Your directors: A boardroom perspective
February 20, 2014
We recently interviewed Alfred M. Rankin, Jr., and Rajiv L. Gupta, two long-serving Vanguard board members, to discuss their roles, their views on investing, Vanguard's ownership structure, and how Vanguard can remain the best place to invest in an increasingly competitive world. Mr. Rankin is chairman, president, and CEO of Hyster-Yale Materials Handling and NACCO Industries. Mr. Gupta is the retired chairman, president, and CEO of Rohm and Haas Company.
Can you describe your dual role as a director of The Vanguard Group and a trustee of Vanguard's mutual funds?
Mr. Rankin: As trustees of each Vanguard mutual fund, I and my colleagues have a primary responsibility to the investors in that fund and to ensuring the health and welfare of the fund according to its mandate. We meet with the fund's investment managers—whether they are external or internal—and review its administration to ensure that all matters are properly handled and in compliance with laws and regulations.
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It's also a great advantage to be a director of Vanguard the company in the context of its unusual ownership structure, because Vanguard is in fact owned by all of the Vanguard funds and provides its services to them at cost. Vanguard ensures all the funds are being managed properly in terms of both investment oversight and administration. As both director and trustee, our core responsibility is to the investors and to ensuring each fund is managed in a proper manner.
Mr. Gupta: This model seems to serve our shareholders and Vanguard better than having two separate boards, one for the funds and a separate one for Vanguard the company. Because of Vanguard's structure, the responsibilities of the director and trustee are the same. It's about service to the client, low cost, and keeping investment and operational risks appropriately low.
Does a board member's role at Vanguard differ greatly from that of a board member at other companies—public or private?
Mr. Rankin: The mutual ownership structure of Vanguard permits us to have a very thoughtful, long-term focus on the interests of the investor, and not on generating short-term profits for owners. Many public companies are often focused on near-term earnings and near-term interests. But in the case of Vanguard, you are working for the investors whether you are thinking about your role as a Vanguard board member or as a trustee of a Vanguard mutual fund.
Mr. Gupta: Vanguard is unique in the investment world: The clients are your only shareholders. It allows us to always be very transparent and proactive in our thinking about what we need to do to maintain our relevance and provide the highest value to our clients. The ability to have a real alignment between the client and the shareholder and full alignment between the fund management and the board allows us to operate seamlessly. Having said that, in terms of what the board needs to think about from the point of view of governance, the board at Vanguard has responsibilities similar to those of any other board, public or nonprofit.
Has your experience at Vanguard influenced or changed your views about investing?
Mr. Rankin: I joined the Vanguard board 20 years ago. Many of Vanguard's principles and its investment philosophy were less broadly understood by the general investing community then than they are today, and certainly I was not as closely exposed to that philosophy. My experience at Vanguard has brought them to the forefront of my own thinking in terms of investing. I have learned a great deal about the value of low cost, taking a long-term view, diversification, indexing, and a number of other concepts. It has given me a more definitive investing philosophy than I had 20 years ago.
Mr. Gupta: The 2008–2009 financial crisis reaffirmed the notion that it's hard—for individuals, for sure—but even for actively managed funds or alternative investments overseen by highly skilled professionals to really beat market performance over the long term. The crisis also made clear that once you go for alternative investments you lose substantial amounts of liquidity; you may not be able to get out when you need to or want to. But Vanguard's investments allow you sufficient liquidity. During my time on the board, indexing and low-cost management have demonstrated the benefits of Vanguard's proposition in good markets and bad.
As more financial services companies compete on price, how can Vanguard continue to distinguish itself as the best steward of clients' assets?
Mr. Rankin: First of all, Vanguard will continue to focus on ensuring that it has economies of scale that are significantly greater than most of its competitors. Since Vanguard is owned by its mutual funds, it can deliver the value from these economies to its investors. Second, Vanguard can continue to focus on excellent delivery of its services and capabilities. I believe that investors will recognize the quality of the service they are receiving and the quality of the management of the funds. In all of these areas, by focusing on the best interests of its investors, in the context of the special ownership structure that it has, there is an opportunity for Vanguard to continue to distinguish itself.
Mr. Gupta: We can continue to drive down our cost. But we have a message beyond cost, and that is the one we need to articulate. It is about building trust with investors as they understand the unique alignment between Vanguard's interests and theirs. We also need to make clear that we pay as much attention to limiting risk as to lowering cost. Finally, we have to add new products and anticipate them—not just copy them—so people see us as not just a credible, reliable organization but also an innovative one.
Vanguard has grown tremendously over the past several years. It's also operating in a challenging economic, regulatory, and competitive climate. How has this influenced the board's strategy for the future?
Mr. Rankin: The economic conditions, regulatory environment, and competitive climate all have a bearing on the board's assessment of Vanguard's long-term strategy. It's very important in challenging economic conditions, when markets are overheated or undervalued, to understand and put in perspective what Vanguard should say to its investors. It is very important from the board's perspective that those communications be thoughtful and well-grounded.
In the current environment, regulators are calling for stringent risk management, and Vanguard has responded to that by continuing to implement the very best practices in its risk management, internal audit, and compliance functions. That is not only the right thing to do from a regulatory point of view, but also for its investors and because there is an important reputational element to carrying out those responsibilities in a first-class fashion.
Of course, the competitive climate is always something one has to take into account strategically and in terms of day-to-day practices. A very thoughtful assessment of our competition is periodically presented to the board and is part of our thinking through how best to serve our shareholders over the long term and continue to deliver the highest level of value to our investors.
Mr. Gupta: The management really engages the board as well as uses stellar resources to continue to sharpen our thinking on this. For example, a more aggressive posture around globalization or our international business has come out of a number of deliberations the board has had over time.
One of the changes we are seeing with Vanguard's competition is that they have multiple lines of businesses, and in some cases, they are able to meet Vanguard's low cost head-on and it's being subsidized by other parts of their business. So we have to almost constantly be thinking not only about how we can get better at what we do, which is driving down our costs, but also about what other avenues we can create to have a competitive advantage so that our clients are served well in years to come. The strategic thinking is taking place, and as I said, the management team is doing a superb job of engaging the board and also getting outside input into the process.
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