The 40th Anniversary of the Vanguard 500 Index Fund was over six months ago, yet the well-deserved accolades for John Bogle and the momentum of indexing continue to mount. Bloomberg estimates Vanguard has saved investors one trillion dollars. Taking just half that figure1 would effectively make Bogle the biggest philanthropist ever, beating Warren Buffett and Bill Gates ten-fold.
Which makes it all the more galling that so much of those savings have been siphoned off by CEO’s and their direct underlings. That is because executive pay has grown at a similarly astounding rate2. Despite the parallels in their tremendous growth rates, the underlying merits for them diverges. For while in the aggregate passive investing has beaten active investing, manifested in the savings noted at top, there is zero evidence that current and past CEO’s have in any way outperformed what 500 market-rate but still extremely well-compensated corporate managers would have accomplished overall.3 According to a recent Economic Policy Institute analysis: ““CEO pay grew an astounding 943% over the past 37 years,” noting it being a far faster growth rate than “the cost of living, the productivity of the economy, and the stock market.”4
Thus in light of these results, Barry Ritholtz’ very astute claim below is irrefutable:
“CEO compensation isn’t the pay for performance its advocates claim. Instead, it is unmoored from any rational basis. This makes it an inappropriate wealth transfer from shareholders to management.”
Despite the great contrast between the financial benefits initiated by John Bogle and the negatives of CEO remuneration, as indexing’s growth has made it a major force in stock ownership, it’s passivity has given a tremendous assist to egregious pay packages. This is because the corporate governance methodology employed by the major index funds has failed miserably when it comes to executive compensation. Actually there is no methodology, and therefore practically zero resistance other than occasional lip service by asset management heads and jawboning by the third party governance overseers they retain. Despite the in-your-face growth of their funds, they are completely acquiescent to corporate boards and refuse to acknowledge their own power.
In light of this void, and in light of their miserable failure in this regard, I believe that all index managers and all managers of retirement assets, Blackrock, Fidelity, Vanguard, etc., initiate and vote solely for “The Pledge.” By doing so, it will greatly reduce the baseline of CEO pay back to where it should be vis-a-vis the laws of supply and demand, and use stock as the sole gauge for CEO (and Board) wealth generation5 – both of which are not unreasonable demands. Most importantly, The Pledge will fully reward the actual owners of these companies: current and future retirees of America.
It’s this last point, that was at the heart of John Bogle’s idea over 40 years ago: allowing savers to retain as much as possible of their hard earned money. Unfortunately, that benevolent concept has been completely usurped by CEO pay. Their compensation has filled the gap and indirectly wasted much of Bogle’s efforts. One simple question highlights this: “Has income equality gotten better or worse during the 40 year time span?” We all know the answer, and though a myriad of theories6 have been put forth as to why – many of which have merit, none of them have proof as tangible as the $1 trillion of investment fee savings that disappeared from the bottom line of the underlying investors. None.
John Bogle created a revolution. Notice how quiet it was? Notice how it was anything but self-serving? Unfortunately, when it comes to active vs. passive, he won the battle but is losing the war.
How the Vanguard Effect Adds Up to $1 Trillion – “here’s a happy statistic: A private-sector wealth-transfer machine has saved average investors $1 trillion”
Excessive CEO Pay for Dumb Luck – only to have the money come out the other end
- or even a quarter [↩]
- albeit lower than the growth of indexing, but it started with a much higher base versus zero for Vanguard [↩]
- of course under this plan some would have really killed it, and others may have been crushed, but no solace for the latter, because they still would have received a million a year in cash [↩]
- http://www.epi.org/publication/ceo-and-worker-pay-in-2015/ [↩]
- Let’s pause here and re-address the issue of using stock price as the overwhelmingly largest gauge of a CEO’s oversight. Critics believe it doesn’t always accurately measure the skill of the manager, because a) it is subject to the movements of the stock market overall, b) because it is subject to the whims of stock market investors, and c) because it is subject to the ups and downs of it’s given industry i.e. when oil prices are high, all CEO’s in the oil industry benefit, and when they are low, they all suffer. Rebuttal a) So what? Does that mean that unlike investors/shareholders CEO’s should feel no ill effects from bad markets and economies and be made whole??? To some extent they actually are because in bad years they actually get more shares of stock = a bigger slice of the company. b) So what?? If the stock is cheap, the CEO is the main person who gets to decide if the company should use the excess cash flows he’s helped to create and make accretive company stock buybacks – in the long run, this will turn. c) Hello people, the CEO has employed her own powers of free will to choose her given industry, just like a teacher, plumber, and the owner of the corner dry cleaner. Why should CEO’s not be subjected to the ups and downs of an industry? Is there any rationale for special coddling? Once again, in the long run there is no employee at a given corporation in a better position to guide a company through the shoals of a downturn than the CEO, and in so doing there is no better person in a position to reap the rewards on the upturn. [↩]
- Yes theories, because none have been able to draw such a direct line [↩]