there is a full blown campaign against Israel and Jews in general and if Prop 7 was aligned with those folks I would be voting against that proposition.
Harold says
For Proposal 4, you wrote:
“This says Vanguard wants to be able to expand the REIT index fund to include other real estate related investments. It will also change the index the fund follows. The new index will include additional 3% of these other real estate related investments. 3% doesn’t sound like big deal one way or the other. I don’t understand why they can’t leave good enough alone.
Although I don’t own the REIT Index Fund I would’ve voted against it if I did.”
Your position does not consider that the Vanguard REIT funds own 10% of the $1 trillion U.S. REIT market, and it may encounter tax problems if it does not expand what can be held by the funds, because “the law ends REIT tax protections when the owner of 10 percent of a REIT also owns 10 percent of a REIT tenant.”
“If the current trend continues without a serious market correction, Vanguard may have to close its REIT index funds to new money, even if they become broader real estate funds, to avoid violating the 10% REIT ownership rule.”
The second quoted statement is speculation, but no one should dispute that the REIT fund is large, and the pool of REITs is relatively not. Voting for Proposal 4 is equivalent to leaving good enough alone, if being able to add additional funds to the fund or add it as a holding is something that someone would like to do. The 3% may be related to the $25 billion market cap of real estate service companies.
Harry Sit says
If the fund is bumping against the 10% cap for tax treatment, expanding the index by 3% will put it at 9.7%. That’s still very close to the cap. Receiving just a little more new cash will push the fund over. They need a better solution for the 10% problem. Just diluting the fund by 3% doesn’t do it.
John Kersting says
Once again, if there is smoke and a few well placed mirrors, there is probably a fire. I have been involved in social issues as a nonprofit raising funds for charities and disaster relief for over 37 years. The above comments opposing Shareholder Proposal #7 trot out the same lies and misinformation you would expect from vested interests or those too lazy to read anything that does not agree with their position. When I read their statement, the red flags of BS came out like clockwork, especially the “We believe that ending genocide requires diplomatic and political solutions.” 1) The Trustees of course support all the proposals as they own great numbers of shares if not the clear majority of them. 2) Independent Shareholders overwhelmingly support using economic and investment strategies to force Petrochina and other companies to stop supporting genocide. 3) Vanguard asked the SEC to allow them to delete these proposals for several reasons, all soundly rejected in turn as deceptive and inaccurate. 4) In Vanguard’s SEC filing yesterday, the company asks its shareholders to “vote against the proposal because it calls for procedures that duplicate existing practices and procedures of the Vanguard funds.” According to Vanguard’s SEC filing, the company has adopted a new policy which “applies to all 157 funds and is substantially identical to the shareholder proposal submitted for 30 funds.” The filing noted that the Vanguard funds’ “trustees directed Vanguard to implement a formal procedure for regular reporting to the trustees on portfolio companies whose direct involvement in crimes against humanity or patterns of egregious abuses of human rights would warrant engagement or potential divestment.”
However in contrast to its stated policy, Vanguard’s SEC filing on March 31 showed that, in its most recent quarter, the company increased its holdings of PetroChina (NYSE: PTR) and the other large oil industry partners of the government of Sudan which help fund the genocide in Darfur. Vanguard has so far declined to make public the policy adopted by its funds’ Board of Trustees, the names of companies about which it has concerns, or how it intends to implement the policy with problem companies.
“Vanguard has failed this first public test of its recently announced policy which seemed to call for action against investments in companies involved in crimes against humanity or patterns of egregious abuses of human rights,” states Cohen. “Further, Vanguard has offered no explanation for its choice to buy more stock in these companies. For the millions of Americans who are Vanguard customers and do not want their savings or pension funds connected to genocide, Vanguard provides no reassurance – purchasing more stock in problem companies, no evidence of positive action, and no transparency about Vanguard’s approach.”
Vanguard’s lack of transparency stands in stark contrast to the recent, clear, public statements by TIAA-CREF to take strong action against PetroChina, and the other problem companies, and the public action by 27 states and 61 colleges and universities that have divested from PetroChina because of its complicity in Sudan.
Harry Sit says
The numbers of shares owned by the Trustees are stated in the proxy materials. They are insignificant.
Investors who don’t like PetroChina can keep the Vanguard funds and short PetroChina.
Shelley H says
Thank you for your detailed response – very helpful to provide context for neophytes like myself. What is the source (Cohen) you quote in your reply?
Harry Sit says
Probably Eric Cohen, co-founder and the Chairperson of Investors Against Genocide. Investors Against Genocide is a project of the Massachusetts Coalition to Save Darfur Inc.
Persephone says
Thank you for the very helpful context- I was pretty sure I support #7 on principle and based on my education in international issues, and was surprised to see the Pontius Pilate-style arguments against it. Very helpful to see a detailed explanation of what’s going on here.
I was viewing it from a political-science and moral standpoint. What our investments support is not different morally from what we support in person, and the proposal is very narrow. If you saw a business down the street working openly with the KKK, would you still shop there? Why is a company across the world profiting from genocide different? The simple answer is it isn’t, it just feels less immediate. Most of the time these issues are very clear and the difficulty is getting action, not determining if a company is involved. Some may successfully cover up, but once it’s publicly known all good people and good companies should pull out their money.
Also, the potential PR disaster in being involved with a company like that would be much more harmful to a fund than the small amount of up-front cost involved in divesting or checking the background of companies to receive investments.
David says
Thanks for this page and the comments – It helped me understand the options
Patrick Sullivan says
I think this proposal comes down to where you are in life. Most Vanguard investors are winners in the economic struggles of life. We live in a paradise of freedom, safety and food security. Thanks for all the information from both sides of this debate. I will vote with my heart on this issue. God bless you all and God Bless America!
David J. Abraham says
Another company I own stock in was subject to this kind of proxy proposal. That company provided simulators to airlines. That proposal was more blatant and specifically mentioned Israel, but the bulk of the wording was the same. Check it out, the company was CAE, a Canadian Company. These proposals are a multipronged effort to destroy Israel.
Kevin says
I was wondering how to vote on #7 so I searched it and found this website. Interesting discussion. I had (and still have) some reservations about exactly who will define genocide and what their definition will be, but I ultimately voted yes. “It doesn’t matter if we divest from this horrible company because someone else will just come in and snap up the shares anyway” just isn’t a very good argument to me. Besides, this is not a question asking to divest from any company that is doing wrong, it’s specifically asking about genocide…the worst of the worst. We are talking about what, 1-5 companies at most? My index funds can index just fine without them.
Aidan says
Nobody would disagree with the sentiment of the proposal, but I believe that it’s up to the individual to choose whether or not to invest in a fund that invests in companies supporting genocide. Determining the complicity of a company would be an extremely tricky task, and not one that I would entrust to a fund manager. Why pass the buck to the fund, which will just increase its fees and likely do a very bad job of the task?
Ryango says
I don’t see a response anywhere to my main concern: I don’t want to personally profit from genocide.
You can say divestment is ineffective. I don’t buy it, but maybe its true. You can say the US government should be our final moral authority, and Id have to disagree. But when you say that we should allow trustees to invest in genocide because it might be just a little bit more profitable, as they write in the statement, I’m confused. Isn’t profiting from genocide what we are trying to avoid?