Memo to the board from your permanent stockholders: all shareholders should respect the people who put the time and energy into governing companies. To enhance that respect, here are eight ideas that should be embraced in every boardroom in America.

AuthorBrennan, John J.
PositionGOVERNANCE LEADERSHIP

EVERY DECISION that you make as a director of a public company should be made with your permanent shareholders as your primary constituency.

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This statement serves as the foundation for how corporate governance is approached at Vanguard. As one of the largest index fund providers in the world, Vanguard owns 2-3% of nearly every public company in America. BlackRock owns a similar portion, as does State Street. In aggregate, these three firms and other indexers hold a sizable portion of the U.S. stock market and serve as an important and permanent source of capital.

Whether you like it or not, index fund managers are your shareholders. Indexers have no discretion. Indexers cannot be enamored with a particular company one year and not like it the next year. So, we each need to realize that we are permanently connected. As indexers, we will be invested in your company as long as you are public, and the reality is that you will have indexers as a major part of your shareholder base.

Unfortunately, some companies look at index funds and say, "Those investors were here yesterday, they'll be here tomorrow, and they'll be here 30 years from now, no matter what we do. So, why shouldn't we just focus on attracting that next investment dollar?" It's a simplistic, but prevalent, attitude.

Another naive and damaging attitude pervades: Certain firms--whether as a matter of wishful thinking or lack of understanding--will equate a passive investment approach with a passive governance approach. Nothing could be further from the truth!

Indeed, one might argue that index managers are the best representatives of all owners because they are permanent shareholders. As such, permanent owners should emphasize to boards and managements that all decisions hinge on two questions:

* How will this decision affect our permanent shareholders?

* Does the decision we're making today align our interests with theirs?

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Aligning the interests of the board and the company with those of your permanent shareholders sounds right, but it can be difficult to do. There is a 24-hour feedback loop. There is a continual focus on, and visibility of, your stock price. There are analyst reports. There are employees. There are communities. There are other stakeholders involved.

It is in our best interest to see corporate governance continue to improve, for no other reason than the value of our portfolio holdings will be determined by the decisions...

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