Vanguard’s Tough Stance on Board Seats Is Changing Corporate Governance


Leslie P. Norton

May 08, 2019

Vanguard Group’s tough stance on directors serving on too many boards—sometimes called “overboarding”—has started to bite, says Don Bilson, head of event-driven research at Gordon Haskett.

Vanguard, which wields immense power as one of the three largest operators of index funds, this year decided to vote against corporate executives running for two or more board seats at public companies outside of where they work. It will also vote against directors seeking more than four board seats at one time.

Exhibit A: Eaton (ticker: ETN). At the April 24 annual meeting of the power-management company, board member Todd Bluedorn, who is the CEO of heating and cooling outfit Lennox International (LII), received just 55% of votes cast, versus 85% last year. Bluedorn is also on the board of Texas Instruments (TXN), in addition to serving on Lennox’s board as chairman.

“This is way too close for comfort for a guy who is probably the most accomplished member of Eaton’s board,” says Bilson of the voting results. “This is a new development in corporate governance. For some directors this could be make or break. It’s a development that will crimp CEOs who want to build out their dance cards as they approach 65.” According to Bilson’s analysis, Vanguard owns 32 million shares of Eaton. Nearly 147 million votes were cast against Bluedorn.

You could see more from the TiVo (TIVO) results, where Chairman Jim Meyer is also CEO of Sirius XM Holdings (SIRI) and serves a director at Charter Communications (CHTR). At the May 1 TiVo meeting, Meyer received 76 million votes in favor and almost 27 million against.

Who else could this affect? Bilson ran a screen of the broad-market Russell 3000 index to see how many CEOs sit on more than one outside board. It includes Sandra Cochran, CEO of Cracker Barrel Old Country Store (CBRL), who also serves on the boards of Dollar General (DG) and Lowe’s (LOW), as well as the CEOs of Abbott Laboratories (ABT), Marathon Petroleum (MPC), Hasbro (HAS), Western Digital (WDC), Tractor Supply (TSCO), Corning (GLW), and Kroger (KR).

Eaton, Lennox, TiVo, and Cracker Barrel didn’t respond to requests for comment.

As a matter of policy, Vanguard declined to provide information about votes for specific companies. A Vanguard spokeswoman, in an email to Barron’s, says the firm “evolved” its guidelines “to help ensure company directors have enough capacity to focus on their responsibilities and continue to serve in the best interest of shareholders. The role of a company director has become increasingly complex and time-consuming and Vanguard expects company directors to be highly engaged, active members of a company’s board.”

She said that at times, Vanguard might support an overboarded director if that person has committed to reducing their board commitments.

To be sure, one kind of better governance might cause problems. For example, there are few female CEOs: Targeting Cracker Barrel’s Cochran might be counterproductive. “The counterargument is, Are we limiting the talent pool? Can it hinder other initiatives like board diversity?” asks Duncan Herrington, who heads the activism response and contested situations investment banking group at Raymond James.

Overboarding has been an issue for some time. Vanguard’s rule goes a little farther by encompassing all named officers. Glass Lewis, a proxy advisory firm, recommends shareholders vote against a director who serves as an executive officer of any public company while serving on more than two public company boards and any other director who serves on more than five. ISS, another proxy advisory firm, offers similar recommendations.

Last year, BlackRock (BLK)—the world’s largest asset manager—decided that CEOs should sit on only one public company board beside his or her own, while outside directors should sit on a maximum of four public boards.

A third big index-fund investor, State Street (STT), is more generous than either Vanguard or BlackRock: It frowns on public-company CEOs who sit on more than three public company boards or directors who sit on more than six public company boards.

That could change if more stringent requirements become a best practice, says Herrington.

“We recognize that Board service today requires more time commitment than it has in the past, and we are trying to find a solution that sufficiently addresses the complexity in judging time availability of directors,” State Street said in an email to Barron’s.

“We see this as the responsibility of the Nomination and Governance Committees to assess the capacity of individuals to fulfill their duties to the boards as part of the annual evaluation process. We will continue to monitor processes and disclosure in this area and will evaluate our guidelines annually.”